Publications

Category: Labor and employment

The rules established for the entry into force and effect of Provisional Measure No. 905/2019 are analyzed below, following the series of articles on the changes implemented by it.

Although the general rule is immediate application of the new provisions, article 53 of Provisional Measure No. 905 separates the rules on the entry into force of the provisions into five major groups:

Regardless of the time frames set out above, it is important to remember that the effectiveness of Provisional Measure No. 905 is, in principle, provisional. Its continued effectiveness is conditioned on its conversion into law by the Legislative Branch, which will have 60 days, extendable only once for the same term, to deliberate on the text presented by the President.

Only after being approved by both houses of the Brazilian Congress, the Provisional Measure will return to the president for signature and will enter into force with the status of a federal law. If it is rejected by the Brazilian Congress, vetoed by the President, or not approved within 120 days, Provisional Measure No. 905 will cease to be effective.

The Brazilian Congress may propose changes and amendments to the original text, which may hinder approval of the Provisional Measure within the maximum time limits established by applicable legislation, especially considering the vast range of issues that are governed by Provisional Measure No. 905.

This was the case with Provisional Measures No. 808/17 and No. 871/19, which were intended to amend relevant points of the original text of the Brazilian Labor and Employment Reform (Federal Law No. 13,467/2017) and regulates Union Dues, respectively. In the first case, there were more than 900 requests for amendments and, in the second case, more than 500 requests. Because of this and the controversy surrounding the issues discussed, approval of both texts by the Brazilian Congress proved to be impracticable, and they ended up losing their effectiveness at the end of the legal term.

It is possible that Provisional Measure No. 905 may follow the same path, which may hinder its approval, creating instability and legal uncertainty in relation to the period of its effectiveness.

Category: Labor and employment

In addition to instituting the Green and Yellow Employment Contract, Provisional Measure No. 905/19 ("MP 905"), published on Tuesday, November 12, implemented various significant changes and innovations in social security, labor, and tax law.

We summarize below the main points of MP 905.

We note, however, that not all changes and innovations are already in effect. The date for entry into force of the changes implemented are addressed in this specific article.

Green and Yellow Employment Contracts:

Companies hiring employees under a Green and Yellow Employment Contract will have significantly reduced payroll charges for these workers.

According to MP 905, hiring companies will be exempt from social security contributions, education allowance, contribution to other “S System” entities, including the contribution to INCRA. In addition, the FGTS rate is reduced to 2%, regardless of the amount of the compensation.

For hiring under this system, which will be valid from 01/01/2020 to 12/31/2020, companies must observe the following requirements: (i) age of the worker between 18 and 29 years; (ii) monthly base salary limited to 1.5 times the national minimum wage; (iii) contract term of 24 months; (iv) be the first record of employment for the respective worker (prior employment as an apprentice, under a probationary employment contract, under an intermittent employment contract, or in one-off jobs (trabalho avulso) is not considered to be a first record of employment for this purpose); (v) the engagement must be exclusively for new job positions; and (vi) the number of workers in this new system cannot surpass 20% of the total number of employees of the company.

The form of remuneration under this system will also be different, and the hiring company must pay the monthly salary and anticipated proportional vacation plus one third, and the 13th proportional salary. It is also possible to negotiate the advance payment of half of the compensation for the FGTS fine.

Changes in the rules related to the payment of Profit Sharing (PLR):

In general, the changes promoted by MP 905 aim to clarify the text of the rules used as a basis for constructing restrictive interpretations of the legislation regarding PLR by the tax authorities and the administrative courts.

In summary: (i) labor union participation was waived if the PLR was instituted by a committee elected by the parties; (ii) in the establishing of substantive rights and complementary rules, including the setting of amounts and exclusive use of individual goals, the autonomy of the will of the parties to the contract must be respected and prevail vis-à-vis the interest of third parties; (iii) the rules set forth in an instrument shall be considered previously established when it is signed (a) prior to the payment of an advance, when provided for; and (b) at least 90 days prior to the date of payment of the lump sum or final installment, if there is advance payment; and (iv) noncompliance with the frequency of payments only prejudices payments made in violation of the rule, thus understood to be (a) overpayments to the second, made to the same employee, within the same calendar year and (b) payments made to the same employee at a frequency of less than one calendar quarter from the previous payment.

