Publications

Category: Tax

Leonardo Martins and João Victor Sadocci

With the publication of Law No. 6,999 on July 14 of this year, the City of Rio de Janeiro instituted tax benefits for the building works framed in the Reviver Centro Program, created to promote the urban, social and economic recovery of part of the central region of the city.

The law grants exemption or suspension of tax credits – enrolled or not in active debt – related to the Property And Urban Land Property Tax (IPTU) and the Household Garbage Collection Fee (TCL), reduction of Property Transfer Tax (ITBI) and exemption from administrative licensing fees for works for buildings and buildings framed in the Reviver Center Program whose purpose is to:

• conversion of regularly constructed and licensed buildings - Retrofit, for multifamily or mixed residential use;
• construction of new residential or mixed buildings;
• financing of social rental, assisted housing and self-management programs;
• restoration, adaptation, complete recovery and completion of works in properties in poor condition, for multifamily or mixed residential use; or
• completion of works paralyzed in structure stage, for multifamily or mixed residential use.

The purpose of the Reviver Centro Program is to attract new inhabitants to this area of the city, encouraging the construction of new housing and the transformation of commercial buildings into residential or mixed use. It is believed that the greater movement of residents in the central area of the city will stimulate socioeconomic activities in the region.

Law No. 6,999/21 also establishes that part of the residential units destined to the Social Rental Program will be exempt from IPTU, while they remain linked to the program.

The granting of these tax benefits is conditional on obtaining:

• license of works within up to 5 years, from 01/08/2021; and
• certificate of Habitor or Acceptance of Works, within the period of 36 months, from the issuance of the respective license of works.

If the established requirements are not met, taxes will be charged with due legal additions, as if the benefits had never been granted. The benefits stipulated by law will not entitle the refund of amounts already paid to the municipality.

This law arrives at an opportune moment for the Real Estate Market in Rio de Janeiro, which, due to several social and economic factors, returns to growth in the acquisition of residential real estate (77.1% increase in the number of transactions in June 2021, compared to the same period in 2020, according to data from the Secovi Rio - Cepai Information Research and Analysis Center). It is a good opportunity for real estate market entrepreneurs to once again direct their attention to downtown Rio and take advantage of the tax incentives offered.

The central region of the city already has good access infrastructure, public transport and leisure capable of serving a public eager for better living and housing conditions. Making the Center a hub of attraction for residents, and not just a region frequented during business hours, will help requalify it urbanly, have a more sustainable occupation, improve policing and security and reduce violence, benefiting all who live, work or frequent the region.

It is, therefore, an important initiative for the upheavement of the central area of Rio. If well executed, it can generate good social and economic fruits for the city and its residents.

Category: Succession planning

The usufruct is a real right (direito real) over something of another that gives a person(usufructuary) the right to use and enjoy the property object of the usufruct as if it were the owner, without changing its characteristics, leaving the actual owner (called bare owner) the right to dispose of the property. Through usufruct, the elements of the right to property are dissociated: it is up to the usufructuary to use and enjoy something of others, while the bare owner, as the holder of the property, has the power to dispose of it.

The products and income of the property will be owned by the  usufructuary , such as the rents of a property or the profits of a company. In addition, decisions on how to use the property are the responsibility of the usufructuary, whose obligations will be to watch over the asset and restore it to the bare owner at the end of the usufruct, which has its duration fixed at the time of the institution.

Among the causes of extinction of the usufruct, established by Art. 1.410 of the Civil Code, are the death of the usufructuary and the time fixed in its creation.

The usufruct may fall on movable property (shares, quotas, fund quotas and others) and real estate. It can be created both directly on the asset in favor of a third party, a hypothesis in which the bare owner retains ownership of the asset and transfer the right to use and enjoy, and through donation, when the donor transfers the property to a third party, but reserves for himself the right to use and enjoy the property.

It is, therefore, a relevant instrument of estate and succession planning, widely used in corporate succession structures, for example, when the patriarch or matriarch of a family company transfers its quotas or shares to successors, reserving for himself/herself the enjoyment, often in a lifetime way, of such corporate participation, in order to maintain control and perception of the fruits (profits) of the company.

Under corporate law, usufruct is a broad right, whose legal nature allows extensive customization in its creation, for example, on all shares or quotas or on part of them. It is also possible to establish the percentage of the products affected by the institute, so that usufruct and bare owner can divide the profits of the company. It is also possible to include rights of a political nature within the scope of the usufruct. However, economic rights must integrate the usufruct as they are part of the essence of the institute.

Perhaps one of the most important points of attention in the use of this legal institute in corporate law is related to voting rights. Law No. 6,404/76 (Corporation Law) regulates the usufruct in five provisions:

• 40 and 100, item I, point "f" (requirement to register the usufruct in the registration book of nominactive shares or in the statements of the financial institution, in case of nominative or book-entry actions, respectively);
• 114 (provides for the right to vote which, if not regulated in the instrument creating the usufruct, can only be exercised by prior agreement between the bare owner and the party entitled to the usufruct);
• 169, §2^nd (establishes that the usufruct extends to shares distributed because of capitalization of profits or reserves); and
• article 171, §5^th (provides that, in case of issuance of shares or securities, the right of first refusal shall be exercised firstly by the bare owner and, provided that if not exercised up to 10 days before the expiration of the established period, the usufructuary will be entitled to exercise the right of first refusal).

