Category: Infrastructure and energy

With the issuance of GM Ordinance No. 517/2018, the Ministry of Transport, Ports, and Civil Aviation provided guidance, at the beginning of October, on the procedures and requirements for the approval of investment projects as a priority in the area of ​​infrastructure, in the logistics and transport sector, and for the issuance of incentive debentures. The text of the rule puts into effect the provisions of article 2 of Law No. 12,431/2011, which regulates the conditions for the offer of incentive debentures with the objective of financing priority investment projects.

The regulation is in line with similar changes made by other infrastructure sectors, which have recently updated the rules for defining their priority projects. As an example, in December of 2017, the Ministry of Mines and Energy issued Ordinance No. 493/2017; the basic sanitation sector, in turn, had its rules for the definition of priority projects updated through the promulgation of Ordinance No. 315/2018 of the Ministry of Cities, in May of 2018.

Ordinance 517/2018, on the other hand, regulates all modalities of the logistics and transportation sector, in such a way that the standards for the qualification of road, railroad, port, and airport infrastructure projects have become the same. The previous ordinances applicable to the different transport segments were revoked.^[1] Thus, the ministry met the interest already shown by the transport and logistics market by standardizing procedures and eliminating inconsistencies found in the framework for investment projects in the different modes of transportation. The ministry also sought to benefit from the experience accumulated in the different sectors, especially the highway sector, which has been using in a more frequent and successful manner the issuance of debentures under the terms of Law No. 12,431/2011, and to apply it uniformly to the segment as a whole, thereby allowing for a more agile and efficient review of the requirements presented.

The new ordinance establishes as priority those projects that are the subject of a concession, permit, authorization, or lease or public-private partnership process included in the Investment Partnerships Program (PPI), under the terms of Law No. 13,334/2016, or any projects previously approved by the Ministry of Transport.

Thus, Ordinance 517/2018 gives relevance to projects considered priority by the PPI, therein formalizing the correctness of the prioritization of the infrastructure projects in the area of ​​transportation and logistics with the Federal Government’s agenda. The measure indirectly meets the Federal Government's objectives of resuming private investments in these projects with more speed and legal certainty.

One of the innovations of the ordinance that should be featured is the possibility of using incentivized debentures to raise funds for the payment of concession expenses (not only implementation, expansion, maintenance, recovery, adaptation, or modernization of projects), in line with changes already made, for example, by the Ministry of Mines and Energy.

The project owner's request must be supported by technical documentation, with a description of the project and project implementation and investment schedule, as well as a technical declaration by the respective regulatory agency attesting to the validity of the contract and stating that the project is contemplated in the concession instrument or related to the public service provided. This requirement was a novelty introduced by Ordinance 517/2018 and aims to prioritize companies in a situation of good standing before regulatory bodies.

Once the application has been received, the Department for Development and Partnerships of the Ministry of Transport will review the application and, if necessary, request the submission of additional documents and information. It is important to note that the Department for Development and Partnerships may consult other departments of the Ministry of Transport (namely, the National Department of Civil Aviation, the National Department Ports, and the National Department of Land and Water Transport), depending on the sector of the project under review.

Once the project is approved, by means of a ministerial ordinance, the issuance of debentures should occur within up to 2 years. In the case of non-issuance, the legal entity owning the project must provide a justification.

The ordinance provides for monitoring of the implementation of the project by the Department for Development and Partnerships. Accordingly, the project owner must inform the department of the issuance of the debentures within 30 days. It must also send information and documents annually regarding the investment in the project of the proceeds received from the issuance (a copy of the management report sent to the debenture holders, project uses and sources, and information on the issuance of debentures and a detailed report on the investment of the funds).

The tax treatment favored by certain investors makes it possible, in many cases, to obtain more attractive rates for companies issuing debentures under Law No. 12,431/2011. The local capital market has been taking advantage of this condition and making significant use of incentivized debenture issuances, per the terms of Law No. 12,431/2011, with 181 public offers carried out since the law was enacted until October 17 of this year.^[2] The changes introduced by the Ministry of Transport through Ordinance 517/2018 aim to eliminate gaps and standardize procedures, thus giving greater legal certainty and encouraging investments in the transport and logistics sector.

