Deductibility of Credit Losses before the CARF: Rationale, Impacts, and Documentation

From an economic standpoint, when a credit becomes irrecoverable—due to statute of limitations, insolvency, or definitive write‑downs granted in renegotiations—there is an effective reduction of net assets, which decreases the taxpayer’s ability to pay and must be reflected in the bases of Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL). Taxing income without recognizing such losses would amount to taxing “paper profits.”

At the same time, the legislature subjected the deductibility of provisional losses to objective criteria—such as value thresholds, days past due, the existence of collateral, and collection measures—to mitigate risks of accounting manipulation and aggressive tax planning. These rules are set forth in Article 9 of Law No. 9,430/1996, which establishes specific hypotheses under which losses may be deducted, adopts objective criteria based on the amount of the credit, the duration of default, and the presence of guarantees, and requires— for larger credits—measures such as judicial collection or the declaration of bankruptcy.

Before the Administrative Council of Tax Appeals (CARF), a clear distinction has been consolidated between estimated (provisional) losses and definitive losses. The former require strict compliance with Article 9, supported by robust evidence of irrecoverability that has not yet been fully realized. By contrast, definitive losses, due to their incontrovertible nature, may be deductible even without full compliance with all specific requirements, provided there is reliable documentary evidence substantiating the loss.

For financial institutions, a particularly relevant inflection point is CARF Precedent (Súmula) No. 139. By recognizing that discounts and write‑downs granted in renegotiations generate an effective loss—as opposed to a merely expected one—the precedent excludes the application of Articles 9 to 12 of Law No. 9,430/1996 in such cases, allowing the deduction as an operating expense for IRPJ and CSLL purposes. This does not eliminate the need for strict evidentiary support: it remains indispensable to prove the renegotiation and the write‑down on a bilateral and verifiable basis (e.g., executed contracts, amendments, expert reports, audit trails), under penalty of disallowance for insufficient documentation.

In transactions involving fraud, cloning, or card theft, CARF has emphasized that the loss tends to remain provisional while there is uncertainty regarding recovery, thereby subjecting such cases to the regime of Article 9.

Practical Guidance for Financial Institutions

(i) Segment credit portfolios by loss stage (provisional vs. definitive) and govern evidence according to the applicable legal framework;
(ii) Standardize documentary checklists for renegotiations, ensuring bilaterality and traceability;
(iii) Align accounting policies (IFRS 9) with the tax calendar, avoiding the recognition of expected credit losses in the tax books (LALUR) without meeting statutory requirements; and
(iv) Maintain evidentiary dossiers for statutes of limitations, bankruptcies, and insolvencies to support definitiveness and reduce litigation.

In sum, the rationale accepted by CARF is straightforward: real loss, robust evidence, deductibility allowed; merely expected loss, strict statutory requirements apply.