Changes to the food voucher concession:

The new text of paragraph 5 of article 475 of the Consolidated Labor Laws ("CLT") provides that the supply of food to employees, either in natura (meals provided at the company) or food provided through vouchers, coupons, checks, electronic cards for the purchase of meals, or groceries are not salary in nature, and no social security contributions or other payroll taxes are levied, such as FGTS and IRRF.

This innovation has put an end to the discussion regarding the levying of social security contributions on the provision of food to employees deriving from old orders by the tax authorities. Now, MP 905 expressly states that social security contributions and labor and tax charges shall not be levied on food granted under the terms of paragraph 5 of article 475 of the CLT.

This understanding, however, concerns only the scenarios defined by MP 905, and does not consider sums paid for food in cash (pecunia).

Changes in the rules regarding payment of premiums:

The changes implemented by MP 905 are intended to make it clear that the parties may fix the terms and conditions for payment of premiums through a written document, via a bilateral act (contract, agreement, or collective bargaining agreement) or unilateral act (internal or communicated policy), thus resolving the current controversy over the “liberality” requirement that had been created by Cosit Response to Inquiry No. 151/19.

In addition, MP 905 also states that the assessment of what constitutes “performance higher than expected” may be done at the discretion of the employer, provided that ordinary performance has been previously defined by it, unilaterally or by agreement. This provision also resolves the current discussion of what “performance higher than expected” would be.

MP 905, however, brought in restrictions on frequency of the payment. Eventual impacts that a change in frequency of payment may have under plans already in force must be evaluated by companies.

New rules for electronic document storage:

Albeit mildly, MP 905 sought to adapt the CLT to the current time of computerization. In this sense, article 12-A has been included in the CLT, which authorizes the storage of any and all documents related to labor duties and obligations in electronic media. This change facilitates the storage of files for both employees and employers.

Following the same reasoning, the wording of paragraph 3 of article 29 of the CLT has been amended, which now provides that, if the employer does not comply with the 5-day period stipulated in the head paragraph of the provision to register a record in the CTPS, the Labor Inspector must input the records related to the drawing up of the infraction notice in the competent electronic system. This change entails dynamization and greater effectiveness of the availability of administrative information on companies.

However, MP 905, while promoting the use of digital media in relation to labor documents, safeguards the maintenance and conservation of the CTPS on paper by, for example, amending article 52 of the CLT so as to impose an administrative fine to be subjectively stipulated by the Inspector, pursuant to article 634-A, also included by the text of MP 905, in the event of loss or destruction of a CTPS due to the employer’s fault.

Changes related to stoppages and shutdowns:

MP 905 revoked an article of the CLT which used to oblige new business establishments to prior inspection and approval of premises by the regional occupational safety and health authority competent in the matter prior to commencement of its activities. The provision that established the obligation for companies to inform the Regional Labor Office in advance of substantial modifications to the premises for a new inspection was also revoked.

In terms of stoppages and checks, the changes brought about by MP 905 adjusted outdated names, such as replacing the Regional Labor Office with the highest regional authority in matters of labor inspection.

MP 905 also established a new deadline of 5 business days from the filing for appeals filed against the stoppage or shutdown decision to be reviewed. SEPRT Ordinance No. 1,069/2019 already established a deadline of 7 days, counted from the receipt of the case at SEPRT, for this review.

Changes in the rules regarding work on Sundays and holidays and weekly days off:

MP 905 amends article 68 of the CLT and authorizes work on Sundays and public holidays, subject to local legislation for the commerce sector only. The previous wording of the article made the possibility of working on Sundays and holidays subject to prior permission. Although the obligation to provide weekly days off is maintained, there is no longer a requirement to do so on Sundays. This is because article 68 of the CLT expressly authorizes work on Sundays and holidays, ensuring in article 67 only the right to paid weekly rest for 24 consecutive hours, preferably granted on Sundays.

MP 905 also added a paragraph to the new article 68 of the CLT, stipulating that the weekly paid break schedule on Sundays will be (i) one Sunday every four weeks of work for the retail and services sector and; (ii) one Sunday every seven work weeks for industry.

There is no longer the obligation to negotiate work on Sundays and public holidays with the union, since the law has fully authorized work on Sundays and public holidays, provided that the rules established in collective bargaining agreements regarding this matter are complied with.

