Publications

Category: Venture Capital and Startups

Since the beginning of 2022, the venture capital ecosystem in Brazil and in the world has been going through a shortcut of resources available for the financing of investment rounds in startups.

Despite the steady increase in resource indicators invested in recent years and the extraordinary performance in 2021, the new context of the sector brings important challenges arising, among other reasons, from the fear of a post-pandemic economic recession, increased interest rates, increased inflation and the intensification of geopolitical disputes around the globe.

In a scenario of greater scarcity such as this, participants in the venture capital environment should be well prepared to address any reductions in startup valuations in future investment funding rounds (known as down rounds).

What does it mean go through a down round?

The term down round is used to designate an investment round in which the value per share of a startup is lower than that of the previous round. The factors that cause this devaluation in the valuation of the startup may be the most diverse. They range from the frustration of assumptions and metrics established in the previous round for evaluating the calculation, such as the non-achievement of a certain monthly invoicing value, to macroeconomic aspects, such as those mentioned above.

Who’s affected the most in down rounds?

Down rounds may affect the startup, its investors and other stakeholders in different ways, depending on the reasons that imposed the need to reduce the value per share.

Regarding the startup itself, the down round may affect its ability to conduct future fundraising rounds, as well as its power to attract and retain talent, especially if the valuation adjustment was due to internal factors of the startup, and not from the macroeconomic context.

With respect to investors who have allocated resources to the startup in previous rounds, in addition to possible dilution if the appropriate mechanisms are not present or are not triggered, the down round may result in the need to adjust the projections (yield) carried out by venture capital funds, which may affect the ability of such funds to carry out new fundraising.

Beneficiaries of long-term stock-based incentive programs, such as stock option plans, may also be affected, to the extent that the reduction in the value per share of the startup may lead to a reduction in the shareholding that these beneficiaries would receive in the future.

Key contributors may also be affected if the startup has its business reputation influenced by the down round.

What are the main consequences of a down round?

The practical result of a down round is usually the triggering of contractual provisions established in the documents that regulate the previous rounds of investment in the startup.

As it well known, in return for the contribution of funds provided by investors, preferred shares with special rights are issued by the startup and attributed to the investors. At the sole discretion of the investors, such shares may be converted into common shares, based on a particular exchange formula or relationship.

As the investment of venture capital funds in startups is based on the protection and appreciation of the acquired shares, investors have developed contractual mechanisms that aim to protect their investments against possible devaluation.

If new investments are made in a startup based on a lower value than the last round, the admission of a new investor will not only result in the dilution of investors who have previousky paid a higher price for the shares, but in dilution different from that which could have been expected. To avoid such a situation, before making their investments, venture capital funds negotiate with the startup founders an anti-dilution contractual mechanism.

The anti-dilution clause

A well-established mechanism for the protection of venture capital is the anti-dilution clause. The purpose thereof is to deliver to former investors (existing before the new round of investment, such as Serie A investors, for example) new shares issued by the startup that ensure the maintenance of the value of the investment, thus avoiding the economic effects of the down round.

There are two types of anti-dilution mechanism:

• Full ratchet: this clause establishes that the former investor shall have the right to receive, free of charge, a certain number of shares necessary to fully compensate the dilution suffered in the down round. Thus, for each dollar devalued, the investor will receive the number of equivalent shares based on the value per share of the down round, which is lower than the price per share paid by the former investor. As a result, the full ratchet is considered the most favorable to the former investor of the startup and the most unfavorable for the founders and other shareholders who do not benefit from the same protection.

• Weighted average: this clause establishes that the former investor will have the right to receive, free of charge, a certain number of shares necessary to neutralize the economic impact of the dillution, but does not offer full protection. The number of shares granted will be calculated based on the average value per share established for the round of the shareholder of the antidilution right.

There are two ways of applying this clause: the form called narrow-based weighted average (NBWA) takes into account only the new shares that will be issued at the time of calculation, while the broad-based weighted average (BBWA) considers the share capital on a fully diluted basis (i.e., computing all shares that would be issued based on current securities and agreements, including subscription bonuses, purchase options, etc.).

The BBWA modality, therefore, has a less dilutive effect for the founders and other stakeholders, as a smaller number of new shares should be issued to the former investor compared to the NBWA modality.