In this article, we analyze the main issues related to the voting rights in respect to the shares subject to usufruct.

Voting and participation in shareholders’ meetings

In accordance with Art. 126 of the Corporation Law, the shareholder must prove his/her condition as such to attend the general meeting. A shareholder may be represented by a proxy appointed less than one year before which shall be a shareholder, a manager of the company or lawyer and, in the case of publicly held companies, financial institutions are allowed. Therefore, the shareholder, by him/herself or by proxy, has the right to participate in the general meetings.

In the case of shares subject to usufruct, the law allows the usufructuary and the bare owner to regulate the right to vote among themselves in the instrument creating the usufruct or even verbally. The voting rights can be fully allocated to the usufructuary (provided that the provisions of Article 171, §5, of the Corporation Law regarding the exercise of the right of first refusal shall be complied with) or divided between the parties, according to the matter for example.

Of course, in the parties are silent with respect to voting rights, the subsequent conduct of the parties should be considered for purposes of interpreting the intention intended by those involved.^[1] If the vote is always exercised by the usufructuary, for example, it could be understood that the parties agreed on such a practice.

In this same sense, if there are shareholders' agreements, it is important that the holder of the voting rights in respect of the shares subject to usufruct is bound by any agreement - if it is the will of the contractors – in order to secure that it produces all the intended effects.^[2]

In the absence of agreement between the parties, Article 114 of the Corporation Law provides that the exercise of the right to vote is only possible by prior agreement between the bare owner and the person entitled to the usufruct, under penalty of non-exercise of the right to vote.^[3] It is, in fact, a true extraordinary legitimation that authorizes the vote by a person who is not a shareholder or his/her representative.^[4]

The legislative choice of consensus between usufructuary and the bare owner is intended to address the potential conflict of interest between those involved: on the one hand, the usufructuary, possibly interested in the largest distribution of dividends possible and, on the other, the bare owner, who may prefer, for example, the reinvestment of resources.^[5]

The doctrine and the comparative laws offer other solutions to the voting, establishing, in some cases, that it may be exercised exclusively by the bare owner (as holder of the position of shareholder even if subject to limitations in its full ownership), or, in other cases, by the usufructuary^[6] (as holder of the rights of possession, use, administration and enjoyment of the property). There are also mixed solutions, in which, depending on the matter, the rightholder changes. In the latter case, it is usual to assign to the usufructuary the right to vote on essentially administrative matters, and to the bare owner, on the other matters.^[7]

The conflict arises when there is no agreement between the bare owner and the one entitled to the usufruct. It can be enhanced if the shares represent a relevant percentage of the company's share capital or even control, and when there are rights arising from the vote, such as the right to withdraw.

The exercise of the right to withdraw

Pursuant to Art. 137 of the Corporation Law, the dissenting shareholder has the right to withdraw from the company, upon reimbursement of his/her shares, in the event of the approval of certain matters prescribed by law. Thus, the right to withdraw "consists, therefore, in the legal power to extinguish, by unilateral act, in the cases provided for by law, the relations that bind the shareholder to the company, moving to the position of creditor of the same, in the amount of reimbursement of the shares". It is, therefore, "the right of the shareholder to, by disagreeing with certain resolutions of the General Meeting, in the cases provided for by law, to withdraw from the Company upon reimbursement of the value of its shares".^[8] This is an essential right of the shareholder pursuant to Article 109 of the Corporation Law.

It occurs that the right to withdraw is intrinsically linked to the exercise of the vote, to the extent that this right can be exercised in the situations prescribed by law in which the shareholder: (i) has voted at the general meeting against the proposal approved later and (ii) has not voted in such a resolution.

Thus, in the absence of specific rules on the exercise of the vote, doubts may arise about the legitimacy of the bare owner to exercise the withdrawal of the company, especially in situations of conflict of interest with the usufructuary. For example, if the usufructuary votes in favor of the matters described in Art. 137, but the bare owner disagrees with the subject, could the bare owner exercise the right to withdraw?

In fact, the bare owner is the shareholder of the company registered in the company’s stock records (nominative or book-entry). The bare owner maintains the right to dispose of the shares and the exercise of the right to withdraw can be an act of disposition of the shares. Moreover, even if the vote is exercised by the usufructuary, it does not seem to us that it is possible to prevent the bare owner's access to the general meetings, for example. Even if the bare owner does not hold the right to vote, participation and discussion of the matters should be secured.^[9]

However, considering that the withdrawal affects the rights of the usufructuary and of the bare owner, prior agreement between both of them could be a requirement for the right to withdraw. In such cases, therefore, we believe that the analysis of the circumstances of the case may be decisive in determining who is the holder of the right. In any case, it is necessary to regulate this matter in the instrument of the constitution of the usufruct to improve the treatment of the relations between the bare owner and the person entitled to usufruct.