Change in work hours for bank employees:

Until the promulgation of MP 905, the normal duration of work hours for employees at banks, banking houses, and Caixa Econômica Federal was 6 continuous hours on business days, with the exception of Saturdays, totaling 30 hours of work per week.

After the publication of MP 905, the normal work hours for bank employees became 6 hours per day exclusively for those who work as a teller. MP 905, however, expressly establishes the possibility of agreeing on longer work hours, at any time, by individual written agreement or collective bargaining agreement. In relation to other bank employees, the workday will be 8 hours per day.

In the previous wording, article 224 of the CLT expressly stated that the normal work hours of bank employees did not include Saturdays, since the activities should be performed from Monday to Friday. However, the new wording did not maintain any provisos regarding the subject. Thus, there is no longer a legal prohibition on having bank employees work on Saturdays, subject to the limit of the 30-hour workweek.

Changes related to trade union relations and organizations:

MP 905 has brought in two major changes on this matter: (i) it made the labor union's participation in the negotiation of PLR plans non-mandatory, thereby allowing this to be done directly by the employer with its employees; and (ii) increased the fine for violations of trade union organization rules, including in cases where the company attempts to prevent employees from joining or organizing or exercising their right to unionize.

Changes in the rules on inspections and imposition of administrative fines related to labor laws and regulations:

One of the main changes of MP 905 in relation to supervision is the criteria for application of the Double Inspection. According to the wording for article 627 of the CLT proposed by the MP 905, the Labor Inspectors must observe this criterion in the following scenarios: (i) enactment or issuance of new laws, regulations, or ministerial instructions, during the period of 180 days, (ii) first inspection of newly opened or instituted establishments or workplaces within 180 days, (iii) in cases of micro-enterprises, small businesses and establishments, or workplaces with up to 20 workers, (iv) when there is a violation of a legal precept or regulation relating to safety and health graded as being light/not severe, and (v) when there are previously scheduled technical supporting visits.

MP 905 also establishes a maximum term of validity of 2 years for Terms of Adjustment of Conduct and Terms of Commitment signed with the Public Labor Prosecutor and the Ministry of Economy, respectively. As of its entry into force, entering into extrajudicial settlements with an indefinite term is no longer allowed.

Another aspect of MP 905 is the need for the Labor Inspector, upon issuing an Infraction Notice, to state which collective actions to prevent and remedy irregularities should be taken by the companies, if repeated infractions or high levels of occupational accidents or diseases are detected. This obligation stems from the institution of planning for labor inspection actions, which should include special projects for inspection by sector for the prevention of occupational accidents, occupational diseases, and labor irregularities involving these topics.

In addition, MP 905 innovates by instituting the Electronic Labor Domicile, with the purpose of informing employees of administrative acts, tax actions, subpoenas, and notices and allowing the receipt of electronic documentation during the course of inspections or when presenting a defense or filing an administrative appeal.

MP 905 also provides for compliance with the deterritorialization requirement for the review of administrative defenses. This means that, if an objection is filed against a particular tax assessment notice, another federal unit other than the one that issued the assessment will be responsible for reviewing the administrative defense.

New criteria were also created for the application of administrative fines, which will be applied considering the nature of the infraction (mild, medium, severe, or very severe), and whose values depend on whether the infractions are subject to a variable fine (from R$ 1,000.00 to R$ 100,000.00) or per capita (R$ 1,000.00 to R$ 10,000.00).

Changes in the application of interest and adjustment for inflation of labor debts:

MP 905 changed the index for adjustment for inflation and the interest rate applicable to labor debts. Adjustment for inflation will be carried out using the IPCA-E index, and not the TR index. Interest will be the same as applicable to savings accounts, as opposed to the current fixed percentage of 1% per month.

Changes in unemployment insurance rules and taxation:

Pursuant to MP 905, workers on unemployment insurance will be considered as compulsory insureds under Social Security for the entire period of receipt of the benefit.

To this end, unemployment insurance was included in the list of amounts considered to be contribution salary and, therefore, will be considered for the purpose of discounting the social security contribution. In turn, maintenance of the status of insured will be ensured until twelve months after the end of the unemployment insurance.