^[1] SEP/PR Ordinance No. 404, of October 2, 2015; SAC/PR Ordinance No. 18, of January 23, 2012; and MT Ordinance No. 9, of January 27, 2012.

^[2] http://sistemas.cvm.gov.br/asp/cvmwww/registro/ofertasreg/OfertasProjPri.asp

Category: Banking, insurance and finance

Presidential Decree No. 9,544/18, published on the last 30th, acknowledged the interest of the Brazilian government in having foreign ownership of up to 100% of the capital stock of Direct Credit Companies (SCDs) and Interpersonal Lending Companies (SEPs) authorized to operate by the Central Bank of Brazil (Bacen), also known as credit fintechs.

These types of financial institutions were recently created by Bacen, mainly to foster competition in the credit market and to legally support the growing evolution of the use of technology in the development of banking activities. Credit fintechs are subject to more lenient regulations as compared to those applicable to "traditional" financial institutions, acting exclusively via electronic platform.

In Brazil, foreign participation in the capital stock of financial institutions is authorized only if it is in the interest of the Brazilian government, in view of article 52, sole paragraph, of the Transitory Constitutional Provisions Act (ADCT). If, for example, a financial institution that has foreign participation in its capital wishes to initiate its activities in Brazilian territory, or a financial institution that already operates in Brazilian territory has an interest in receiving foreign investment, it must, in addition to obtaining authorization from Bacen, request an opinion from the government, through a decree by the President of the Republic, attesting to the interest of the Brazilian government in this foreign participation, in accordance with the procedure prescribed by Bacen Circular No. 3,317/16.

Under Decree No. 9,544/18, the national interest in foreign participation of up to 100% in credit fintechs is automatically recognized, which makes the authorization process more agile and efficient, since an opinion by the presidency of the Republic in each specific case is avoided.

The issuance of the decree was a significant step forward in the effective practical implementation of the BC+ Agenda, inasmuch as it eliminated a time-consuming and costly legislative step that until today needed to be met for any foreign investment in the credit fintechs regulated by Bacen.

Since the process for operating authorization for credit fintechs is faster than that of "traditional" financial institutions, because of the very nature and the limited scope of these companies, it made perfect sense that this requirement for the authorization process also be simplified. The measure will serve as a catalyst for potential new investments in these types of financial institutions, which will likely also contribute to the emergence of more players in this segment, thereby creating more competition and reducing the cost of credit for the end customer.

Category: Infrastructure and energy

The collision of the Tunisian-flagged container ship Ulysse with the Cypriot-flagged freighter CLS Virginia near the island of Corsica in the Mediterranean Sea in early October spilled dozens of cubic meters of fuel oil and mobilized French and Italians in an attempt to contain the oil spill in the sea. The oil slick stretched for about 20 kilometers towards the French coast in a strip 100 meters wide. The authorities involved have not yet disclosed the cause of the accident, but given the good conditions of visibility and weather, the accident was probably caused by human error.^[1] 

The episode drew attention not only because of the serious environmental consequences of the spill, but also because of the closure of the famous beaches of the French Riviera, such as Saint-Tropez, Ramatuelle, and Sainte-Maxime due to the presence of oil slicks.^[2] Considering the circumstances of the event, the objective of this article is to analyze the liability regime that may be applied to the polluter based on the international conventions that govern the subject.

France is a signatory to the main international conventions dealing with civil liability in matters relating to maritime transport, namely the International Convention on Civil Liability for Oil Pollution Damage 1992 (CLC 92),^[3] the International Convention on Civil Liability for Bunker Oil Pollution Damage 2001 (BUNKERS 2001),^[4] and the International Convention on Limitation of Liability for Maritime Claims (LLMC 96).^[5] 

CLC 92 is applicable in cases of damage caused by contamination resulting from an oil spill from the ship, whether it is cargo or fuel for the ship’s own consumption (bunker oil), in the territory, including the territorial sea and the exclusive economic zone of State that is a signatory of the Convention. However, for the purposes of the convention, only vessels constructed or adapted to carry oil loads are contemplated in the definition of ship. In other words, the convention has its application restricted to tanker ships.