Rights of supervision and action

Finally, it is also questioned who would be the holder of the right to supervise the management of the company (Art. 109, III, Corporation Law) and to file liability actions against managers and controlling shareholders (Arts. 159 and 246 of the Corporation Law). In principle, in our view, the right of supervision could be able to be exercised by both the bare owner and the person entitled to usufruct: in accordance with the applicable legislation,^[10] the interest of both is unequivocal. As an example, we understand that the participation of the usufructuary and the bare owner in the general meetings should not be prevented, regardless of who is the holder of the right to vote in matters to be resolved.

In relation to the filing of liability actions against managers and controlling shareholders, in principle, we understand that there are arguments to argue that both, bare owner and the person entitled to usufruct, would be legitimate active parties to the action,^[11] but this analysis would depend on the circumstances of the case. However, the lawsuit against the management pursuant to Article 159 of the Corporation Law depends on prior resolution at a shareholders’ meeting. If the holder of the right to vote, for example, does not approve the filing of the lawsuit by the company, it does not seem coherent to us that the other person involved may subsequently file such lawsuit, as an extraordinary legitimate under the law.

Final considerations

As can be seen from the above reflections, the matter is complex, involves several interpretations, there is no jurisprudential uniformity and depends on the analysis of the circumstances of the specific case. In this scenario, a sophisticated legal advice is even more necessary in the drafting of the instrument for the creation of the usufruct, as well as a strong and robust structuring of the operation in which the instrument is included, especially in relation to the clarity of the rights attributed to the bare owner and the person entitled to usufruct.

^[1] TJSP, 4th Chamber, Civil Appeal 53.836-4, Rep. Judge Cunha Cintra, j. 08.06.1998, "owners and person entitled to usufruct could regulate the voting exercise later and did so in a tacit manner in the general meetings held, because the usufructuaries always exercised the right to vote with the approval of the bare owners. (...) Contracts must be interpreted in accordance with the parties' conduct, in a kind of authentic interpretation, and it is for the judge to examine their conduct at the implementation stage."

^[2] LAMY, Alfredo and PEDREIRA, José Luiz Bulhões. Companies' Law. Vol. I, 2009, p. 442, "In turn, the Shareholders' Agreement is perfectly valid. It was recognized as being the defendants [person entitled to usufruct] the exercise of the right to vote in respect to the shares given, which grants them legitimacy to subscribe it." TJSP, 4^th Chamber, Civil Appeal 836-4, rep. judge Cunha Cintra, j. 06.08.1998.

^[3] Previously, the matter was regulated by Art. 84 of Decree-Law No. 2,627 of 1940: "In the usufruct of shares, the right to vote may only be exercised by prior agreement between the owner and the person entitled to usufruct".

^[4] LAMY, Alfredo and PEDREIRA, José Luiz Bulhões. Companies' Law. Vol. I, 2009, p. 390, "Your [of the usufructuary who votes] legal position is sui generis. With the fractionation of the property that operates with the institution of the usufruct, the person entitled to usufruct must be considered a person legitimized by law for the exercise of the right to vote. CARVALHOSA, vol. II, 489. As prescribed by JOSÉ LUIZ BULHÕES PEDREIRA (opinion not published), the exercise of the right to vote by the usufructuary, in this case, is also the sole hypothesis in which the law admits that the vote is exercised by those who do not have the quality of shareholder or their representative: the law requires that the shareholder who attends the general meeting proves his position as shareholder (art. 126, Corporations Law) and only admits representation by a proxy appointed less than a year."

^[5] EIZIRIK, Nelson. The Law of S/A Commented. Vol. I. São Paulo: Quartier Latin, 2011, p. 646; CARVALHOSA, Modesto. Comments to the Corporations Act. Vol. II. São Paulo: Saraiva, 2011, p. 488.

^[6] Italian law, for example, assigns the vote to the person entitled to usufruct, unless otherwise agreed between the parties, pursuant to Art. 2352 of the Italian Civil Code.

^[7] CARVALHOSA, Modesto. Comments to the Corporations Act. Vol. II. São Paulo: Saraiva, 2011, p. 487.

^[8] EIZIRIK, Nelson. Reform of the Corporations & Capital Markets. Rio de Janeiro: Renovar, [1997], p. 61.

^[9] COMPARATO, Fabio Konder. "Stock Usufruct And Almost-Usufruct. Limits to the Rights of the Person entitled to Usufruct." In: Essays and Opinions of Business Law. Rio de Janeiro: Forense, 1978, p. 88.

^[10] There are different understandings, such as WALD, Arnoldo. "The Legal Regime for the Use of Limited Liability Company Quotas and Shares of Corporations". Revista de Direito Mercantil, Industrial, Econômico e Financeiro (Journal of Commercial, Industrial, Economic and Financial Law). São Paulo: Ed. Revista dos Tribunais, v. 77, January/March, 1990, p. 10, "The supervision of social business (...) is attributed to the person entitled to usufruct when the political rights are assigned to it".