Some startups adopt mechanisms that encourage, or even force, their investors to participate in future investment rounds with lower value per share. These clauses are called pay-to-play and establish the replacement of the former investor's preferred shares with shares of the down round and, where appropriate, penalties if the former investor does not participate in the down round.

As it has already been said, the activation of the anti-dilution mechanism tends to generate negative impacts for the founders, other investors who do not benefit from the same anti-dilution protection and, eventually, the beneficiaries of long-term stock-based incentive programs, as they will not be protected by the anti-dilution clause and, consequently, will bear the dilutive effects of the round down-round Alone.

If the anti-dilution mechanism is triggered in the last round before an IPO, the investors that acquires the shares at the IPO will also participate in the impact of the antidilution. This was also one of the reasons wework dropped its IPO in 2021.

Role of management in down rounds

The need to carry out a down round will be deliberated by the company's management, both at the c-level, usually occupied by the founders of the business, who have technical qualification for the development of the startup, and at the board level, usually composed of  founders and representatives appointed by the investors.

Venture capital practice in the United States has shown that the approval of down rounds can be judicialized due to the existence of possible conflicts of interest at the time of approval of the rounds.

In this context, it is important to bear in mind that members of the startup management must act in compliance with the fiduciary duties established by the law. Precedents of conflict of interest in the United States occurred in situations where:

• the manager is a representative of a venture capital fund who is participating in the down round;
• the manager participated directly in the down round;
• the manager has a close relationship with the participants of the down round; and
• the manager receives economic benefits due to the down round.

Preparation is key

It is extremely important that startups perform a careful analysis of their business and the impacts that will be caused by the down round to identify the possible outcomes and thus avoid unwanted surprises.

The management should also produce clear and complete documents, capable of under course the effective need to carry out a down round and prove that all precautions have been taken in the decision-making process of the startup.

In this way, startups and other industry participants who are prepared and well advised are more likely to easily go through times of economic turmoil such as the ones currently ongoing.

Category: Tax

Decree 11,374/23, published on  January 2^nd of this year, revoked the Decree 11,321/22, of December 30, 2022, which had established a 50% discount for the rates of the Additional Freight for the Renewal of the Merchant Navy (AFRMM) specifically for the triggering  events that occurred as of January 1, 2023.

Therefore, the tax burden of AFRMM returned to the amounts in force before January 1st, 2023.

The AFRMM rates with and without the discount are detailed below:

The repeal of the discount on the AFRMM rates was so fast that the Brazilian Internal Revenue Service itself did not even update its systems to contemplate the reduced rates.

Although Decree 11.374/23 provides for the applicability on the date of its publication, there are good legal grounds to discuss the immediate imposition of the tax burden without the discount, as to the fact that  Decree 11.321/22 came into force and produced effects in the legal system, even if for a short period of one day.

Legally, given that the repeal of Decree 11.321/22 effectively led to an increase of AFRMM rates, it is possible to argue that the constitutional principle of annual and nonagesimal anteriority must be observed, which prevents the collection of taxes in the same financial year and before the course of 90 days counted from the rule that increased the tax (art. 150,  paragraphs "b" and "c"):

Art. 150. Without prejudice to other guarantees of the taxpayer, it is not allowed to the Federal Union, the States, the Federal District and the Municipalities: (...)

III - collect taxes: (...)

(b) in the same financial year in which the law establishing or increased them has been published;

(c) before ninety days since the date on which the law that established or increased the tax has been published, in accordance with item(b);

The jurisprudence of the Supreme Federal Court (STF) has long definedthe legal nature of AFRMM as a Contribution of Intervention in the Economic Domain (CIDE), according to Resp 177137/RS .

CONSTITUTIONAL. TAX. ADDITIONAL FREIGHT FOR RENEWAL OF THE MERCHANT NAVY - SECTION 155, § 2, ADCT, section36.

I. - THE ADDITIONAL FREIGHT FOR RENEWAL OF THE MERCHANT NAVY - AFRMM - is a parafiscal or special contribution, contribution of intervention in the economic domain, third tax genre, distinct from taxes (cf., art. 149)

II. – The AFRMM is not incompatible with the rule of section 155, §2, IX, of the Constitution. Irrelevance, under the tax aspect, extinct,accoding to section 36, ADCT.

