Publications
- Category: Banking, insurance and finance
Individuals and legal entities resident, domiciled or with headquarters in Brazil, as provided for in tax law, must report to the Central Bank of Brazil the assets and amounts held by them outside the country. The reporting is mandatory to those holding assets abroad (assets and rights, including corporate interests in companies, fixed-income securities, shares, real properties, deposits, loans investments, among others) amounting to or exceeding the equivalent to US$100,000.00 on December 31, 2018.
Furthermore, the individuals and legal entities mentioned above holding assets abroad must also deliver to the Central Bank of Brazil a quarterly report relating to assets held abroad on March 31, June 30 and September 30 of each year, in case the total amount of such assets amounts to or exceeds the equivalent to US$100 million.
The report referring to December 31, 2018 must be delivered by means of the Brazilian Capital Abroad (CBE) reporting form available in the internet website of the Central Bank of Brazil at: www.bcb.gov.br, from February 15th, 2019 through 6PM of April 5th, 2019.
The manual containing detailed information about the content and requirements of the reporting is also available in the website of the Central Bank of Brazil mentioned above.
The late delivery, lack of reporting, or the submission of false, inaccurate or incomplete information subjects the violator to the imposition of a fine by the Central Bank of Brazil of up to R$250,000 (two hundred fifty thousand Brazilian reais).
(CMN Resolution 3,854, of May 27, 2010, BCB Circular 3,624, of February 6, 2013, and BCB Circular 3,857, of November 14, 2017, as amended).
- Category: Litigation
When the Superior Court of Justice (STJ) decided at the end of last year to reinstate the bank freeze, or fiduciary assignment of receivables, which had been suspended by the court in a judicial reorganization case, it took into account the concept of capital goods provided for in article 49, paragraph 3, of the Bankruptcy and Corporate Reorganization Law (Law No. 11,101/2005, the “LRF”).
This legal provision deals with debt claims that are not subject to judicial organization, including those with a fiduciary guarantee. The final part of the article states that, during the 180 days of the stay period (article 6 of the LRF), capital goods essential to the debtor’s activity may not be removed.
The question of the essentiality of the goods in specific cases inevitably gave way to a discussion regarding the possibility of classifying receivables as capital goods, the possession of which should be assigned to debtor during the stay period by virtue of said provision.
Although the STJ has previously stated that receivables cannot be considered essential assets, the discussion was further elaborated in the special appeal in question (1.758.746/GO). The concept of essential capital goods was analyzed, and whether or not receivables could be included within it, given that this prohibition appears in the final part of article 49, paragraph 3, of the LRF, which served as a basis for companies in judicial reorganization to petition to the Judiciary to suspend bank freezes.
In summary, the appellants' petitions for “canceling bank freezes" lodged in judicial reorganizations were based on the need to maintain the source of production, the employment of workers, and the interests of creditors, which, in theory, would require the financial resources to be given as collateral via a fiduciary assignment to remain with the company under judicial reorganization to give it strength to overcome the crisis.
These arguments have always been strongly questioned, considering that receivables are not even within the assets of the company undergoing reorganization and, in the case of debt default, financial institutions, which already act as the fiduciary owner of the receivables, are entitled to immediate transfer of possession and ownership of the assigned receivables. The subject, therefore, has always generated controversy among scholars and judges.
Prior to delivery of the decision in Special Appeal No. 1.758.746/GO, and given the recurrence of the topic, Justice Aurelio Bellizzi had already indicated, in another case, the need to decide whether or not to categorize receivables that are subject to a fiduciary assignment as capital goods, emphasizing that this categorization could not be influenced by the essentiality of the goods, so as not to become something subjective, because, in fact, it should be objective.
By means of an appellate decision rendered in the special appeal, the STJ, in a unanimous opinion, finally set the criteria for classifying the assets of the debtor in possession as capital goods and, therefore, subject to the protection provided for in the final part of article 49, paragraph 3, of the LRF.
According to the decision, in order to be considered a capital good, the good must be in the possession of the debtor, it must be tangible, and its use cannot mean the vacating of the guarantee, such that, at the end of the stay period, it can be returned to the creditor.