Category: Infrastructure and energy

Distributed generation (DG) allows consumers to generate their own electricity from renewable sources or qualified cogeneration and, where possible, provide the surplus to their own local distribution grid. The system has two modes: distributed microgeneration (with installed power less than or equal to 75 kW) and distributed mini-generation (with installed power greater than 75 kW and less than or equal to 5 MW) of electricity. With the possibility of new regulations for DG, the innovations expected may combine financial economy, social and environmental awareness, and self-sustainability.

The National Electric Energy Agency (ANEEL) regulates the generation of electricity in the DG modality through Normative Resolution No. 482/2012 (REN 482/2012). In 2015, REN 482/2012 was revised with the purpose of increasing the limit power from 1 MW to 5 MW and creating the modalities of multiple consumer units and shared generation projects. Since then, Aneel has shown interest in modifying, by the end of this year, the terms and conditions governing DG. On October 15, the agency announced the opening of Public Consultation No. 25/2019, in order to receive contributions to proposed revision of REN 482/2012 and to open discussion with the industry players about the rules to be applied to distributed micro and mini-generation. In this sense, Aneel held a public hearing (in person session) to discuss the issue at its headquarters in Brasília, in November 7, 2019.

According to public information provided by the agency, the majority (75%) of power generation via DG is local, that is, in systems installed in a single residence, condominium, business, or industry. The other 25% is allocated to remote DG, that is, two or more units in different locations, belonging to the same holder. In this last modality, we highlight large consumers who seek to reduce expenses and social and environmental awareness.

The crucial point of the revision of REN 482/2012 is the DG Energy Offset System. Under the current rule, the deduction of the energy injected takes into account not only the Energy Tariff (TE), but also the TUSD Wire A and Wire B tariff components. Thus, offsets for DG projects that inject energy into the system include tariffs on the wire, and the costs of using the grid are currently apportioned by other consumers who do not consume the energy generated via DG. Although DG projects generate their own electricity, the distribution grid continues to be used by them anyway, causing undue tariff compensation and burdening all other consumers who will have to apportion the costs of using the grid.

For this reason, after public discussion, the following proposal was reached: for local DG, existing consumers and those who file an access request prior to the publication of the standard continue with the offset rules currently in force until the end of 2030. From the following year, only the power component of the TE will be offset. Consumers filing a request for access after publication of the standard will not offset the TUSD Wire B and Wire A tariff components, but only the TE tariff component when the additional installed capacity of 4.7 GW is reached (article 7-D of the draft amendment to REN 482/2012).

For Remote DG, existing consumers and those filing a request for full access prior to the publication of the standard also continue to be subject to the offset rules currently in force until the end of 2030. After that, only the TE tariff component will be in force. Consumers filing a request for access after publication of the standard will offset only the TE tariff component (article 7-D of the draft amendment to REN 482/2012).

Regarding distributed mini-generation, the understanding was that the mini-generator, when using the grid to consume and inject energy through the same connection point, should enter into a Distribution System Use Agreement (CUSD), including the MUSD values (Amount of Use of the Distribution System) contracted for each tariff station and referring to the consumer unit, according to the choice of tariff modality and the amount of MUSD contracted referring to the generating center (article 4, paragraph 4-B, of the draft amendment to REN 482/2012).

Although the measure does not mean the regulatory classification of mini-generation as a generating unit, the result will be the application of the generation tariff (TUSDg) to the respective MUSD of contracted generation. In this respect, it is important to highlight that, despite the application of TUSDg, the consumer with mini-generation is still not entitled to the incentivized source discounts provided for by Law No. 9,427/96.

Per the new regulations, therefore, even offsetting all the energy consumed (through the energy injected or credits from past months), the consumer still has to pay for the other components of the tariff, which, in the vast majority of cases, may surpass the minimum amount to be invoiced at the consuming unit. Thus, the draft amendments to REN 482/2012 suggest that offsetting should be limited to the completeness of the consumption in the billing cycle (Article 7-C of the draft amendment to REN 482/2012).

ANEEL has affirmed that its studies would indicate that even with the implementation of the amendments to REN 482/2012, the return on investment in DG would remain very attractive, with an estimated payback of between four and five years. However, industry players do not seem to have the same perception. It is expected that the contributions to be made in Public Consultation No. 25/2019 will be taken into account in order that any changes to the draft resolution make investments in DG attractive to the market.

