The issue is on the Supreme Court’s agenda; score so far is in favor of the National Treasury
03/07/2025
The ongoing debate at Brazil’s Federal Supreme Court (STF) regarding the taxation of profits from foreign subsidiary and affiliate companies could potentially result in a R$142.5 billion impact on Brazil’s federal government if the ruling goes against it. This estimate, outlined in a technical note from the Brazilian Revenue Service, pertains to the reimbursement or loss of Business Income Tax (IRPJ) and Social Contribution over Net Profit (CSLL) revenues from 2017 to 2021. Additionally, the decision could reduce the National Treasury’s annual revenue by R$28.5 billion moving forward.
This calculation—part of the Federal Revenue note (“Nota Cetad/Coest No. 14 of 2023”)—was prepared at the request of the Attorney General’s Office of the National Treasury (PGFN) and is based on data from the Central Bank concerning profits and dividends received abroad from direct investments between 2017 and 2021. The document notes that this estimate does not account for all affected taxpayers but rather a subset assumed to share a similar taxable situation.
A survey by the law firm Trench Rossi Watanabe reveals that in addition to Vale—which is involved in the STF case—Petrobras, JBS, Ambev, and CSN are embroiled in similar multi-billion disputes. Collectively, these five multinational companies are challenging R$64.1 billion in assessments from the Brazilian Revenue Service: R$22.2 billion from Vale, R$20.6 billion from Petrobras, R$11.3 billion from JBS, R$5.8 billion from CSN, and R$4.4 billion from Ambev. The survey was based on the most recent reference forms disclosed by these companies.
The issue resurfaced on the STF’s agenda in early February, but the analysis was postponed following Justice Nunes Marques’s request for more time. It may resume in May, with a new opinion expected within 90 days. The justices are evaluating the validity of applying IRPJ and CSLL on domestic companies’ profits from affiliates in countries with treaties with Brazil to avoid double taxation. Currently, 38 such agreements are in place.
Lawyers indicate that the Superior Court of Justice (STJ) precedent is more favorable to taxpayers, recognizing the supremacy of international treaties over Brazilian domestic law. However, at the STF, the government currently leads two votes to one. According to Lana Borges, Deputy Attorney General for Court Representation of the PGFN, the STJ did not adhere to STF precedents on this matter.
Most multinational companies’ cases remain in the administrative phase, and their liabilities are not provisioned since losses are deemed possible, based on STJ precedents. The issue is contentious and typically resolved by the tiebreaking vote of the president of the Administrative Council of Tax Appeals (CARF), who represents the National Treasury.
The tax authority argues it is not taxing the profits of the foreign subsidiaries but rather those of the Brazilian parent company, which reflect the foreign entities’ accounting results via the equity method (MEP).
The method aims to assess the value of an investment when a company holds a stake in another. Through it, the investment is initially recognized at cost and then adjusted to reflect the invested company’s results, proportionate to the investing company’s stake.
This methodology is outlined in the Brazilian Corporate Law (No. 6.404/76) and was later incorporated into tax law by Article 74 of the provisional presidential decree No. 2158/2001. The provision states that “profits obtained by a foreign subsidiary or affiliate will be considered available to the Brazilian parent or affiliate company on the date of the financial statements in which they were accounted for, as per regulations.”
Petrobras faces the most cases on the matter, with five in court. Four have already resulted in unfavorable decisions. In the remaining case, Petrobras won at the appellate level, but the PGFN’s appeal is pending. Ambev has four cases, but only one is in court, still in the expert phase.
CSN is contesting four cases before the Administrative Council of Tax Appeals (CARF), with no victories, and one in court. A favorable ruling was made, but the PGFN appealed to the Federal Regional Court of the 6th Region (TRF-6). JBS has faced several tax deficiency notices between 2006 and 2018, and all discussions remain in the administrative realm.
