Brazilian Supreme Court limits tax penalties to 100% for evasion, fraud, or collusion

In the recent decision in Extraordinary Appeal 736.090, the Brazilian Supreme Court (Supremo Tribunal Federal, or STF) addressed the constitutionality of tax penalties imposed by the Federal Revenue Service (Receita Federal) for tax evasion, fraud, or collusion. Specifically, the STF examined whether a penalty amounting to 150% of the tax due violates the constitutional prohibition against confiscatory taxation.

The case centred on a fuel station in Camboriú, a city in southern Brazil, that was fined 150% of the tax owed on the ground of participating in a tax evasion scheme. The taxpayer contended that such a penalty was out of proportion and was against the constitutional ban on confiscatory taxes, as stipulated in Article 150, item IV, of the Brazilian Constitution.

Upon thorough deliberation, the STF unanimously determined that imposing a penalty exceeding 100% of the tax due implies a violation of the constitutional prohibition against confiscatory taxation. In the ruling handed down on October 3 2024, the court held that in instances of tax evasion, fraud, or collusion, the penalty should be limited to 100% of the tax owed. However, in cases of recidivism, the penalty may be increased to up to 150%.

This decision led to the definition of a binding precedent by the STF (regime de repercussão geral), which determined that "until a federal complementary law is enacted on the matter, the qualified tax penalty for evasion, fraud, or collusion is limited to 100% of the tax due, which may be increased to up to 150% in cases of recidivism, as defined in Article 44, §1-A, of Law Act 9.430/96, included by Law 14.689/23, observing also the provisions of §1-C of the cited article".

It is important to highlight that a regime de repercussão geral is a procedural tool used by the STF to filter the cases it reviews, ensuring that only those with broader legal or social implications are considered. Introduced by Constitutional Amendment 45/2004, the repercussion mechanism allows the STF to focus on matters that transcend the interests of individual parties, dealing with issues that affect the entire legal system or have significant national importance.

This ruling significantly enhances legal certainty for Brazilian and foreign enterprises operating within the country. By clearly delineating the limits of tax penalties, the decision ensures that businesses are not subjected to excessive fines that could jeopardise their financial stability. Furthermore, the judgment reinforces the constitutional safeguard against confiscatory taxation, thereby fostering a more predictable and stable legal environment for economic activities.

By upholding the principles of proportionality and reasonableness in tax penalties, the STF's decision provides companies with a clearer framework for compliance and risk assessment, contributing positively to the overall business climate in Brazil.

In sum, the STF’s decision in Extraordinary Appeal 736.090 represents a pivotal moment for tax regulation in Brazil, establishing a clear boundary for penalties in cases of tax evasion, fraud, and collusion. By limiting fines to 100% of the tax due, with the possibility of increasing the penalty to 150% only in cases of recidivism, the court has reinforced constitutional protections against excessive and confiscatory taxation.

This ruling not only safeguards the financial stability of businesses but also promotes greater legal certainty, benefiting domestic and foreign enterprises. As Brazil continues to attract international investments, the assurance of proportional tax enforcement contributes to a more stable and predictable business environment.