^[11] There is different case law, e.g. TJMG, AI n° 1.0024.05.827925-8/001, rep. Judge Alberto Aluízio Pacheco de Andrade, j. 14.03.2006, "It is a Corporation, in which the author acquired shares through the "Donation Contract in Advance of Legitimate", requiring the approval of the claims made, in order to suspend resolutions taken in general meetings without its presence. The appellee, bare owner of shares that were given to him, alleges that she is entitled to the full exercise of the rights reserved by law to the shareholders. It occurs, however, when there is usufruct, the bare owner does not have legitimacy to act as shareholder." The divergent vote of the judge Alberto Vilas Boas, however, indicates that "I do not know the argument that, pending the usufruct, the powers of the owner whose domain will only be consolidated on a future occasion are reduced, as the usufruct is the right of use and enjoyment over the other person's thing. However, I do not share the understanding that it would not be possible to the bare owner to exercise the right to supervise the acts of the corporation, despite not having the right to vote in the general meetings that may be held. In fact, art. 114 of the Corporation Law is not applicable, because the appellee does not intend to exercise the right to vote, but only to anticipate the effects of the declaratory decision in relation, among others, to the right to participate in the general meetings of the company, as well as other rights that are compatible with the legal condition it bears. In fact, the condition of bare he nominative shares does not deprive her of the legal power to be summoned to participate in the meetings of the corporation, since she is a shareholder, even if deprived of the voting power".

Category: Litigation

Although doctrine and the Consumer Defense Code (CDC) have afforded protection to "bystanders", identification of this kind of consumer in some cases can still generate doubt. For this reason, the Superior Court of Justice, the highest court for non-constitutional matters, has often been called to rule on the matter, and with each new case, new contours have been identified.

As a rule, only the final recipients of products and/or services can be considered consumers for the purpose of the CDC. This is what Article 2 of the Code states. However, in accordance with Article 17 of the CDC, individuals or intermediaries in the consumer chain who suffer the consequences of a consumer accident can be considered bystanders, even if they are not part of the initial relationship.

The concept of bystander in Brazilian law was inspired by American law, and with time has evolved case by case. Currently, the CDC provides for the possibility of considering bystanders all victims of a particular injurious event, regardless of whether they were a party to the initial consumer relationship.

The subject has been analyzed by the STJ at different times over the past few years, with constant evolution of its interpretation.

In 2012, the STJ ruled on a case involving a vehicle accident between a car and a taxi. At the time, the court held that "the subject of the consumer relationship does not necessarily need to be a contracting party and may also be a third party victimized by this relationship, a party that U.S. law calls a bystander".^[1]

Despite recognizing the bystander in our legal system, the court ruled out its application in that specific case, since the taxi was not in service (no passenger) at the time of the collision. The appellate judges ruled that the taxi driver was no bystander, since there was no previous consumer relationship from which the consumer status of the taxi driver, who was the victim of the accident, could be deemed a bystander.

On another occasion, in a plane crash, the STJ held that all those who were affected by the disaster, regardless of whether they were passengers of the affected aircraft, should be considered consumers. People who were close to the site at the time of the accident and were affected, although only morally, were considered bystanders. The reporting judge stressed that "the victims of aviation accidents not on the aircraft, are consumers by configuration (bystanders), and the rules of the Consumer Defense Code relating to damage from accidents should be extended to them (art. 17, CDC)."^[2]

In another case, involving oil leakage into an environmentally protected area, the STJ applied the CDC to all the victims of the event, considering them bystanders: "The plaintiffs were victims of a consumer accident, since their fishing activities were supposedly impaired by the oil spill that occurred in the state of Rio de Janeiro. The provision of Article 17 of the Consumer Defense Code applies."^[3]

Thus, when a "standard" consumer relationship exists in the injurious event, all other victims involved in the accident should be considered consumers, albeit by configuration, and consequently consumer legislation applies.

Recently, the STJ encountered a peculiar situation. A street sweeper was hit by a bus carrying passengers (customers). He was the only victim of the event and had no relationship with the bus company, that is, he was not part of the original consumer relationship established between the bus company and its passengers, none of whom were injured. Even though the accident did not injure any of the direct consumers of the company, could the street sweeper be considered a bystander? Or would some "direct" consumer of the bus company need to have been injured to talk about equating the street sweeper as a consumer? According to the reporting judge in his leading opinion:

"The fact that the only person victimized by the accident allegedly caused by the bus owned by the appellee, while providing transportation service for people in Rio de Janeiro, was a third party to the consumer relationship does not rule out his bystander status."^[4]

On this occasion, the existence of a consumer relationship was deemed to be sufficient, i.e., the fact that the service/product was being offered within the scope of the CDC, so that the accident resulting from this relationship, by victimizing any individual, whether or not part of the consumer chain, fell under the scope of the consumer legislation and all its protective institutes. Thus, even if none of the direct consumers of the bus company were injured, the court considered that it was possible to expand consumer protection measures to the third party, by configuration.