According to CLC 92, compensation for damages caused to the environment is limited to the costs incurred as a result of actual recovery measures. The party civilly liable for any damage and pollution caused as a result of the incident shall be the owner of the vessel at the time of the accident or, if the incident consists of a series of events, when the first of them is found to have occurred.

BUNKERS 2001, for its part, is applicable only in the case of damage caused by pollution resulting from contamination due to an oil leak or spill from the ship itself, which is to say, oil intended for the operation or propulsion of the ship, in the territory, including the territorial sea and the exclusive economic zone of a State signatory to the Convention. BUNKERS 2001 identifies as subject to civil liability the owner of the vessel, the shipowner, and the bareboat charterer at the time of the incident or, if the incident consists of a series of occurrences, when the first of them is found to have occurred. It should be noted, therefore, that this convention significantly broadens the list of individuals subject to liability.

Although both conventions have quite similar provisions in some respects, since BUNKERS was very much inspired by CLC 92 and was motivated by the need for international rules suited for leakage from bunkers, they differ greatly with regard to the limitation of liability. CLC 92 establishes a regime for limitation on liability based on the gross tonnage of the vessel, according to which the maximum limit shall be set for the compensation to be paid by the owner or, depending on the convention applied, the shipowner and bareboat charterer.

The rule of the CLC stipulates that, for vessels with a gross tonnage of 5,000, the maximum compensation limit will be 4,510,000 Special Drawing Rights (SRD) (approximately US $ 5.78 million), which are units of measurement with currency conversion determined by the International Monetary Fund (IMF) and updated daily. The maximum values ​​are adjusted according to the gross tonnage of the vessel, not exceeding the total value of 89,770,000 SRD.

BUNKERS 2001, for its part, leaves the limitation on liability to the national legislation of the country in which the incident occurred. That said, under the regime proposed by BUNKERS 2001, the person subject to liability may be subject to both the internal regime and the limitation of liability proposed by LLMC 96, when it has been incorporated by the domestic law of the country in question.

The logic of civil liability adopted by LLMC is similar to that used by CLC, while its compensation ceilings are driven by the gross tonnage of the ship. Therefore, depending on the legislation applicable in the country concerned with respect to limitation of liability, the parties responsible for the incident may encounter significantly different amounts payable by way of compensation.

The collision between two vessels off the coast of France is emblematic, therefore, for its shedding light on the coexistence of different international conventions on civil liability in international maritime traffic. In the present case, considering that France is a signatory to LLMC 96, isolated interpretation of the language of the conventions analyzed would lead to the indication that the compensation limits to which the persons responsible for the incident will be subjected will be those established by that convention, despite the fact that France is also a signatory to CLC 92 and BUNKERS 2001.

^[1] https://www.dailymail.co.uk/news/article-6249813/Oil-spill-feared-ships-collide-near-Corsica.html

^[2] https://www.apnews.com/53297575985c487488799a260c7dbbbe

^[3] http://www.imo.org/en/About/Conventions/ListOfConventions/Pages/International-Convention-on-Civil-Liability-for-Oil-Pollution-Damage-(CLC).aspx

^[4] http://www.imo.org/en/About/Conventions/ListOfConventions/Pages/International-Convention-on-Civil-Liability-for-Bunker-Oil-Pollution-Damage-(BUNKER).aspx

^[5] http://www.imo.org/en/About/Conventions/ListOfConventions/Pages/Convention-on-Limitation-of-Liability-for-Maritime-Claims-(LLMC).aspx

Category: Tax

Normative Instruction No. 1,765/17, published on December 4 of last year, conditioned the receipt of offsetting statements for IPI credits, contribution to PIS, Cofins, and negative IRPJ or CSLL balances on prior confirmation of transmission of tax documents in which the right to a credit is demonstrated.

Due to electronic cross-referencing of data, it is common that some offsets are not ratified by the Brazilian Federal Revenue Service (RFB) because of mistaken information transmitted by the taxpayer itself through DCTF, EFD, and ECF, which do not reflect payment in excess. Not infrequently, only when after becoming aware of what transpired does the taxpayer identify the error it committed and submit a response in disagreement supported by evidence of its credit right with a basis on the principles of substantive truth and good faith.