Based on these assumptions, the STJ stated that a fiduciarily assigned receivable is not used materially in the productive process of the company in reorganization, since it is not a tangible asset, nor is it in the possession of the debtor. With that, he stated "the conclusion [was] peremptory that it is not a 'capital good’.” The Superior Court also concluded that "the term 'capital good' could not be interpreted as capable of rendering the fiduciary guarantee void.”
That being the case, based on its finding that receivables cannot be classified as capital goods, the STJ decided that the protection provided for in the final part of article 49, paragraph 3, of the LRF should not be applied to the bank freeze, and the guarantee must prevail intact, including during the stay period.
It is hoped that the new precedent of the STJ analyzed here will serve as a paradigm for the next cases in which the subject is presented, such that the case law will begin to be settled in line with the guideline of the Superior Court, thus generating greater legal certainty with respect to an issue that has hitherto been disputed.
However, even after delivery of the appellate decision in question, the São Paulo court rendered a decision to the contrary in the judicial reorganization of Livraria Cultura (case No. 1110406-38.2018.8.26.0100, in progress before the 2nd Court of Bankruptcy and Judicial Reorganization of the Central Civil Courts). In this case, an interlocutory appeal filed against the trial decision, upheld in limine by the appellate judge presiding over the appeal, is yet to be decided.
Effective since January of 2014, the Anti-Corruption Law (Law No. 12,846/13) has built a legacy of changes in corporate culture over the past five years. The scenario today is very different from the one observed at the beginning of its enactment, when corruption risks seemed far from the corporate reality, and companies still saw megaoperations of the Federal Police and the Public Prosecutor’s Office as episodes restricted to political agents.
The law has brought companies to the center of legal accountability for acts of corruption and investigations (in particular Operation Car Wash) have spread the idea that integrity risks are too great to be ignored by top management, which has given rise to a race to implement compliance mechanisms and procedures.
Although beneficial, this movement is often erratic. Often, companies are lost in a sea of legal uncertainties, derived, in part, from the absence of a legal framework. Such uncertainty can cause inaction, as in the case of leniency agreements (discussed in a prior article), in addition to risks, as occurs in internal investigations.
Corporate investigations are a primary part of a compliance program, which must rely on three basic principles: prevention, detection, and response to integrity risks. In this sense, a program that has preventive policies will be able to detect problems, which if ignored, can cause the program to become ineffective, in addition to exposing executives and managers to even greater risks arising from their inertia.
This fact is not ignored by business owners, compliance and legal officers, who in recent years have increasingly resorted to corporate investigations in cases of corruption, internal fraud, competitive issues, and labor problems (such as harassment), among others, to guide their decisions or prepare the defense of the company in an investigative or punitive proceeding.
The problem, however, is that corporate investigations are a relatively new subject in Brazil and, because they involve complex multidisciplinary and technical issues, they need to be conducted by skilled and experienced professionals in order to avoid the risk of increasing the problems instead of solving them.
Nevertheless, even for experienced corporate investigators, Brazil’s scenario presents challenges. The absence of legal guidelines fuels uncertainties and demands frequent use of foreign legislation and market practices in order to respond to questions from clients and partners.
Therefore, the approval of Provision No. 188/2018 of the Federal Board of the Brazilian Bar Association (OAB) came at a good time, being that it regulates the exercise of the lawyer's professional prerogative to carry out investigative diligence/procedures.
Although it does not have the strength and definitive nature of a statute and is still highly generic, it assists in drawing up a first normative outline capable of bringing legal certainty to lawyers involved in the investigation of breaches of integrity in the corporate environment and, especially, for their clients.
The provision defined the institute of defensive investigations as the "complex of activities of an investigative nature carried out by a lawyer, with or without the assistance of technical consultants or other legally qualified professionals at any stage of criminal prosecution, proceeding, or degree of jurisdiction, in order to obtain elements for the establishment of a lawful body of evidence, for the protection of their clients’ rights."
This definition comprises relevant issues. The first of those is that, although it focuses on the regulations of an investigation as a counterpoint to a potential criminal prosecution, the provision also includes in its conception any investigation conducted by a lawyer that seeks to gather evidence for the protection of a client’s rights.