III. - R.E. not accepted.

(Resp 177137/RS, Rel. Ministro LUIZ FUX, FIRST SECTION, judged on 08/09/2010, Dje 18/04/1997, griffin)

Given that CIDEs, as a rule, are subject to double anteriority (annual and nonagesimal),^[1] there are good legal grounds to defend the applicability of the reduced rates of AFRMM throughout the year 2023, with the possibility of reestablishing its rates only as of January 1, 2024.

Machado Meyer's Tax Department is available to clarify doubts and discussions on the subject.

^[1] Exception made to CIDE-Fuels, which is subject only to nonagesimal anteriority (section177, §4°, item I, point "b" of the Federal Constitution).

Category: Tax

Published on December 30, 2022, the Decree 11,322/22 reducedPis and Cofins rates levied on financial revenues from companies subject to the non-cumulative regime. The rates went from 0.65% and 4% to 0.33% and 2%, respectively.

According to the Decree, the reduction of the rates would take effect from January 1, 2023. However, on January 2,  Decree 11,374/23 revoked Decree 11.322/22, reestablishing the Pis and Cofins rates on financial revenues to their original values.

Although Decree 11.374/23 provides for its validity on the date of its publication, there are good legal grounds to discuss the immediate increase of the rates, as Decree 11.322/22 came into force and produced effects in the legal system, even if for a short period of one day.

In legal terms, the repeal of Decree 11.322/22 resulted in the increase of the social contributions rates in question, resulting in the applicability of the constitutional principle of nonagesimal anteriority (section150, item III, "c", combined with section 195, § 6, both of the Federal Constitution), which prevents the collection of taxes before 90 days of the rule that increased them:

Art. 150. Without prejudice to other guarantees of the taxpayer, it is not allowed to the Federal Union, the States, the Federal District and the Municipalities: (...)

III - collect taxes: (...)

(c) before ninety days since the date on which the law that established or increased the tax has been published, in accordance with item(b);

Art. 195. Social security will be financed by the society, directly and indirectly, in accordance with the law, through resources from the Federal Union, the States, the Federal District and the Municipalities, and the following social contributions: (...)

• 6 - The social contributions related in this section may only be required after ninety days after the date of publication of the law that have established or modified, not being applicable the provisions of section 150, III, "b".

The recent jurisprudence of the Supreme Court (STF) establishes compliance with the nonagesimal anteriority principle even in cases in which the modifications  in the Pis and Cofins rates have been promoted by means of rules other than ordinary law, as decided in Direct Action of Unconstitutionality 5,277 (ADI 5,277):

Direct action of unconstitutionality. Tax Law. Principle of tax legality. Need for analysis of each tax species and each specific case. Contribution to PIS/PASEP and Cofins. Paragraphs 8 to 11 of section5 of Law No. 9,718/98, included by Law No. 11,727/08. Sale of alcohol, including for fuel purposes. Fixing, by the Executive Branch, coefficients to reduce the rates of these contributions, which may be changed more or less in relation to the class of producers, products or their use. Presence of extrafiscal function to be developed. Nonagesimal anteriority. Need for observance.

1. Compliance with the principle of tax legality is verified according to each tax species and in the light of each specific case, and there is certainly no broad and unrestricted freedom for the legislator to dialogue with the regulation regarding aspects of the main rule of tax incidence.

2. In order for the law to authorize the Executive Branch to reduce and reinstate the rates of contributions to PIS/Pasep and Cofins, it is essential that the maximum value of these matters and the conditions to be observed are prescribed by law in the strict sense, as well as there is in such taxes extrafiscal function to be developed by the authorized regulation.

3. The contested provisions deal with the possibility of the Executive Branch to fix coefficients to reduce the rates of the contribution to the PIS/PASEP and Cofins on the gross revenue recorded in the sale of alcohol, including, for fuel purposes, rates provided for in the caput and in § 4 of section 5 of Law No. 9,718/98, wording given by Law No. 11,727/08,  which may be changed, to more or less, in relation to the class of producers, products or their use. The law established the limits and conditions to be observed by the Executive Branch. Moreover, the on-screen measurement is closely connected to the optimization of the extrafiscal function present in this matters. It is also verified that the dialogue between the tax law and the regulation takes place in terms of subordination, development and complementarity.