With the enactment of Cosit Normative Opinion No. 2, of August 28, 2015 (PN Cosit No. 2/15), it was established that, if an error is identified in the statement of credit subject to an offset, the SRF shall allow the taxpayer to transmit a corrected DCTF to prove its right to a credit at a time subsequent to delivery of the offsetting statement or even after a decision denying ratification of the offsetting. In this situation, the case should be released to the Brazilian Federal Revenue Office (DRF) for review of the decision not to ratify the offset, thus returning for a judgment by the Brazilian Federal Revenue Office’s Review Board (DRJ) only if the review is partial or if there is a question of law to be decided.

The Attorney General of the National Treasury (PGFN) also recognizes the duty of the Tax Administration to review, at any time, tax documents that may result in reduction or extinguishment of tax credits arising from an error of fact committed by the taxpayer, as per Opinion PGFN/CAT No. 591/14 and Opinion PGFN/CDA No. 1,194/04, since it is against the public interest to collect debts that may be corrected through an administrative review.

In fact, the taxpayer's credit right is born with the undue payment or overpayment of a tax, as per the provisions of article 165 of the CTN, regardless of the information contained in the tax documents transmitted to the RFB. This same conclusion may be extracted from article 168, I, of the CTN, according to which the taxpayer's credit right expires within a period of five years from the extinction of the tax credit, and not from the transmission of supporting documents.

In this context, a recent amendment to IN No. 1,765/17 began to require that the offsetting statements not be received without the respective proof of the amount of the credit. This has resulted in a real restriction on the right of taxpayers to recover, by way of offsetting, amounts wrongly collected, since the receipt of RFB offset statements is conditioned on prior transmission of the tax documents showing the right to a credit (EFD-ICMS/IPI, EFD-Contributions, and ECF).

The rule established by the RFB will have a significant impact on the offsetting of credits arising from negative IRPJ and CSLL balances, since companies that calculate profit per the real profit tax framework on December 31 of each year will be obliged to postpone the offsetting of the negative balance of said taxes until the delivery of the ECF, which occurs “by the last business day of July of the year following the calendar year to which it refers" (article 3, of IN No. 1,422/13). This will oblige taxpayers to seek other funds to settle federal taxes even though they are aware of the existence of a negative balance, which will impact on their cash flow.

For taxpayers who calculate IRPJ and CSLL in quarterly periods, the restriction will only apply after the close of the calendar year.

If a taxpayer insists on offsetting the negative IRPJ and CSLL balance with other taxes administered by the RFB prior to the transmission of the ECF, there is a risk that the offsetting statement will not be "received", which may entail immediate collection of the offset taxes, and even result in the registration of such amounts as delinquent debt.

Thus, although it seems that the RFB seeks to improve the control and review of credits offset by the taxpayers, IN No. 1,765/17 ended up imposing a restriction on the right to an offset to which taxpayers are entitled, without any basis on articles 165, 168, and 170 of the CTN or article 74 of Law No. 9,430/96. The measure therefore violates the constitutional principle of legality (article 5, II, of the Federal Constitution).

In addition, by conditioning the "receipt" of the offset statement on the transmission of the tax document proving the credit right, IN No. 1,765/17 assumes that the taxpayer's right to a credit arises with the tax document, which interferes with the starting point for the statutory limitations period for the taxpayer to recover the amounts unduly collected by making it the moment of effective delivery of the tax documents, which constitutes a matter reserved for a Complementary Law (146, III, b, of the Federal Constitution).

In view of the aforementioned defects, taxpayers have litigated this change in court. An injunction granted by the Federal Court of the Judicial District of Rio de Janeiro ensures the right of the taxpayer to regulate the processing of the offset statements based on negative IRPJ and CSLL balances, regardless of the previous transmission of the ECF, precisely because it recognizes that IN No. 1,765/17 illegitimately restricted the right to offset without any legal support.

