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Uncertainty on Brazilian CFC regime remains after Supreme Court ruling


In 2001, Provisional Measure No. 2,158 was published in Brazil which allowed the Brazilian tax authorities to tax the profits of controlled and affiliated companies established in other countries, even if they had not been distributed to the Brazilian parent.

The measure generated an enormous backlash at the time, and a Direct Action for Declaration of Unconstitutionality was filed with the Federal Supreme Court seeking to repeal the provision.


The appellants claimed that the taxable event of income tax is the economic or legal availability of income and revenue of any nature, and the mere ascertainment of profits by the controlled or affiliated companies located abroad would not represent an equity accrual in Brazil that would justify the levy of such tax.

Although the Direct Action for Declaration of Unconstitutionality was filed 2001, the judgment was only recently concluded without the matter having been definitively resolved.


In the judgment, three distinct opinions were stated by the justices of the Federal Supreme Court.

The reporting judge understood that the taxation of profits ascertained abroad would be constitutional in the case of controlled companies, and for affiliated companies such taxation would be unconstitutional. The judge grounded her understanding in the fact that, for affiliated companies – which do not have any control binding – the income and/or revenue would only be deemed acquired by the affiliated company in Brazil once the distribution of the revenue has been determined.

Four of the ten Federal Supreme Court justices voted in favour of the total constitutionality of the rule by affirming that the ordinary law – in such case, Provisional Measure No. 2.158 – should provide for the time of availability of the profits and revenue of any nature.

Subsequently, four other justices said the rule was entirely unconstitutional.

More recently, the tenth justice declared that the rule would only be deemed to be unconstitutional in the cases of taxation of profits ascertained by an affiliated company in a country not considered as a tax haven.

However, despite all of the anticipation generated in the last few years, the decision did not resolve all existing cases, more specifically the situations of affiliated companies in tax havens or controlled companies in non-tax havens.

This leads to the understanding that the matter regarding the taxation of profits abroad shall only be complete and definitively decided when a new case is submitted to trial before the Federal Supreme Court, despite the fact, as mentioned above, that this refers to a matter that has been awaiting resolution for more than a decade.

By principal Tax Disputes correspondent for Brazil, Glaucia Frascino ( of Mattos Filho.

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