4. The increase of the contribution to Pis/Pasep or Cofins authorized by Decree is subject to the nonagesimal priority provided for in section195, § 6, of the CF/88, corresponding to section150, III, c.

5. Direct action of unconstitutionality judged partiallyfavorable, giving interpretation according to the Federal Constitution to Paragraphs 8 and 9 of section5 of Law No. 9,718/98, included by Law No. 11,727/08, and establishing that the rules issued by the Executive Branch based on these paragraphs must observe the nonagesimal priority provided for in section150, III, c, of the constitutional text.^[1]

Therefore, the current jurisprudence of the Supreme Court indicates that it is possible to propose a judicial measure to ensure the applicability  of the reduced rates of PIS and Cofins on financial revenues until April 1st, 2023, in order to respect the principle of nonagesimal anteriority provided for in the Federal Constitution.

Machado Meyer's Tax Department is available to clarify doubts and discussions on the subject.

^[1] ADI 5277/DF, rel. ministro Dias Toffoli, first section, tried on December 11, 2020, DJe 03/25/2021. Our griffins

Category: Real estate

A question still troubling in the case law is to define whether or not the Transmission Tax Cause Mortis and Donation (ITCMD) in exchanges of real estate of different values without making it price.

The real estate exchange is the legal business through which a party gives property to another person in exchange for another property, owned by that second person. This is the exchange of immovable property that may or may not have the same monetary value.

The exchange of real estate can be done with or without makes in cash. The exchange with makes occurs when, in addition to the transfer of ownership of the property, one of the parties makes payment in cash as a complement action of the payment by the ownership of the property it is receiving.

In this article, we will try to demonstrate that in the absence of makes and faced with the onerous nature of the exchange, it is impractical to require ITCMD in the operation, even if the exchanged properties have different values.

According to the Federal Constitution, it is the competence of the States and the Federal District to require the ITCMD:

"Art. 155. It is up to the States and the Federal District to institute taxes on:

I - transmission cause mortis and donation, of any goods or rights;"

The Constitution also says it is the responsibility of the municipalities to collect the Property Transfer Tax (ITBI):

"Art. 156. Municipalities are responsible for instituting taxes on:

(...)

II - 'inter vivos' transfer, in any capacity, by onerous act, of immovable property, by nature or physical accession, and of rights in rrights in immovable property, except for collateral, as well as assignment of rights to its acquisition;"

After defining the hypotheses of tax incidence described above, it is necessary to verify the legal definition of the exchange and donation.

According to Article 538 of the Civil Code, donation is understood "the contract in which one person, by liberality, transfers assets or advantages from his assets to that of another."

Therefore, in order to be faced with donation, there must be an act of mere liberality, not onerous.

In relation to the exchange, although there is no conceptualization about it in the Civil Code, there are provisions that help to differentiate it from the donation:

"Art. 533. The provisions relating to the purchase and sale apply to the exchange, with the following modifications:

I - unless otherwise provided, each contractor shall pay in half the costs of the exchange instrument;

II - the exchange of unequal values between ascendants and descendants is nullable, without the consent of the other descendants and the spouse of the alienating."

As stated, the real estate exchange can occur under two modalities: with or without makes money. The tornadoes occur when, in addition to the exchange of ownership of immovable property, there is the payment of waste (difference) of the value of the goods from one party to another in cash.

The majority understanding of the doctrine is that, in case of torna, its value can not exceed 50% of the value of the property that is received in exchange, under penalty of mischaracterizing the exchange – if it exceeds, there would have a sale and purchase of property with a payment.

In the case of the exchange, it is essential to be a costly act.

The legal concepts of exchange and donation, therefore, are not confused or resembled.

Another consequence of Article 533 of the Civil Code is that, in real estate exchanges, because they represent costly transfer, there will be the incidence of ITBI, as already established in the case-law.

On the eventual capital gain in real estate exchanges without torna, the Receita Federal do Brasil published the Cosit 166/19 Consultation Solution and the Attorney General's Office of the National Treasury Opinion PGFN/CRJ/COJUD SEI 8.694/2021/ME clarifying that there will be no capital gain to be taxed by income tax in the exchange or real estate without torna.

In detailing the legal concepts of both institutes, we began to examine the possibility of requiring ITCMD in exchanges without making real estate of different values.