Although the change brought about by IN No. 1,765/17 is also applicable to IPI credits (article 161-B) and contribution to PIS and Cofins (article 161-C), the economic and/or financial impacts to companies are not as marked, since EFD-ICMS-IPI and EFD-Contributions are delivered monthly.

In view of this scenario, companies must remain vigilant when the information transmitted to the RFB is delivered and corrected through DCTF, EFD-Contributions, EFD-ICMS/IPI, and ECF in order to ensure the receipt and processing of their offset, and to continue to be assured the right to rectify actual errors. In addition, if taxpayers have calculated a negative IRPJ and CSLL balance for 2017 and intend to offset it with other taxes administered by the RFB prior to the transmission of the ECF, there is a basis for the filing of a judicial measure questioning the unconstitutionalities and illegalities of the restriction imposed by IN No. 1,765/17.

Category: Tax

Investment funds have had a prominent place in the Brazilian financial market because they enable the gathering and consolidation of assets from different investors into a single investment channel.

Unlike the general rule applicable to legal entities in Brazil, investment funds are not subject to taxation on gains or income earned by their portfolio. In these cases, as a rule, taxes are levied only when the funds are distributed to the unitholders. For some types of funds there is also the possibility of exemption and zero income tax rate, provided that some requirements are met.

As a general rule, income from investments in the financial and capital markets is subject to withholding tax. In the case of investment funds, the income paid is usually subject to withholding tax (IRRF) at rates ranging from 22.5% to 15%, depending on the length of the investment. With respect to the Equity Investment Funds - FIPs, which are Brazilian private equity funds, there is a specific framework, which provides for the application of a 15% rate, regardless of the length of the investment, subject to certain requirements.

Article 78 of Law No. 8,981/1995 equates non-resident investors to residents with respect to various investments, both of which are subject to the same tax rules. As a general rule, therefore, non-resident investors are subject to the tax framework described above with regard to investments in funds.

However, in order to foster investments in our country, Brazilian legislation has established a framework for non-residents who invest in the financial and capital markets in accordance with the standards established by the National Monetary Council (CMN), currently set forth in CMN Resolution No. 4,373/2014.

For foreign investors in FIPs, a 0% IRRF rate on income and capital gains, including those obtained from the divestiture or amortization of their units, is provided, as long as the following requirements are met: (i) the fund does not hold in its portfolio, at any time, debt securities at a percentage greater than 5% of its net equity, though debentures convertible into shares are not subject to this limit; (ii) the foreigner is not resident or domiciled in a country with favored taxation, such that the country that does not tax the income or taxes it at a rate lower than 20%; and (iii) the unitholder does not hold units that, alone or together with persons related to it, represent 40% or more of all the units issued by the fund or whose units, alone or together with persons related to it, entitle it to receive income in excess of 40% of the total income earned by the fund.

In view of their potential economic benefits, investments via funds, especially FIPs, have been increasingly used by resident and non-resident investors. In a recent move, however, the Federal Revenue Service of Brazil began to focus its attention on FIPs. Last year, the Undersecretary of Oversight announced that one of the pillars of the fight against tax evasion would be tax planning involving such funds.

The results have already begun to be felt by the sector, with a new front of inspections and assessments focused on financial institutions that act as administrators of FIPs and account custodians for foreign investors.

In general terms, private equity fund managers are responsible for the organization and maintenance of the fund and, from a tax point of view, are charged with withholding and collecting the tax due on the income received by investors, pursuant to article 32 of the Law No. 9,532. Custodians, in turn, are responsible for the actual movement of the foreign investor’s funds in Brazil.

Apparently, the purpose of the Federal Revenue Service in recent audits is to identify the existence of any Brazilian investors or residents of favorably taxed countries who invest in these FIPs indirectly (through other investment vehicles) as final beneficiaries. In the Federal Revenue Service’s view, the existence of indirect investors residing in Brazil or in countries with favored taxation could eliminate the application of the zero rate mentioned above.

However, there is no provision in Brazilian tax law that eliminates or disqualifies a particular tax treatment, whether or not more beneficial, for legal arrangements that may indirectly benefit individuals who are not legally related to this tax treatment. What does exist are norms that have the purpose of mere registration, such as Normative Instruction No. 1,634/2016, which requires information about certain final beneficiaries in pre-established circumstances, but without the attribution of any tax consequences to them.