It is no accident that on more than one opportunity, the STJ has taken the time to deal with the topic of the bystander. The subject is relevant and its legal consequences are even more so. What can be observed is a constant evolution of the issue. The correct and timely identification of bystanders in specific cases is fundamental, since the consequence is the application of consumer legislation, which is protective and seeks to balance the relationship between consumers and suppliers.

The application of consumer legislation alters both the competence to judge lawsuits and the reversal of the burden of proof. The inadequate or late identification of bystanders can, therefore, be catastrophic, so it is essential to know the subject and to monitor the evolution of its interpretation by the courts.

^[1] Special Appeal 1125276/RJ, rel. Reporting Judge Nancy Andrighi, 3^rd Panel, judged on February 28, 2012, published in the DJe on March 7. 2012.

^[2] Special Appeal 1281090/SP, Reporting Judge Luis Felipe Salomão, 4^th Panel, judged on February 7, 2012, published in the DJe on March 15, 2012.

^[3] Conflict of Competence 143.204/RJ, Reporting Judge Ricardo Villas Bôas Cueva, 2^nd Section, judged on February 29, 29, 2016. In the same sense, "According to the jurisprudence of this Superior Court, defined in a case similar to that here, in the present hypothesis, the plaintiffs are comparable to consumers, by configuring the oil spill as a consumer accident, which allegedly harmed the fishing activity of the interested parties" (CC 132.505/RJ, Reporting Judge Ricardo Villas Bôas Cueva, 2^nd Section, judged on February 3, 2015).

^[4] Special Appeal178.731-8, Reporting Judge Paulo De Tarso Sanseverino, 3re Panel, judged on June 16, 2020, published in the DJe on June 18, 2020.

Category: Tax

The recent Answer to Consultation (SC Cosit) no. 99, of June 21 of this year, dealt with the imposition of Withholding Income Tax (IRRF) in the conversion of foreign investment in the Brazilian financial and capital markets via portfolio, pursuant to the Resolution of the National Monetary Council (CMN) no. 4,373/14 (Investment 4,373 - Portfolio) for foreign direct investment, according to Law No. 4,131/62 (Investment 4,131 - Direct).

The taxpayer consultant, as tax responsible of legal entities resident abroad that carry out Investment 4,373 - Portfolio, non-residents or domiciled in a country or dependence considered as a  country with a favorable taxation (Low Tax Jurisdiction - LTJ), wanted to know from the tax authorities:

• if it would be correct to understand that the conversion is not a triggering event of the IRRF, due to the absence of transfer of ownership and disposal in the operation;
• if the conversion was a taxable event, what would be the applicable tax treatment: exempt, because it is a sale carried out in the Brazilian stock exchange by Investment 4.373 - Portfolio not located in LTJ or subject to the rate of 15% of the IRRF, because it is not a sale carried out in the Brazilian stock exchange by Investment 4.373 – Portfolio not located in LTJ; and
• if, in the event that the conversion is understood as a triggering event of the IRRF, who would be responsible for the collection.

SC Cosit concludes that the conversion is not subject to IRRF taxation on any capital gains, considering that:

• there is a regulatory obligation to carry out simultaneous exchange operations (purchase and sale of currency) without effective transfer of resources (section 7, item IV, Resolution CMN no. 4,373/14);
• such transaction is not on the list of exceptions for transactions that can be carried out outside the Brazilian stock exchange (section 19 of Resolution CVM No. 13/20); and
• Section 30 of Circular Bacen No. 3,691/13 considers, for all purposes, simultaneous foreign exchange transactions as effective transactions.

According to SC Cosit, the fact that simultaneous foreign exchange transactions are considered for regulatory purposes as effective transactions, i.e., foreign exchange transactions with physical currency transfer, would be ficticiamente the settlement of the investment, agreement for the sale of foreign currency tied to a remittance of resources abroad and a foreign currency purchase agreement tied to an investment in the country.

Although not expressly stated in SC Cosit, the implicit reasoning would be that these operations, a priori, would be held on the stock exchange. Thus, it concludes by the application of Section 81, § 1, of Law No. 8,981/95, together with Section 16 of MP No. 2,189-49/01, which excludes from the imposition of IRRF capital gains earned in Investments 4,373 – Portfolio in transactions carried out on stock exchanges.

SC Cosit also makes it clear that, after registration, the new Investment 4,131 - Direct is subject to IRRF tax rules on capital gains, pursuant to Section 18 of Law No. 9,249/95, Sections 20 to 23 of the Normative Ruling of the Brazilian Revenue Service No. 1,455/14 and the other regulations in force. Currently, this means progressive rates of 15% to 22.5%, depending on the amount of the capital gain determined, except for situations in which the beneficiary of the capital gain is located in a LTJ. In the latter case, the applicable rate is 25%.

SC Cosit represents an important interpretation of tax authorities favorable to taxpayers, as it recognizes the application of the IRRF exemption regime on capital gains accumulated between the entry date of entry of Investment 4.373 - Portfolio and the date of conversion to Investment 4.131 – Direct.