Category: Real estate

The opportunity for regularization of buildings granted by the São Paulo City Government, through Law No. 17,202/19, should benefit more than 750,000 irregular properties in the state capital. The Amnesty Law, as it is popularly known, meets the provisions of the Strategic Master Plan of the Municipality of São Paulo and establishes the subordination of regularization of buildings, when necessary, to the execution of works.

Promulgated by Mayor Bruno Covas last October 16, the new law aims to regularize buildings built before the enactment of the 2014 Strategic Master Plan and, to that end, establishes three distinct procedures.

One of them is the automatic procedure, in which the owner needs not perform any act or take any action to ensure regularization. This procedure only includes low and medium grade properties, which were exempt from the payment of the Urban Property Tax (IPTU) in 2014 (occupied by retirees and pensioners with income below three minimum wages, under the terms of Municipal Law No. 15,889/13).

The second procedure is the regularization by declaration of the owner. This category includes properties up to 1,500m² and up to 10 meters high, for residential use, multifamily properties (up to 20 units), Social Interest Housing (HIS), and Popular Market Housing (HMP), but they must still meet other requirements of the law. The interested party may file the request for regularization on a website created by the City Government and present simplified technical documents, signed by the person responsible for the building, as well as documents relating to the property itself and the construction.

To perform this procedure, one must pay a fee of R$ 10.00 per square meter regularized. HIS and HMP developments are exempt from this payment.

For buildings that do not fit into any of the above scenarios, the Amnesty Law creates the possibility of regularization through a common procedure, by presenting the same list of documents required for the declaration procedure. The fee charged for this procedure will also be R$ 10.00 per square meter regularized. In practice, therefore, the legislation does not differentiate much between the declaratory and common procedures.

Moreover, depending on the constructive potential stipulated by municipal zoning (relationship between the size of the built area and that of the land area), it might be necessary to pay for an authorization to ensure regularization. That is, the city government stipulates the maximum constructive potential for the buildings in each zoning, allowing payment of remuneration for construction above this limit, the so-called paid authorization. However, there is a limit for the acquisition of additional constructive potential. If the building is above the maximum limit (already considering the paid authorization), it cannot be regularized. The paid authorization will be calculated in accordance with the Amnesty Law, and payment thereof may be made within up to 12 fixed monthly installments.

Other cases not covered by the new law: (i) works completed after July 31, 2014; (ii) works built on areas of dams, lakes, streams, and electric transmission lines; (iii) works carried out on public municipal land, including state or federal grounds; (iv) constructions that have been subject to an Integrated Operation or Urban Consortium Operation; (v) areas affected by a road improvement provided for in municipal laws; and (vi) areas that do not fit within the city government’s subdivision restrictions.

It is worth mentioning the levying of Tax on Services of Any Nature (ISS) in the regularization of buildings. Payment of the tax is one of the requirements of the law.

The Amnesty Law also provides for the issuance of a regulatory decree to clarify specific issues. The decree must be promulgated by the Executive Power within 60 days from the publication of the legislation, that is, by December 17 of this year.

Only after the enactment of the regulatory decree and the entry into force of the law, scheduled for January 1, 2020, will the amnesty program be open for interested parties to join and submit their applications, where appropriate, to the city government. The initial period for issuing the decree is 90 days and may be extended three times for the same period of 90 days.

With the regularization of a building, it will be possible to issue a completion report, a requirement for the construction to be recorded in the registration of the property with the competent Real Estate Registry Office. This is also a requirement for obtaining the an operating license and inspection report from the Fire Department for functional buildings.

More information may be found on the website of São Paulo’s city government: https://meuimovelregular.prefeitura.sp.gov.br/

Category: Tax

Executive Order (MP) No. 899/19, already known as the Legal Taxpayer's Executive Order, was published on October 17 of this year with the purpose of reducing tax litigation and recovering debts classified as irrecoverable or difficult to recover. To this end, the MP provides for the possibility of settlement to end administrative or judicial disputes at the federal level.

The possibility of settlement between public authorities and taxpayers in tax matters has been allowed since 1966 by article 171 of the National Tax Code (CTN),^[1] which, however, requires a specific provision of law for the competent entity.

