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Brazil: Supreme Court rules on taxation of foreign profits



Nélio B Weiss

Philippe Jeffrey

In a session held on April 1 2013, the Brazilian Supreme Court (STF) passed judgment on the Direct Action on the Grounds of Unconstitutionality (ADI) No. 2588, initially brought in 2001, which questioned the constitutionality of Article 74 of Provisional Measure No. 2158-35/2001 – a rule that determines the taxation of profits earned by foreign controlled and associated companies on an accrual basis (Brazilian general CFC rules). By a majority of six votes, the court:

  • Upheld the constitutionality of Article 74 with respect to controlled companies located in countries defined as tax havens under the law;

  • Declared Article 74 unconstitutional with respect to associated companies located in countries not considered as tax havens by the law; and

  • Declared unconstitutional the retroactive effect provision of the sole paragraph of Article 74, which provided that the profits earned until December 31 2001 by controlled or associated companies located abroad would be taxable at the parent/investor company on December 31 2002.

No decision was taken with regards to the constitutionality of Article 74 in the case of:

  • Controlled companies located in countries not defined as tax havens; and

  • Associated companies located in tax havens.

Further, in the same session, the court judged on two extraordinary appeals regarding the same matter (taxation of foreign controlled companies):

  • Extraordinary Appeal No. 611,586 (taxpayer's appeal, with general repercussion): Involving a controlled company located in a tax haven, and therefore, the application of Article 74 was maintained; and

  • Extraordinary Appeal No. 541,090 (Federal government's appeal, without general repercussion): Involved only controlled companies not located in tax havens and Article 74 prevailed. Further, the case was returned to the Lower Court to evaluate whether Article 74 conflicts with the double taxation treaties provisions, which the Lower Court had not considered, since it had already decided for the unconstitutionality of Article 74.

The information above was obtained directly based on speeches made during the Supreme Court´s sessions on the Direct Action on the Grounds of Unconstitutionality and Extraordinary Appeals, the votes of which are still pending formalisation and publication, which is the reason why changes to the final understanding on the judgment outcome cannot be ruled out. Upon publication, the ruling on the ADI shall have general and binding effectiveness (that is must be applied by all lower tribunals).

These decisions represent a landmark regarding the constitutionality of Brazilian general CFC rules, a discussion that has stretched over 12 years. Although the decision in Extraordinary Appeal 541,090 was unfavorable to taxpayers, this decision does not have general binding effectiveness, because it was not deliberated by the full Supreme Court. It may therefore be reconsidered by the court in a future case, although it cannot be disregard as a precedent regarding the Supreme Court's understanding on the matter.

Nélio B Weiss ( and Philippe Jeffrey (


Tel: +55 11 3674 2271


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