The theme generated great insecurity, due to the lack of effective stock trading on the stock exchange, a factual condition of the normative hypothesis of the exemption rule. SC Cosit equates concepts of regulatory rules, concluding that there is exemption.

Category: Competition

The possibility of calculating fines for violations of Law No. 12,529/11 (Competition Defense Act) based on the benefit obtained by the infringer was widely discussed by the Court of the Administrative Council of Economic Defense (Cade) between 2015 and 2019, but never prevailed among most councillors. In December 2020, the discussion was reopened by the current councillors, especially in debates related to cartels in public auction markets, and that possibility has gained strength in the Cade Court since then.

Article 37, item I, of the Competition Defense Act determines that Cade may impose on infringing companies a fine of 0.1% to 20% of the value of their gross revenues (in the last year prior to the opening of the administrative proceedings), in the business area in which the infringement occurred. According to the samearticle, the fine mustnever be less than the benefit obtained, when it is possible to set it.

Until recently, Cade's fines hadalways been calculated based on the definition of the fine rate and its application on the gross revenues of the company investigated. However, in three recent cases, this traditional methodology was replaced by the calculation based on the benefit obtained.

In the trial of the case known as "Leech Cartel", which occurred at the end of 2020, the rapporteur councillor Paula Farani decided to calculate the benefit obtained, given the absence of data on the billings of the companies investigated in the administrative process. In that calculation, the councillor adopted the premise that the cartel would have generated an overpricing of 20% on contracts that expired during the cartel practiceand used the amounts received in the bid to calculate the fines to be imposed on the companies, which would be similar to the benefit received by the companies. His vote was accompanied by the majority of the court, defeated the councillors Bandeira Maia, Luiz Hoffmann and Alexandre Barreto that was  president of Cade at that time.

In February 2021, the discussion came back to the fore in a case involving private bids from Telemar and Telefónica. The rapporteur concillor Paula Farani calculated the fine of the investigated company Redex Telecomunicações Ltda. by the traditional methodology, based on the billing data available in the file, and filed the administrative process in relation to the company Araguaia Indústria Comércio e Serviços Ltda.

In a vote-view, the councillor Sergio Ravagnani diverged from the understanding of concillor Paula about Araguaia, and concluding for the condemnation of the company. For the dosimetry of the penalty, the councillor stopped estimating the benefit given to Redex for not having sufficient elements in the case. However, when dealing with Araguaia, the board member estimated the benefit granted on the basis of invoices issued by the company that would demonstrate or how much she would have received as transfers by submission of coverage offers in the bids. After that exercise, Ravagnani voted to convict Araguaia on the basis of the advantage granted, after finding that the maximum possible fine would be less than the advantage granted. His vote was corroborated by a majority of the members of the court, with the exception of the councillors Bandeira Maia, Luiz Hoffmann and the then president of Cade, Alexandre Barreto. The rapporteur councillor added her vote to follow the majority position.

In June, the imposition of a fine based on the calculation of the advantage granted prevailed again in the trial of the cartel in public bids of school materials, under the rapporteurship of counselor Paula Farani. In this case, contrary to what happened in the Leech Cartel, also under his rapporteurship, the company's billing data was available. The rapporteur advisor calculated the maximum fines for each company by imposing the 20% rate on the respective revenues. It also calculated the advantage based on the 20% overpricing assumption adopted when dealing with the Leech Cartel. After completing this exercise, the councillor voted to calculate the fine on the basis of the advantage granted only to Capricorn S.A., after it was clear that, in this case, the maximum possible fine would be less than the advantage granted. His vote was corroborated by a majority of the members of the court, again councillors Maurício Bandeira Maia, Luiz Hoffmann and Alexandre Barreto that was  president of Cade at that time In these precedents, it was adopted the understanding that the amount corresponding to 20% of the gross revenues of the company in the business sector in which the infringement occurred, in the last year prior to the establishment of the administrative procedure, does not correspond to a legal ceiling of fine. It was also understood that the use of the benefit earned confers greater rationality and proportionality to the fine in relation to the severity of the illicit, since it is not limited to amounts earned in only one year, but throughout the duration of the cartel practice.

The prospects of consolidating this new form of fine calculation in the short term are still uncertain, as they will depend on the position of the new president of the Cade Court, Alexandre Cordeiro, and the councillor who will replace Bandeira Maia, whose term has already ended.

Category: Tax

Leonardo Alfradique Martins and André Araújo de Andrade

Budget funds are a classic way to individualize and link revenues for a given purpose. Its use dates back to the time of colonial Brazil and gained more traction with the increasing decentralization of public policies among national political actors (Union, states and municipalities).

These funds were designed to streamline management and secure public resources for purposes of national strategic interest, as Camillo de Moraes Bassi teaches in his study Special funds and public policies: a discussion on the weakening of the financing mechanism:

"Is of course, the funds were created to make the public machine more flexible by decentralising resources for pre-established purposes. In tow, the linked revenues emerged, understood as an 'antidote' to financial uncertainty, a guarantee of resources."