In its explanatory notes, Vale states it has faced multiple deficiency notices for years 1996 to 2008. The dispute for 1996 to 2002 had a R$2.3 billion impact, but it received a final favorable decision. From 2003 to 2012, the impact stands at R$22.2 billion. The company also reports it has entered a payment plan, with a remaining balance of R$10 billion to be paid in 58 installments.
While Vale’s case does not have general repercussions, it will serve as a significant precedent—being the first and only case to reach the STF. The court has not yet thoroughly analyzed the matter concerning treaty precedence. A key precedent dates back to 2013 when Article 74 of presidential decree 2158/2001 was validated for affiliate companies in tax havens or favorable tax regimes (ADI 2588).
The current judgment will determine whether the rule applies to foreign companies in countries with which Brazil has a double taxation treaty. Vale is challenging the “automatic taxation” of IRPJ and CSLL on profits earned by subsidiaries in Belgium, Denmark, Luxembourg, and Bermuda.
So far, Justices Gilmar Mendes and Alexandre de Moraes have sided with the PGFN, contending that treaties do not preclude taxation in Brazil. The rapporteur, Justice André Mendonça, deemed the issue non-constitutional but stated he would support Vale if overruled on that point.
Initial and appellate court rulings favored the federal government, but the STJ partially reversed this, maintaining the charge only for Bermuda, as there is no bilateral agreement with Brazil and it is considered a tax haven.
Simone Dias Musa, a partner at Trench Rossi Watanabe, believes there are chances for a taxpayer victory. She argues that the Treasury’s stance that the equity method inherently presents an economic or legal availability for taxpayers is flawed. “The equity method thesis claims that the profit accounted for in Brazil from foreign affiliates allows for taxation. However, treaties to prevent double taxation should preclude Brazil’s jurisdiction from taxing profit earned by a foreign-based company,” she states.
The equity method, she explains, is an accounting method to prevent a Brazilian parent company’s balance sheet from reflecting the group’s profit. “It does not represent standalone profit,” she says. “It is an accounting reflection of a profit generated by a foreign company, so the double taxation treaty is perfectly suited to prevent taxation in Brazil until it is distributed.”
However, Deputy Attorney General Lana Borges asserts that the profit does not have to be repatriated to be taxed. “It is already within the parent company’s assets,” she claims. Ms. Borges views it as a matter of fiscal fairness. “A Brazilian company with no foreign affiliates pays taxes once its profits are accounted for, not when they are distributed. Should a parent company with foreign subsidiaries not pay taxes?”
Ms. Borges also argues that there is no reason to invoke treaty-based double taxation relief, as there is no tax on profits generated abroad. “Typically, the parent company pays the tax. Being in Brazil, the Brazilian law applies, so there is no double taxation,” she explains.
She notes that Brazilian legislation provides mechanisms for the parent company to deduct any taxes paid on the same profits abroad by the subsidiary—such as Article 26 of Law No. 9.249/1995 and, later, Article 87 of Law No. 12.973/2014.
Tax lawyer Telírio Saraiva, also a partner at Trench law firm, emphasizes that the STJ has ruled in favor of treaty precedence. “Brazil must honor its commitments with other nations,” he states. He disagrees with the votes of Justices Mendes and Moraes, who argue that Brazilian taxation aligns with OECD principles. “OECD only permits double taxation in cases of abusive tax planning,” he argues, noting the significant impact of the thesis on multinationals—34% on profits from foreign subsidiaries.
Tax attorney Eduardo Pugliese, a partner at Schneider Pugliese Advogados, claims that the Revenue Service seeks to tax foreign subsidiaries’ profits automatically. “It won’t wait for a foreign company to remit the funds to Brazil and intends to tax the profit as soon as it is realized abroad as if it were an automatic availability,” he says.
In a statement, CSN asserts that international treaty rules hierarchically supersede domestic universal taxation rules. “Therefore, international tax law rules prevail over ordinary domestic legislation,” the company states, citing STJ rulings.
Vale, JBS, and Ambev declined to comment on the matter. Petrobras did not respond immediately.
*By Marcela Villar — São Paulo
Source: Valor International