The scenarios for and modalities of settlement that are now admitted, and the peculiarities thereof, shall be analyzed below. The conditions are still subject to regulations and a framework to be established, as appropriate, by the authorities indicated in the MP.

1. Settlement in relation to the outstanding debt with the Federal Government

Assumes the existence of debt already registered as outstanding debt, whether or not of a tax nature. It may be proposed by the competent prosecutor, individually or by adhesion, or by the debtor.

The transaction may relate to: (i) the granting of discounts for debts classified by the tax authority as irrecoverable or difficult to recover; (ii) term or method of payment, including deferral and default fine; and (iii) offering, substituting, or disposing of guarantees or encumbrances.

Therefore, this scenario for settlement only allows for proposal of a reduction of amounts for debts considered irrecoverable or difficult to recover, according to criteria that will be established in an act by the attorney general of the National Treasury (PGFN), and provided that there is no evidence of fraudulent depletion of assets.

The total amount of the debt may be reduced by up to 50%, with the possibility of payment within up to 84 months, for companies in general. For individuals, small businesses, and microenterprises the reduction may reach 70%, with a payment term of up to 100 months.

The MP prohibits reduction in principal, settlements for fines for fraud, evasion, collusion, or any penalty of a criminal nature, in addition to settlements for debts related to the Simples Nacional tax system [“Simplified Tax Regime”] or FGTS payments.

The individual settlement must be signed by the PGFN or an authority delegated by the PGFN.

2. Settlement for adherence in tax litigation to a relevant and widespread legal controversy

Settlement for adherence is that which is proposed by the government and subject to the acceptance of taxpayers that meet the conditions and requirements in that regard. It shall be conducted exclusively by adherence to be formalized electronically, as proposed by the Minister of Economy to terminate tax or customs disputes. The settlement should always deal with disputes considered relevant and whose legal theory under discussion involves a considerable number of taxpayers. The existence of an ongoing administrative or judicial proceeding is, therefore, a condition for entering into the settlement in this scenario.

The settlement proposal must be disclosed in the official press and on the respective agencies' website, with a notice specifying the conditions and requirements, including any reductions or concessions offered, terms, and forms of payment. Settlement regard debts related to the Simples Nacional or FGTS is forbidden, and the maximum time limit for discharge may not exceed 84 months.

3. Other provisions and points for attention

In any scenario for settlement, the good faith of the government and the taxpayer must prevail. Therefore, settlement is prohibited in the case of intent, fraud, sham transactions, malfeasance, graft, or passive corruption and fraudulent depletion of assets, among others.

In entering into a settlement to terminate a tax dispute, the debtor must waive all the legal claims that underlie the judicial or administrative proceedings.

Specifically in the case of lawsuits, the waiver must also involve collective actions, and the debtor must request that the judge terminate the case with a resolution on the merits, by ratification of waiver of the claim brought.

This is a point for attention, which is expected to be corrected in the regulations of the standard: the MP deals with a true scenario of settlement, with express reference to article 171 of the National Tax Code (CTN). Settlements are a mechanism of self-composition, whereby the parties provide mutual concessions in order to settle the dispute.^[2] Therefore, the most appropriate approach would be that the claim submitted to the court have the purpose of terminating the case with a resolution of the merits for approval of the settlement. The MP itself refers to judicial ratification of the settlement for the purpose of forming a enforceable judicial instrument.

Far from nitpicking, the clarification is necessary in order to avoid parallel disputes between the government and taxpayers, as the treatment of liability for costs and attorneys' fees is different in each case: in the case of pure and simple waiver, procedural costs and fees shall be paid by the waiving party. In the case of a typical settlement, with mutual concessions from one party to another for termination of the dispute (reduction of debt with the termination of the proceeding), a judgment to pay fees for loss of suit cannot be considered.

Another obscure issue concerns the treatment of tax debts not yet enrolled as outstanding debt but for which the administrative proceeding has already been completed. Apparently, per the framework of the MP, this debt would not be subject to settlement. The same seems to occur in relation to a tax obligation challenged in court by the taxpayer via a preventive measure (writ of mandamus or declaratory action, for example), but for whom a tax credit has not yet been created.

There does not seem to be any reason to exclude these situations from the settlement field. Nor could it be said that the Federal Government would have no interest in entering into a settlement with the private individual in that scenario because there was no proceeding to be closed, in the first case, and a credit created, in the second.