This means that any corporate investigation conducted by a lawyer may be included in the concept of the provision, since its primary objective will always be to seek elements of information that allow clients to thoroughly know a fact that may affect their rights, for example, to negotiate a leniency agreement, defend themselves in a sanctioning proceeding, or seek indemnification for damages caused by employees or third parties.
The provision establishes that corporate investigations are activities exclusive to attorneys and, recognizing their multilateral and multidisciplinary nature, provides for the role of technical consultants, exemplified in the text as "experts, technicians, and fieldwork assistants."
Experience in corporate investigation cases shows that the presence of lawyers is relevant for the outcome and confidentiality of the work, but that just as corporate investigations conducted without lawyers generally lose out in terms of organization, technique, utility, and legal certainty, those performed only by lawyers can sometimes end up being incomplete.
Good corporate investigation lawyers should be specialized technical experts and excellent project managers, but they also need to be able to identify where they need specialized help, which is often the case with technology and forensic accounting services.
In this sense, the inclusion of the role of technical consultants in the provision may be its most relevant aspect, especially as it extends to those professionals the right and duty to confidentiality, pointing out that, as advisors to a lawyer, they "do not have the duty to inform the competent authority of the facts investigated” and that "any report and disclosure of the result of the investigation shall require the express consent of the client."
Such protection is fundamental not only for the proper professional practice of the consultants (for whom the absence of confidentiality brings about profound risk exposure) but also for the security of clients who engage the investigation.
- Category: Tax
Launched in October of last year as a very positive initiative by the Federal Revenue Service of Brazil (RFB) to guide taxpayers, in addition to avoiding default and potential litigation, the draft ordinance establishing a federal program to encourage tax compliance, Pro-Compliance, has some very questionable points that we shall review in this article.
The text was submitted to Public Consultation No. 4/2018 of the Federal Revenue Service of Brazil (RFB) to receive opinions and proposals from the taxpayers, but since October of 31, when the time limit for the contribution ended, no normative act was published to ratify or modify the draft of the original ordinance that will establish the program.
The proposal is inspired by the program named "Nos Conformes" (in English, "Compliant"), instituted by the State of São Paulo through Complementary Law No. 1,320/2018, and the Compliant Debtors Tax Registry, to be implemented by the Attorney’s Office of the National Treasury.
According to the explanatory memorandum of the RFB's draft ordinance, Pro-Compliance "seeks to encourage taxpayers to adopt good practices in order to avoid misconduct and comply with the law." These "good practices" are related to compliance with principal and ancillary tax obligations (payment of taxes and submission of returns and information to the tax authorities).
According to the draft, the program has the objective of settling tax debt, through measures that facilitate its payment, guide and support taxpayers, and prevent the creation of debts, delinquency, and litigation (administrative or judicial). To this end, taxpayers will be classified into categories (A, B, or C) according to their recent[1] history of relationship with the agency. To create the classification, the RFB will take into account the following criteria: (i) registration and maintenance of a registration status compatible with their activities; (ii) filing with the RFB of returns and documents with integrity, accuracy, and timeliness; (iii) full and timely payment of taxes due (article 4 of the draft ordinance).
Taxpayers classified into category A, with the best history, will be entitled to the following benefits: (i) prior information on indicia of an infraction determined by the Federal Revenue Service before a tax proceeding is initiated, which would enable taxpayers to return them to good standing without imposing the penalties applicable; (ii) priority service when appearing in person; (iii) priority in review of claims by the RFB, including in relation to the receipt of refunds, subject to the priorities defined by law; and (iv) Certificate of Tax Compliance issued by the Internal Revenue Service (article 12 of the draft ordinance).
In turn, taxpayers classified into category C will be subject to "the rigors of the law",[2] such as inclusion in the Special Inspection Regime addressed by the RFB Normative Instruction No. 979/2009, which imposes, among other measures, maintenance of uninterrupted supervision at the taxpayer’s establishment, reduction of calculation periods and tax withholding periods, compulsory use of electronic control of transactions carried out, and daily collection of the respective taxes, with special control in the issuance of commercial and tax documents.