The funds became part of the Constitution of 1934, when the Education Fund was created, mandatory for states, municipalities and the Federal District and formed, according to the constitutional text, by the "leftover budget appropriations plus donations, percentages on the proceeds of public land sales, special fees and other financial resources".

In the period between 1934 and 1988, several funds were created for various purposes, such as the National Development Fund (1986), the School of Business Administration Fund (1971), the Central Medicines Fund (1973) and the Space Activities Fund (1985), among many others at the state and municipal levels.

The Federal Constitution of 1988 deals timidly with the theme, mentioning only the mandatory that the funds are included in the Annual Budget Law (LOA) and the impossibility of binding to tax revenues, as provided for in Articles 165, §4, and 167, IV, respectively.

In addition to these provisions, Article 36 of the current Federal Constitution imposed that all funds in force on the date of its promulgation should be ratified by the National Congress within two years, except those that held revenue stemming from tax exemptions that are part of private property and those of interest to national defense.

However, even with the express constitutional determination, the funds were maintained on the basis of Law No. 4,320/64, received as a complementary law, which regulates the financial and budgetary norms of the Union and other federal entities.

If well managed, with the effective application of the funds raised in their specific purposes, the funds bring encouraging results.

In a study conducted on the Poverty Eradication and Combat Fund in the state of Mato Grosso, the researchers found that "the results of previous research suggest that there is a relationship between the establishment of the Fund for Combating and Eradicating Poverty and the decrease in poverty indicators in the State."^[1]

According to empirical data, however, budget funds no longer have the relevance of the old one.

Decree No. 93,872/86 modernized and streamlined the Brazilian financial system. The creation of the Single National Treasury Account, among other measures, also promoted a direct alignment between the origin and final destination of resources, drastically reducing the delay and bureaucracy for their arrival to their effective destinations.

Actually, the funds are no longer attractive for the management of public resources. As well presented by Camillo de Moraes Bassi, "innovations in public resource management" eventually "making funds expendable both to link revenues and to the accumulation of balances (financial surplus)".

In the study, Camillo de Moraes Bassi comments that "the dependence of the funds for a rapid management of direct administration (financial autonomy of the managing body), another motivation rooted in its use, has completely lost its meaning. In fact, it has become obsolete in the face of advances already commented on in financial management."

Moreover, the lack of transparency in management, the fragile control mechanisms, the little information available about the process of election of expenses to be incurred and the dubious application of resources in the purposes for which the funds were instituted (deviation of purpose), eventually made them outdated.

Added to this is the fact that there is no legal obligation on the need to spend all the resources accumulated in the same financial year of the collection, which causes a large part of the funds to accumulate considerable amounts that end up being passed on for other purposes.

There is also express authorization in the Fiscal Responsibility Law for the accumulation of balances in these budget funds and the use of such amounts in various years:

"Art. 8^or Up to thirty days after the publication of the budgets, in accordance with the provisions of the budget guidelines and c of art. 4 item I^or, the Executive Branch shall establish the financial programming and the schedule for the monthly implementation of disbursement.

Single paragraph. The resources legally linked to the specific purpose will be used exclusively to meet the object of their binding, even if in exercise different from the one in which the entry occurs."

Based on this legal tolerance, a practice that had already been taking place in the management of these funds was legitimized: not necessarily applying the funds raised in the purposes of strategic public interest for which they were instituted.

Or what has been seen is the frequent flexibilization of the laws of creation of funds to allow the accumulated amount to be allocated to the cost of other purposes, including the public machine, as Camillo de Moraes Bassi points out:

"(...) special funds are designed to streamline management and ensure public resources for specific areas/sectors, on the grounds that they are strategic to national interests. In this condition, it makes little (or no) sense for a special titled fund to perform personnel expenditure or compulsory expenditure unrelated to personnel, since these are associated with the cost of the 'public machine'."

The data collected by the researchers Sílvio da Costa Magalhães Filho, Luzinete da Silva Magalhães and Fernanda da Silva Rodrigues are included with this important note, which, although they were examining the FECP/MT, demonstrate that the use of funds for state costing ends up negatively interfering in the promotion of the purposes for which they were instituted:

"However, it is observed that from 2015 onto other links to the cost of the public machine and payment of debt becomes commonplace and the resources to be allocated to the Fund presents (sic) a significant reduction. Thus, in 2015, 25.68% of the total amount collected was allocated to cover the deficit of irradiated effects related to the untying of up to 30% of the funds collected for the payment of the State Public Debt (...).

In 2016, in addition to the links already mentioned, a portion was linked to the collection to be allocated to the payment of expenses with personnel of the Secretary of State for Labor and Social Assistance - ARROWS (...)."