In real estate and tax practice, there are many questions, whether by notaries or registrars or even the tax authorities, who seek to collect the ITCMD in the exchange without making real estate of different values.

An example of these discussions is the response given by the Department of Finance of the State of São Paulo to the Tax Consultation 21.030/19. According to the secretariat, "the exchange involving real estate of different values, carried out without due financial compensation, characterizes a donation, operation subject to taxation of ITCMD (...)".

The same understanding had the Superior Council of the Judiciary of São Paulo, for which the exchange of real estate of different values without making it represent "asset increase in a non-costly way to characterize donation."^[1] In our view, several legal concepts are run over and are shuffled in the decision.

Exchange and donation, as seen, do not get confused or resemble. While the exchange is necessarily costly, the donation is always free of charge.

The authorities, therefore, whether the registrars, notaries or even the employees, cannot avail themselves of equalization or presumption to argue that, in the face of exchange of real estate of different values in which there is no makes money of difference, would be faced with disguised donation and, thus, demand the ITCMD on the value of the difference of the real estate.

The reasons for the authorities' missteps are varied.

If the authorities are convinced that this is not an exchange without making, but rather a simulated donation, there are conditions, procedures and rites in the Civil Code and in the Civil Procedural Code to be observed for the disregard of the legal business.

Articles 166 to 170 of the Civil Code regulate precisely the concepts of null acts. Articles 133 and following of the Civil Procedural Code establish the rite to be observed for the disregard of legal business:

• Civil Code:

"Art. 166. The legal business is null and void when:

I - celebrated by an absolutely incapable person;

II - its object is unlawful, impossible or indeterminable;

III – the decisive reason, common to both parties, is unlawful;

IV - does not take the form prescribed by law;

V – any solemnity that the law deems essential for its validity is depresed;

VI - aims to defraud mandatory law;

VII – the law taxing it declares it null, or prohibits the practice, without comminar sanction.

Art. 167. The simulated legal business is null and void, but what has been disguised, if valid, is in substance and form.

• 1 There will be simulation in the legal business when:

I – appear to confer or transmit rights to persons other than those to whom they actually confer, or transmit;

II - contain statement, confession, condition or clause not true;

III - particular instruments are dated or post-dated.

• 2The rights of third parties in good faith in the face of the contracting parties of the simulated legal business are protected.

Art. 168. The invalidities of the preceding articles may be alleged by any interested party, or by the public prosecutor, when it is up to him to intervene.

Single paragraph. The invalidities must be pronounced by the judge, when he/she learns of the legal business or its effects and finds them proven, and is not allowed to supply them, even at the request of the parties.

Art. 169. The null legal deal is not subject to confirmation, nor does it convalesce for the course of time.

Art. 170. If, however, the null legal deal contains the requirements of another, that will remain where the purpose for which the parties sought to suppose that they would have wanted it, if they had foreseen the nullity."

• Civil Procedural Code:

"Art. 133. The incident of disregard of legal personality shall be initiated at the request of the party or the public prosecutor, when it is for him to intervene in the proceedings.

• 1 - The request for disregard of legal personality shall comply with the conditions laid down by law.
• 2 - The provisions of this Chapter apply to the hypothesis of inverse disregard of legal personality.

Art. 134. The incident of disregard is appropriate at all stages of the knowledge process, in the enforcement of judgment and in the execution based on extrajudicial enforcement.

• 1 - The establishment of the incident shall be immediately communicated to the distributor for the appropriate annotations.
• 2 - The establishment of the incident is not necessary if the disregard of legal personality is required in the application, in which case the partner or legal entity will be cited.
• 3 - The initiation of the incident shall suspend the proceedings, except in the case of § 2.
• 4 - The application must demonstrate the fulfiling of specific legal conditions for disregard of legal personality.

Art. 135. After the incident, the partner or legal entity will be cited to speak and request the appropriate evidence within 15 (fifteen) days.

Art. 136. Once the instruction is complete, if necessary, the incident will be resolved by interlocution.

Single paragraph. If the decision is given by the rapporteur, there is an internal injury.

Art. 137. The request for disregard, disposal or the charge of property, which has been committed by enforcement fraud, shall be ineffective in relation to the applicant."