These taxpayers will also be subject to the application of coercive measures, such as restrictions on those who do not bring into good standing debts subject to a Special Administrative Charge, among them, cancelation of tax benefits, inventorying of assets, and the exclusion from installment payment programs. As there is no provision regarding the treatment to be given to taxpayers classified into category B, it is inferred that they will not have differentiated treatment.
The points in the draft that may be considered fragile relate precisely to the criteria established for classifying taxpayers. Regarding the confirmation of the presentation of returns and documents with integrity and accuracy, for example, article 8, IV, of the draft establishes as one of the criteria to be observed the "results of requests for refunds, reimbursement, and returns and declarations of offsets." Once again, the RFB, like the isolated fine provided for in article 74, paragraph 17, of Law No. 9,430/96,[3] seems to seek to penalize taxpayers in the event of mere rejection of requests for restitution, reimbursement, or non-recognition of offsets.
The adoption of this criterion may constitute a violation of the right to petition provided for in the Federal Constitution (article 5, XXXIV), as it ends up creating obstacles (including financial obstacles) for companies to petition the public authorities in defense of their right to recover taxes improperly collected. In this sense, the means of political sanctions is a kind of mechanism to discourage taxpayers from seeking to defend their rights.
It is also worth remembering that taxpayers who have their request for restitution or reimbursement denied, or who have an offset not ratified by the Internal Revenue Service, have the constitutional right to demonstrate in the judicial sphere the legitimacy of their claim or the good standing of the offset conducted. Therefore, as set forth in the draft ordinance, this criterion may lead to violation of the guarantee of the inalienability of the access to Justice (article 5, XXXV, Federal Constitution).
In order to analyze the presentation of returns and documents in a timely manner, the criterion of "repeated rectifications of returns" will be reviewed (article 9, III). The problem is that, within the legal deadline, taxpayers have the right to rectify returns without them being considered untimely, which would rule out the use of this criterion for the purpose of classifying taxpayers.
In addition, the provision that classification will consider periods prior to the issuance of the ordinance represents an unlawful retroactive effect of the rule, since it may lead to penalization of taxpayers for conduct adopted before even knowing the rules.
The greatest controversy, however, is related to the severe consequences and penalties imposed on taxpayers in category C. Among them, cancelation of tax benefits by means of an administrative act (the ordinance) and, more seriously, the imposition of penalties even in cases where the taxpayer is in good standing with the tax authorities, but has received this classification.
There is not even a provision regarding reporting to the competent authority for the application of penalties related to the cancelation of tax benefits, which may violate the principle of legality and the right of defense and an adversarial proceeding.
It is important to point out, however, that after being informed of their classification by means of an e-CAC, taxpayers may request a review of this classification within 30 days, “upon identifying an error in the application of the criteria" (article 5, paragraphs 1 and 2, of the draft ordinance). Thus, although there is no appeal against the RFB’s decision to review such a request, the draft ordinance provides mechanisms to review the classification. It is advisable, however, that this request be processed with supersedeas effect, in order to promote the right to an adversarial proceeding and a full defense.
There is also no provision regarding disclosure of the taxpayers’ classification to third parties, as in the Nos Conformes program. Such disclosure, as long as the taxpayer does not object, can be beneficial and bring about competitive advantages for those who are classified into category A.
In summary, even considering that a rapprochement between the tax authorities and taxpayers is always welcome, the Pro-Compliance program, as proposed in the draft ordinance that establishes it, may bring in uncertainties and questions. There are points that need improvement, including in order to avoid injustice in taxpayer classifications.
[1] According to article 4, paragraph 3, of the draft ordinance, historical for the current year up to the last four years as of the calendar year of 2016.
[2] According to the explanatory memorandum of the draft ordinance.
[3] One-time fine of 50% applicable over the value of the debt subject to declaration offset that is simply not approved.
- Category: Infrastructure and energy
In January, the state government of São Paulo enacted Law No. 16,933/2019, which regulates the institutes of contract extension, early extension, and rebidding in the State of São Paulo. This law is similar to the rules set forth in Law No. 13,448/2017, which governs the same institutes in the federal public administration sphere.