The objection cannot be sustained because litigation does not end simply because the judicial sphere has not yet been activated. Likewise, it exists when one disputes in court a tax obligation not yet created. If, after all, the goal sought is to reduce litigation, it is as important to close ongoing proceedings as it is to avoid the initiation thereof. And it is also irrelevant, for this purpose, whether or not the credits have been created.

Still in the scenario of settlement via adherence, special attention should be paid, with regard to the tax litigation over widespread and relevant legal controversy, to the need for waiver of rights in all proceedings involving the same theory. In principle, it would not be possible to select specific cases.

Having discussed the guidelines of the MP, the framework that will established by the competent authorities, as the case may be, the Minister of State for the Economy, Federal attorney general, attorney general of the National Treasury, and special bureau of the Federal Revenue Service of Brazil, will shape the success or failure of the objectives sought.

^[1] Article 171. The law may provide the option, under the conditions it establishes, for taxpayers' with tax debts or credits to enter into a settlement which, through mutual concessions, may result in the termination of litigation and consequent extinction of the tax debt.

Sole paragraph. The law shall designate the authority competent to authorize the transaction in each case.

^[2] The only scenario contemplated in the MP that does not represent a typical settlement scenario is the possibility of a settlement over the offering, replacement, or disposal of guarantees and encumbrances, which constitutes a kind of procedural legal settlement, pursuant to article 190 of the Code of Civil Procedure.

Category: Corporate

With the enactment of the Economic Freedom Law (Law No. 13,874/19), which establishes the Declaration of the Rights of Economic Freedom and whose purpose is to establish free market guarantees, new rules have been in place since September 20 which should simplify the daily life of Brazilian businessmen and reduce bureaucracy in the Brazilian business environment.

In order to make these measures viable, specific rules and laws (including the Civil Code) were also amended, the nature and purpose of which directly affect corporate law and, consequently, the form and conduct of business by entrepreneurs in Brazil.

The Economic Freedom Law created the business form of a “sole proprietorship,” that is, a limited liability company with a single partner. Formerly, in order to open a limited liability company, in which the use of the partners' equity to settle the company's liabilities is limited to the amount of their contribution to the capital stock, it was necessary to resort to a limited company (Ltda.) or an individual limited liability company (Eireli).

However, neither of these two corporate types really met the needs of entrepreneurs in Brazil. The limited company, by its nature, required at least two partners in its membership. According to data from 2014,^[1] 85.7% of limited companies in Brazil had only two partners. The survey does not report, but a simple observation of the market shows that, in the vast majority of limited companies, the second partner holds a merely symbolic interest, such as 0.1% of the capital stock, just to satisfy the rule of a plurality of partners.

Eirelis, in turn, as the name implies, are formed by only one person, but represent a vehicle little used in Brazil, as they are required by law to pay in capital of at least one hundred minimum wages (currently, R$ 99,800) at the time of their organization. That is, by trying to solve the problem of plurality of partners with an Eireli, the legislator ended up creating a financial barrier for the vast majority of small businesses in Brazil, which, according to data released by Sebrae in 2018^,[2] represent almost 99% of enterprises, split between micro and small businesses, a significant portion, therefore.

With the creation of a sole proprietorship, the incorporation of a limited liability company by a single person is now permitted, without the requirement of minimum or maximum capital, pursuant to article 1,052 of the Civil Code.

Another long desired measure concerns piercing of the corporate veil. In companies in which the assets of the partners and the company are divided, with the limitation of their liability vis-à-vis third parties (as in limited companies, for example), the law provides that the corporate veil of the company is pierced when it is subjected to abuse by officers and directors and/or partners, such that they are held liable for the obligations of the company.

This piercing of the corporate veil is due “in cases of abuse of legal personality, characterized by misuse of purpose, or mixing of assets.” Since the Civil Code does not specify what constitutes misuse of purpose or mixing of assets, legal scholarship and case law have been assigned the task of defining such concepts over the years. In addition, by providing that piercing the corporate veil is due in order that “the effects of certain and determined relations of obligations of the company be extended to the private property of the officers and directors or partners of the legal entity,” the legislature ended up leaving sufficient room for partners and officers and directors who had nothing to do with the abusive act to be held liable as well, like minority partners with no power of management, for example.