Without the observance of the rite imposed by the Civil Procedural Code, therefore, the authorities cannot, at their discretion and in a subjective and discretionary manner, requalify the exchange without making it into a donation, especially to enable the requirement of taxes.

This is because, in addition to the necessary respect for the rite commented above, there is in the National Tax Code express rule that prohibits the use of analogy for tax requirement purposes:

"Art. 108. In the absence of an express provision, the competent authority to apply the tax legislation shall use successively, in the order indicated:

I - the analogy;

II - the general principles of tax law;

III - the general principles of public law;

IV - equity.

• 1 - The use of the analogy may not result in the requirement of tax not provided for by law.
• 2 - The use of equity may not result in the waiver of the payment of taxes due."

Therefore, understanding cannot be applied by analogy, similarity, equalization or presumption of institutes regulated in Brazilian law for the purpose of demanding taxes, as also if article 110 of the National Tax Code is closed:

"Art. 110. The tax law cannot change the definition, content and scope of institutes, concepts and forms of private law, used, expressly or implicitly, by the Federal Constitution, the Constitutions of the States, or the Organic Laws of the Federal District or municipalities, to define or limit tax powers."

It is pertinent to recall the reasons for the vote-conductor of Justice Gurgel de Farias in the judgment of the RESP 1,937,821/SP – about which we comment on another article written in co-authorship. At the time, it was based that "the basis for calculating the ITBI is the venal value under normal market conditions and, as this value is not absolute, but relative, it may fluctuate in the face of the particularities of each property, the moment the transaction was carried out and the motivation of the traders".

The comment of Justice Gurgel de Farias is fundamental, because, after all, the presumption that is in the Brazilian normative system is about the good faith of the parties, as provided for in Article 113 of the Civil Code:

"Art. 113. Legal business shall be interpreted according to good faith and the uses of the place of its celebration.

• 1 - The interpretation of the legal business shall give it the meaning that:

I - is confirmed by the conduct of the parties after the conclusion of the business;

II - correspond to the uses, customs and practices of the market related to the type of business;

III - to respond to good faith;

IV – is more beneficial to the party who has not drafted the device, if identifiable; and

V – correspond to what would be the reasonable negotiation of the parties on the issue discussed, inferred from the other provisions of the business and the economic rationality of the parties, considering the information available at the time of its conclusion.

• 2 - The parties may freely agree to rules of interpretation, filling of gaps and integration of legal business esplanade so diverse from those provided for by law."

Moreover, the double taxation of the same economic magnitude by different entities would constitute invasion of constitutional competence, which is not allowed.

By this we mean that, if in exchanges, with or without makes, there is a visible obligation to pay the ITBI on the actual value of the transaction, one cannot consider the concomitant requirement of the ITCMD in that same transaction.

Another fundamental point is that the values of real estate in an exchange are not necessarily restricted to those determined by the market. In not uncommon circumstances, including the intimate forum of the parties, it is possible that real estate of different values is exchanged, due to preference of the physical location of the other property, its pattern, the purpose of use or even sudden disinterest or disenchantment for the property to be exchanged.

For the owners, the material value of this property may not correspond to the value assigned by the market. The value for its owner, in certain circumstances, becomes secondary, because the most immediate desire is to get away from that property.

Not necessarily, therefore, the mismarriage between the values of the property in an exchange without makes it should be treated as a disguised donation. There needs to be hard evidence from the authorities that there is a simulated or fraudulent act to justify their disqualification or requalification.

Precisely in this context is that the judge of law of the 1st and 2nd courts of public records of the district of São Paulo removed the collection of ITCMD in exchange without making real estate of different values.^[2]

On the unbalance between the values of the properties object of exchange without renders, the magistrate pointed out that:

"In fact, for the contractors, the intrinsic value of the goods can be quite variable, gaining relevant appreciation for very personal issues of emotional and affective background becoming uninteresting and even despicable for changes in the living condition of each, as in the case of the applicant who reports having moved to Portugal, which prevents her from enjoying the rural property,  preferring urban real estate with the expectation of financial return that would not reach with the site."

We are thus convinced that the exchange without makes of real estate of different values can only justify the requirement of ITCMD if there is concrete evidence of simulation or fraud of the act. In addition, one must observe the rite provided for in the Civil Procedural Code for the disregard of legal business.