In both of the laws abovementioned, the institute of extension refers to two distinct modalities. The first one consists of the extension of contract, carried out due to the advent of its original term, by means of which its length of validity is modified. The second one consists of the early extension, which, under federal law, is conditioned on the provider making new investments not originally provided for in the contract and which are not amortizable considering its initial term. It is worth noticing that in the State of São Paulo, the obligation for the provider to include new investments under contractual terms is also a condition for the pure and simple extension of contract.
Certain requirements provided for at the federal level regarding the extension institute were not mentioned in the text of the state law. An example is the lack of a reference in the São Paulo rule to the need for explicit authorization in the public notice or in the original contract as a requirement for the adoption of the processes of extension of contract and early extension.
In addition, the state law does not define a deadline term for the presentation of a request for the extension intended by the interested party, in contrast with the provisions set forth in the federal law. The latter requires that the request for an extension shall be submitted at least 24 months in advance, counted as of the end of the original contract signed, and must also occur when the contract has reached between 50% and 90% of its original term.
Other requirements of the federal law that were detached from the São Paulo version of the rule are the prohibition that the same contract is extended more than once and the limit on the term of its extension. While extensions of federal contracts may only occur once and with its duration limited to a period equal to or shorter than the extension period originally established or admitted in the contract, in state contracts these limitations do not exist. This is because, in the state rule, there is no prohibition on successive extensions and their duration is not linked to a specific framework based on the original term of the contract, but, in fact, is related to the (i) amortization of investments not originally provided for or (ii) the mitigation or resolution of economic and financial imbalance.
In order to justify the extension and support its decision, the competent entity shall present a technical, economic, and environmental study demonstrating the advantage of the extension in relation to promoting a new bidding procedure. In addition to the requirements already enforced at the federal level, the State Administration must contemplate additional analysis and information, namely: (i) the reasons for maintaining or changing the remuneration criteria; (ii) mechanisms that demonstrate mitigation or resolution of the economic and financial imbalance found in relation to the private partner; and (iii) guarantees that will be given to the private partner as a way to mitigate the contractual risks and reduce the associated costs. At this point, the state legislature was especially concerned with guaranteeing the economic and financial balance of contracts in the context of changing their term of duration.
The most relevant procedural change in the state law, in comparison with the federal law, is the fact that it is silent with respect to prior public consultation and the submission of the extension process to the scrutiny of the accounting court.
The rebidding provided for in the federal law also inspired the São Paulo legislator. This administrative procedure provides for a friendly termination of partnership agreements and the signing of a new business arrangement for the ventures, under new contractual conditions and with new contracting parties, by means of a bid promoted for this purpose. Both laws provide for the possibility of rebidding existing contracts that: (i) are not being complied with by providers; or (ii) whose providers show an inability to fulfill the contractual or financial obligations assumed.
On the one hand, the federal law establishes that the regimes for judicial and extrajudicial reorganization provided for in Law No. 11,101/2005 (except in the case provided for in paragraph 1 of article 20 of this law) do not apply for the rebidding procedures intended by the public authorities. The state law, on the other hand, does not mention these regimes.
Another important provision of the state law also inspired by the federal rule is the possibility for the parties to submit their calculation of the compensation to an arbitration proceeding, carried out alongside the administrative proceedings for the new bidding. The state legislature reveals the same intent to make the process more efficient, since the discussion of compensation in the judicial sphere is one of the main factors for delay in cases of the termination of contracts. Thus, both laws recognized faster means for the resolution of conflicts: amicable termination and arbitration.
The definition of property right, in order to allow the submission of the termination procedure to arbitration, gained an amendment in the state law. The text finds that divergences regarding the technical execution of a contractual obligation shall also be considered an economic right subject to arbitration, in addition to those other situations already considered in the federal law, namely: (i) questions related to the recomposition of the economic and financial balance of the contracts; (ii) calculation of compensation resulting from the termination or transfer of the concession contract; and (iii) default in contractual obligations by either party.
The state rule has also required the execution of a public consultation before deciding to rebid a contract. However, instead of sending the studies to the accounting court after the public consultation, the Commission of Control and Oversight of the Legislative Assembly will be the institutional body responsible for expressing its opinion on the process in São Paulo.