Therefore, the innovation brought in by the Economic Freedom Law is praiseworthy, which amended article 50 of the Civil Code in order to restrict its interpretation. With the new wording, it was specified that piercing of the corporate veil must occur in order to reach the private assets of officers and directors or partners of the legal entity who "benefited directly or indirectly from the abuse." The concepts of “misuse of purpose” and “mixing of assets” were also defined in order to ensure equitable treatment of the matter before the various courts of Brazil and greater legal certainty for the Brazilian business environment.

In addition to setting clearer parameters for the application of piercing of the corporate veil, the Economic Freedom Law sought to clarify that it may only be applied on an exceptional basis and that the mere existence of an economic group does not authorize application thereof. The new law also elevated the principle of the equity autonomy of legal entities as a lawful instrument of risk allocation and segregation. In a previous article on this portal, the new rules for piercing of the corporate veil are addressed in more depth.

With the Economic Freedom Law, the interpretation of business contracts must comply with new rules, which value more what was agreed upon between the parties (pacta sunt servanda). This gives the parties greater autonomy to freely agree upon rules of construction to the detriment of legal stipulations in order to impose certain limits on judicial intervention in the construction of such contracts.

According to some principles stipulated by the new law, the construction of the contract must take into account the meaning that:

1. is confirmed by the behavior of the parties subsequent to the execution of the deal;

2. corresponds to market usages, customs, and practices relating to the type of business;

3. corresponds to good faith;

4. is more beneficial to the party who did not write the provision, if identifiable; and

5. corresponds to what would be the reasonable negotiation of the parties on the matter debated.

It is also defined that, in private contractual relations, the principle of minimum State intervention and the exceptionality of blue penciling shall prevail, thus assuming symmetry and balance in civil and business contracts until proven otherwise. It is also ensured that the risk allocation defined by the parties must be respected and observed.

With these changes, doubts regarding the constructions of civil and commercial contracts in the light of applicable laws, which previously could have the effect of restricting the entrepreneur's freedom of contract, will now be guided by more objective criteria, given the greater autonomy of the parties at the time of drafting of the document. The change will avoid often unfavorable interpretations of ambiguous meanings or those not provided for by law.

Following the recent wave of modernization of the State and digitization of data and information, the Economic Freedom Law also states that public or private documents may be stored in electronic media, in which case they will have the same probative value as physical documents for all legal purposes and to prove any act of public law. The originals of such documents may even be destroyed after their digitalization, provided that the integrity of the digital document is verified, under terms that will be established in a regulation to be promulgated by the federal government.

The Law of Public Registration of Mercantile Companies (Law No. 8,934/94) was also amended in order to ensure greater speed and efficiency in the incorporation and termination of companies and in the registration and filing of corporate acts. Boards of trade must now review and record such acts within specific time frames, as otherwise they will be considered filed.

Upon establishing that acts, documents, and statements containing mere registration information must be automatically registered if it is possible to obtain them from other databases available from public agencies, the law created the system for automatic registration of information, thus transferring from the individual to the State part of the burden of maintaining registration data up to date.

Another long-awaited change was the permission for limited companies to issue debentures (securities) via private offerings, currently the exclusive right of corporations. It had been included in the text of Executive Order No. 881/19 in the mixed committee of Congress, but was removed from the legal text by the Chamber of Deputies. It is hoped that the topic will be discussed again by the Legislature, given the positive impact it can have on the Brazilian capital markets.

The main beneficiaries of the simplification and cutting of the red tape brought about by the Economic Freedom Law should be small businesses (including startups), which will likely have an impact on job creation over the years. The measures also create an environment more conducive for innovation and business, which may boost the economy and contribute to making Brazil more competitive on the international stage.

[1] Source: Radiography of limited companies, performed by the Center for Research on Markets and Investments (Núcleo de Estudos em Mercados e Investimentos), FGV Law SP, published in October of 2014: https://direitosp.fgv.br/sites/direitosp.fgv.br/files/arquivos/anexos/radiografia_das_ltdas_v5.pdf

^[2] Source: Market study: Small businesses in numbers, http://www.sebrae.com.br/sites/PortalSebrae/ufs/sp/sebraeaz/pequenos-negocios-em-numeros,12e8794363447510VgnVCM1000004c00210aRCRD