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Brazilian taxpayers challenge the PIS and Cofins levy on financial revenues

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Brazilian taxpayers go to court to challenge the increase of the PIS and Cofins after nearly 10 years of a zero rate being applied on financial revenues.

The non-cumulative taxation system of the social contributions on revenues (PIS and Cofins) was established by Laws 10637/04 and 10833/03. It contributions are levied on the gross revenues of companies at the rates of 1.65% and 7.6%, respectively. The system grants the right to book credits arising from some expenses and was established as a mandatory regime for most Brazilian companies.

The former system (a cumulative system) charged the contributions only on the revenues arising from the company’s core business at the rates of 0.65% and 3% respectively, but did not grant the right to offset credits.

Under the non-cumulative taxation system, contributions are levied on companies’ gross revenue, comprising almost all of its revenues, including financial revenues, which since the enactment of Laws 10637/04 and 10833/03, could be subject to a PIS and Cofins levy.

In order to mitigate the impacts of such tax hikes, Law 10865/04 established that the federal government could reduce and re-establish the PIS and Cofins rates on financial revenues. This was done through Decrees 5164/04 and 5442/05, which reduced the rates to zero.

Nevertheless, in 2015, Decree 8426/15, with the wording provided by Decree 8451/15, determined that the PIS and Cofins rates on financial revenues were to be raised to 0.65% and 4%, respectively, and 1.65% and 7.6% for revenues arising from interest on capital, with the exception of the following revenues that remained subject to a zero rate: 

  • Monetary variations resulting from exchange rate in connection with exports of goods and services, as well as with the companies’ liabilities, including loans and financing; and 

  • Hedge transactions held on stock exchanges, commodities and futures or over-the-counter (OTC) markets, exclusively intended for the protection against risks inherent to price or fees fluctuations, if, cumulatively, the purpose of the agreement negotiated is related to the operational activities of the legal entity and intended to protect its rights or obligations.

Although some financial revenues remain subject to zero PIS and Cofins rates, several taxpayers were irked with the taxation of their financial revenues by the PIS and Cofins and took the discussion to the Brazilian Courts, mainly arguing that:

  • As the taxation is mandatory, subject to the Principle of Legality, no tax can be established or increased if not by law. Hence, rising the PIS and Cofins rates by a decree would be unlawful; and

  • If the re-establishment of the mentioned rate by a decree is considered lawful, the taxpayer should be entitled to book PIS and Cofins credits in connection with expenses incurred in order to obtain the financial revenues, respecting the non-cumulative taxation system.

At this moment, the matter is still highly controversial, with rulings with different understandings rendered by the local courts. Further, the Superior Court of Justice has recently begun the analysis of the matter for the first time in Special Appeal 1.586.950.

At the moment the possible outcome of this dispute is not clear, as the Superior Court of Justice (STJ) is analysing the matter for the first time. Nevertheless, taxpayers hope that the ruling of Special Appeal 1.586.950 might shed some light on the matter.

Within such context, on a preliminary basis, we cannot dismiss the possibility of the taxpayers individually challenging such a levy, even if only to ensure their position in case the dispute reaches the Brazilian Federal Supreme Court (STF). Moreover, the effects of a favourable ruling to taxpayers might be modulated in time (that is, the STF might modulate the effects of its ruling but, generally, taxpayers that had already filed a lawsuit would still benefit from the favourable ruling).

This article was written for International Tax Review by Júlio M. de Oliveira (, Fernando Telles da Silva (, and Gabriel Caldiron Rezende (, members of the Machado Associados indirect tax team.

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