As a way to mitigate risks and reduce costs associated therewith, the São Paulo law established a general authorization for the creation of a public guarantee in common concession contracts, public-private partnerships, concessions governed by sectorial legislation, permission of public services, and other public-private deals. This provision seems to bring in an important component of innovation, with no corresponding provision in the federal law: The State Administration, which was only authorized to provide guarantees under public-private partnership contracts, could now do so in relation to other various types of contracts.
The federal law restricts its scope of application to road, rail, and airport industries, considering that others sectors already have a specific rule regarding those institutes. In turn, the state law referred to health, sanitation, piped gas services, and transportation infrastructure sectors (such as highways, road, rail, metro, railway, and waterway transportation).
Both laws reflect an increasingly well-founded understanding that conventional bids bring with them their own costs and therefore cannot be considered the only legally valid alternative available to the public administration. Both extensions and rebidding, if the precautions for their correct application are observed, can minimize opportunity costs and provide greater speed and economy in the implementation of new investments, in addition to accomplishing termination of unsuccessful contracts, resolving the imbroglios, and giving continuity to the projects of the State’s interest.
- Category: M&A and private equity
Law No. 13,800/2019, enacted in January, converted into law, with various modifications, Presidential Decree No. 851/18, published shortly after the fire at the National Museum in Rio de Janeiro. The purpose was to regulate endowments and other heritage or philanthropic funds. Among the changes promoted are simplification of the governance of the endowment funds and the expansion of the causes to be supported by them, with the express inclusion of human rights, public safety, and other causes of public interest.
Endowment funds are sets of private assets organized, managed, and administered by an independent organization with the purpose of providing a long-term funding for the supported institutions or the institutions holding the funds. As a general rule, only the net income of the endowment, discounting for inflation, but not its principal amount, may be applied to projects. These funds serve as a regular and stable source of funding for institutions whose purpose is to develop projects for education, science, technology, research and innovation, culture, health, environment, social assistance, sports, public safety, human rights, and other purposes in the public interest. For the time being, such institutions may be public or private non-profits.
Law No. 13,800 has brought in important advances in encouraging donations in Brazil by improving the corporate governance of endowment fund management organizations, therein providing for a separation of responsibilities among those who manage these funds and the institutions supported by them. The endowment fund manager must include in its bylaws, among other matters: (i) its name, which should include “endowment fund manager"; (ii) supported institutions (the change requires a qualified quorum); (iii) the obligation to set up a board of directors, audit committee, and investment committee (the latter for funds with equity exceeding R$ 5 million), as well as rules regarding the composition, operation, competencies, form of election or appointment of its members, and (iv) the form of approval of policies regarding management, investment, redemptions, and use of fund resources; (v) transparency and accountability mechanisms; and (vi) prohibition on the allocation of funds to a purpose other than that provided for in the bylaws and prohibition of granting guarantees to third parties over the assets that make up the fund.
The regulations also require endowment funds to (i) maintain accounting books and records in accordance with Brazil’s generally accepted accounting principles, with annual disclosure of the financial statements and management and use of resources on their websites; (ii) submit, every six months, information on investments and, annually, on the use of resources; (iii) adopt internal mechanisms and procedures for integrity, auditing, and incentives for reporting irregularities; and (iv) establish codes of ethics and conduct for managers and employees. Fund management organizations with shareholders' equity exceeding R$ 20 million must have their financial statements reviewed by independent auditors.
Law No. 13,800 also provides that the managing entity’s board of directors shall be composed of a maximum of seven members. It is the responsibility of the board to decide on changes to the bylaws, investment policy, management rules, and rules for the redemption and use of resources, as well as financial statements and provision of accounts of the fund management organization, among other matters.
The investment committee, to be appointed by the board of directors, is responsible for recommending to the board the investment policy and the rules for the recovery and use of funds, in addition to coordinating and supervising the actions of those responsible for managing funds, and to prepare an annual report on this management work. Another important advance of Law No. 13,800 for the professionalization of management of endowment funds is the authorization for management organizations to outsource the management of the fund to a legal entity registered with the Brazilian Securities and Exchange Commission (CVM), allowing the payment of a performance fee.