This flexibility has also been carried out by the jurisprudence of the courts. There are decisions, for example, that exempt the constitutional imposition of a prior state supplementary law establishing the conditions for the institution and operation of the fund:

DIRECT ACTION OF UNCONSTITUTIONALITY - STATE LAW 2,826/03 - TAX AND EXTRA TAX INCENTIVES LAW - FINANCIAL CONTRIBUTION TO THE FTI - FORMAL UNCONSTITUTIONALITY - IMPROCEDENCE - MATERIAL UNCONSTITUTIONALITY - IMPROCEDÊNCIA - CONSTITUTIONALITY OF THE CONTESTED PROVISIONS. 1. Preliminary loss of the object received, to deem prejudiced the present direct action of unconstitutionality, in connection with Article 43, § 1, item III, Article 47, § 2, Article 45, Article 25, § 27, and Article 47, all of Law 2.826/03. 2. Regarding the claim of formal unconstitutionality, it is verified that the requirement of complementary law is met with the edition of the law 4.320/64, which provides for general rules on Financial Law, dealing generically with the institution of funds, and the specific law is responsible for establishing the rules on the institution of a given fund, having law 2.826/03, compatibility with the Brazilian legal system. 3. With regard to material unconstitutionality, the submission of the allegations is unproven, because the financial contribution questioned here does not fit the definition of tax, which is made by Article 3 of the National Tax Code and Article 9 of Law 4.320/1964. 4. Compulsoriety is essential to characterize the tax obligation, since the practice of fact provided for in a tax legal rule automatically and independently of the taxpayer's will, the duty of a cash benefit. 5. The financial contribution provided for in Article 19(XIII) (c) of the contested law is only a condition for a given company to benefit from the policy of tax incentives of the State of Amazonas. 6. Direct action of unconstitutionality partially extinguished, without resolution of merit and, at the other point, dismissed. (TJ-AM 00015708720108040000 AM 0001570-87.2010.8.04.0000, Rapporteur: Jorge Manoel Lopes Lins, Trial Date: 22/09/14, Full Court)^[2]

However, even with the great problematization about the use of funds, what is currently seen is that "The Brazilian States have increasingly instituted funds aimed at their maintenance, costing and investment", as it comments Igor Bastos de Almeida Dias in your article The establishment of "state funds" as an alternative to collect revenue for public safety.

As an example, one can cite the recent debate in the Legislative Assembly of the State of Rio de Janeiro (Alerj) for the untying of revenues from state funds and alteration of the mandatory application of its resources, so that, if not applied to the end of the exercise of its collection, its destination is at the discretion of the governor of the state. This allows the funds raised to be applied to the salary payment of the servers.

There is light at the end of the tunnel when one sees in the Rio de Janeiro parliament itself initiatives to extinguish budget funds, precisely because of their obsolescence, as well placed in the explanaming of the Complementary Bill No. 18/20 for the extinction of one of the State funds:

"What many forget is that by ending revenue linkage does not mean that a particular body will no longer receive the funds, but that it should demonstrate that its expenses are more priority than others. Thus, the good practice recognized internationally through the budgetary principle of non-allocation of revenues (non-linking of resources), is that priorities should be discussed each year when drafting and discussing the budget law.

The most intriguing is to observe parliamentarians in favor of funds when the final word on any allocation of resources should be from the legislator of the present (not from the past). In this way, one of the practical consequences of the extinction of the funds is the strengthening of the role of the current parliament.

In addition, the existence of a fund is in advance allocating resources, in a fixed and continuous way, without knowing what future priorities will be.

In general, the legislation of the funds prevents the resources from being used for other purposes that are not related to the activities of the bodies that administer them. The Special Funds of the Powers (Assemblies and Chambers, Courts of Accounts, Public Prosecutor's Office) and others linked to organs (Attorney, Ombudsman,for example), that is, without ties to priority social areas such as safety, health, education and social assistance should be the first to be extinguished. This is an aberration under the moral context as well as contrary to good budgetary practices.

The extinction of these funds will allow the transfer of resources to the State Treasury considering the free cash balances at the end of 2019 of r$ 1.5 billion already deducted from existing financial obligations."

It is, therefore, more than the time to prevent the funds raised from being used deliberately for the general cost of the public machine to the detriment of the relevant social purposes for which they were instituted.

If there is repeated jurisprudence of the Supreme Court so that the service fees are to be paid to the state activity for which they were created, in the same way the commoner redirect of the collection of funds for the general cost of the public administration can be legitimized, under penalty of transforming the funds into a new source of funding for the fundry – a function that is typical of taxes.

A different scenario would be to allow the allocation of leftovers (surplus) of the collection of funds for the general cost of the fund, when it is proven that the specific purpose connected to this fund was fully met.

^[1] FILHO, Sílvio da C.M., MAGALHÃES, Luzinete da S. and RODRIGUES, Fernanda da S. "Collection and Investments of the State Fund for Combating and Eradicating Poverty in the State of Mato Grosso: An investigation of the period 2013-2016". Anais of the 16th National Meeting of Researchers in Social Work, see 16 n. 1 (2018), ABEPSS.

^[2] Quoted by Igor Bastos de Almeida Dias in his article The establishment of "state funds" as an alternative to collect revenue for public safety