Judges and authorities must always keep in mind that, by presumption, legal business is appropriate and has been conducted in good faith between the parties. Their denaturation or requalification require contrary proof and observance of the rite of Articles 133 and following of the Code of Civil Procedure, not only abstract presumptions.

^[1] Proc. 1001733.55.2015.8.26.0615, DJe of November 23, 2021.

^[2] Proc. 1127941.72.2021.8.26.0100, DJe of 17/01/2022.

Category: Labor and employment

The Brazilian Supreme Court (“STF”) determined, in November of 2022, the extension of the period of maternity leave for mothers of newborns who remain hospitalized for more than two weeks.^[1] The decision was taken in the judgment on the merits of the Direct Action of Unconstitutionality 6,327.

Why is this discussion relevant in Brazil?

Only in 2019, 300,000 premature births were registered in Brazil – 10th in the world prematurity ranking, according to data from the National Health Agency. In addition, 11.7% of the childbirth in Brazil occur prematurely before 37 weeks of gestation.

It is also important to consider the number of hospitalizations that exceed two weeks. In the most extremes cases of prematurity – there are pregnancies that do not exceed 24 weeks and the hospital discharge takes place, on average, only after 34 weeks.

The central question is what the date of the beginning of maternity leave would be: the date of hospital discharge or the date of birth. This is because, until then, there were several judicial discussions on the subject. Often, the understanding was that the date to be considered for the beginning of the maternity leave count should be that of childbirth, even in cases of long hospitalizations of the mother and newborn.

What changes with the STF's decision?

When analyzing the theme, the STF decided that counting from the date of the childbirth in cases of long hospitalizations of the mother and newborn is discriminatory. In such cases, the period of 120 days of maternity leave (or 180 days for companies that benefits from Law No. 11,0/2008, which implemented the Citizen Company Program) should begin only when the mother and newborn discharge from the hospitalization.

In practice, the extension of leave will apply to employees whose newborn children remain hospitalized for more than two weeks. The license count should be initiated on the date of medical discharge of the employee or newborn, or what happens last.

The costs will be convered by Social Security, and the procedures for payment will be the same as the maternity salary. The application must be made on the date of the childbirth or up to 28 days before delivery.

Only in cases of hospitalizations longer than two weeks, the mother must request the extension of the benefit to the employer, who will continue paying for the entire period of hospitalization until 120 days after the date of hospital discharge (or 180 days, for companies that benefits from Law No. 11,0/2008, which implemented the Citizen Company Program). Compensation will be made later in accordance with the law.

In case of hospital discharge and new hospitalization due to the childbirth, it will be up to the employee to request new extensions – which will suspend the leave for each new hospitalization – until the 120-day period of coexistence with the child is completed.

Considering the new rules and the enforceability of the STF's decision, companies should evaluate the impacts on their internal practices and policies – especially benefits linked to the period of maternity leave.

The decision does not address extraordinary situations involving, for example, cases of congenital diseases that could lead to very long periods of hospitalization.

This may raise doubts: what does the situation look like when employees remain with newborns who stay two or even three years in hospital? What is the impact of leave on the employee's career? And the promotions? What is the impact on variable compensation and profit sharing programs?

Given the gap left by the decision, how should the company act in cases where the mother seeks to return to work, but is prevented from working due to the impossibility of renouncing her license? What will her relocation be like after years away?

It is essential for companies to be prepared to face cases like these.

^[1] Articles 392, §2, of the Brazilian Labor Law - CLT, and Article 93, §3, of Decree 3,048/99.

Category: Labor and employment

Initially scheduled for January 16, along with the implementation of the S-1.1 version of eSocial, the production of the Events S-2500, S-2501, S-3500 and S-5501 was extended to April 1 this year.

Companies will therefore only be able to access the web module for sending the events from April, when GFIP will also be replaced by DCTFWeb.

With the extension of the deadline, companies will have more time to organize and identify which labor complaints should have their information transmitted for the new events.

In addition to the extension, there may also be changes in the new layouts made available by eSocial, which should be disclosed before the new period of entry into production of labor process events.

The other time limits and determinations contained in the eSocial Guidance Manual, for now, remain the same:

• Date of entry of labor proceedings events: April 1, 2023
• Initial milestone of the information to be transmitted: January 1, 2023
• First deadline for transmission of events: May 15, 2023