The audit committee must be composed of three members appointed by the board of directors, and members who sit on the board of directors in the three years prior may not be appointed. The members of the board of directors, audit committee, and investment committee may be compensated in accordance with the fund’s income.
The endowment funds’ managers will only be held liable for damages that they cause when they engage in (i) acts of management with willful misconduct or by virtue of gross error; or (ii) acts that violate law or statute.
Law No. 13,800 created the role of the executive organization, a non-profit institution or an international entity recognized and represented in Brazil, which may be engaged by the managing organization to assist and coordinate the supported institution in the development of projects and programs. The law regulates the relationship between the supported institution and the management organization, therein requiring the execution of a partnership instrument and the execution of programs, projects, and other purposes within the public interest, which must establish, respectively, (i) the cooperation link between them and the purpose of the public interest to be supported; and (ii) how the funds will be spent.
Endowment funds may receive grants under the following modalities: (i) permanent non-restricted, which refers to funds whose principal is incorporated into the fund's permanent assets and cannot be redeemed, but income may be used in general programs and projects; (ii) permanent restricted to a specific purpose, which defines resources whose principal is incorporated into the permanent assets of the fund and cannot be redeemed, but the income may be used in projects related to the purpose previously defined in the instrument of donation; and (iii) specific purpose, which includes resources allocated to previously established projects, the principal of which may be redeemed in accordance with the terms and conditions set forth in the donation instrument.
Provided that they are intended for cultural projects, the amounts relating to specific purpose restricted donations and specific purpose donations may be deducted from the tax due on the donor's income tax return at 100% or 80% of the donation made to individuals, subject to the global deduction limit of 6% of the tax due; and 100% or 40% for legal entities taxed on the basis of the real profit regime, subject to the limit of 4% of the tax due, depending on the classification in the Rouanet Law.
Presidential Decree No. 851 originally extended the deductibility of donations to other causes, such as human rights, public safety, and other causes in the public interest. However, these provisions of Law No. 13,800 were subject to a presidential veto due to concerns about the relinquishment of government revenues. By limiting the deductibility of income tax only to donations for cultural projects, the law has missed an excellent opportunity to encourage donations to other social causes and thus to make endowment funds a useful tool for the third sector in general. These presidential vetoes will still be evaluated by representatives and senators within 30 days as of February 2, 2019.
Discussions on the enactment of the law were also an opportunity to address, at the national or state level, another recurring problem in the third sector: the application of the Tax on Transfers Causa Mortis and Donation of Any Goods or Rights (ITCMD) in donations to social causes. In the specific case of the state of São Paulo, the ITCMD is the responsibility of the grantee, incurred at the rate of 4% (the maximum established by the Federal Senate is 8%) over the amount donated. Entities whose social objective is to promote human rights, culture, or the environment have an exemption from this tax. Pursuant to the terms of article 4, item IV, of Decree No. 46,655/02, the ITCMD does not affect the transfer of assets and rights to the equity of educational and social assistance institutions that enjoy immunity only in relation to assets linked to essential purposes, which do not include assets for use as a source of income (as would be the case of endowment funds).
Considering that the ITCMD would be applicable to donations to funds and, in most cases, to donations from funds to supported institutions, a concern with double taxation of funds intended for social causes arises.
According to a study by a researcher with FGV, Rafael Oliva, and the report Sustentabilidade econômica das organizações da sociedade civil – Desafios do ambiente jurídico brasileiro atual ["Economic Sustainability of Civic Society Organizations - Challenges in the Current Brazilian Legal Environment”], FGV Direito SP, the funds raised with ITCMD, including inheritances and donations, correspond to 1% of net current revenue of the state of São Paulo, and only 1% of the total collected (therefore, 0.0168% of the net current revenue of the State of São Paulo) refers to donations to legal entities, including civil society organizations, which demonstrates the financial viability of this tax relinquishment.
Regulation of endowment funds through Law No. 13,800 provides greater legal certainty for donors and managers of social projects, as well as improved transparency and corporate governance for the third sector. However, limitations on tax deductibility stemming from the presidential veto cast doubt on the success of endowment funds as a tool for developing a culture of donations in Brazil.