Despite the absence of legislation that covers the lack of identification of the final beneficiary on the presumption of noncompliance with the legal requirements for enjoyment of the beneficial tax framework, the Federal Revenue Service has reviewed and assessed custodians and fund administrators that failed to identify the individuals who are the final beneficiaries of the income remitted by the funds.

In cases of already formalized assessments, in which the taxpayers, in the opinion of the tax authorities, were not able to present documentation capable of demonstrating the identity of the beneficiaries of the income paid by the funds, the tax authorities imposed a withholding tax at the rate of 35%, based on the rules governing payments to an unidentified beneficiary (article 61 of Law 8,981).

In view of this, and in view of the issuance of Normative Instruction No. 1,634/2016, which, despite having registration as its purpose, requires the maintenance of records on the beneficiaries of the investments, it is recommended that FIP administrators collect the information and, especially, documentation regarding the actual beneficiaries in order to anticipate possible inspections and reviews and avoid the effects of application of effective rates that can reach 53% due to an allegation of an unidentified beneficiary.

With this information and documentation in hand, the tax authorities will be able to verify the profile of the beneficiary, especially the beneficiary’s residence, in order to analyze whether this beneficiary was actually entitled to more beneficial tax treatment. In this case, if Brazilians or residents in countries with favored taxation are identified, the tax authorities may charge IRRF at the rate of 15% in relation to these beneficiaries, plus a fine and interest.

Although the presentation of the documentation may give rise to a second stage of action by the tax authorities, the advantage is that the allegation of an unidentified beneficiary would be ruled out, which could lead to taxation at a rate of 35% on all income paid by the funds.

If the documents due are presented, it will be incumbent upon the tax authorities to analyze each individual case and collect the tax only from the beneficiary who, in the opinion of the agency, does not meet the requirements necessary to obtain differential tax treatment.

As a practical consequence of the new tax reality that surrounds FIPs in Brazil, it will be up to managers to evaluate alternatives in order to mitigate risks, therein considering, for example, implementation of different investment structures to segregate investors with different profiles. The Federal Revenue Service’s race has already begun and it will now be up to fund administrators to seek different avenues to alleviate the risk of assessments related to the payment of income to non-resident beneficiaries.

Category: Litigation

The São Paulo State Court of Appeals (TJSP) has ruled in a recent judgment that the São Paulo State Tax Authority must reimburse costs and procedural expenses incurred by a defendant acquitted in a public civil action for administrative corruption.

The party filed a collection action against the state pleading reimbursement of costs and procedural expenses (including an appeal bond) that he disbursed in a public civil action in which he was acquitted on appeal. At the trial level, the party was convicted and, after appeal, the TJSP modified the decision so as to acquit him of the accusations of corruption.

In public civil actions, the plaintiff, unless bad faith is proven, is exempt from the payment of costs, procedural expenses, and attorneys’ fees, by virtue of article 18 of Law No. 7,347/85. The Public Prosecutor's Office relies on the exemption granted by the law in the filing of public civil actions, and the causes, often even because of this exemption, are assigned very high values.

Not infrequently, these suits are dismissed after many years and the expenditure of large amounts by the defendants, both in hiring lawyers for the exercise of the technical defense as well as in costs and procedural expenses, including the payment of appeal bonds that use as a calculation basis the value of the causes.

In the appeal decided by the Court of Appeal (Appeal No. 1028683-23.2016.8.26.0405), the plaintiff was compensated for costs and procedural expenses, including the significant appeal bond that he disbursed.

The correct basis adopted in the appellate decision was that of the procedural principle of causality, according to which the person who gives rise to the proceedings and who is unsuccessful must bear the costs and expenses incurred by the winning party, as well as the fees for loss of suit.

Although the Public Prosecutor's Office is exempt from the payment of fees for loss of suit, the costs and procedural expenses must be reimbursed in the event of dismissal of the public civil action. According to the ruling, because the state exempted the Public Prosecutor's Office from paying fees for loss of suit, the State Tax Authority must compensate the opposing party for the amounts that he spent.

Category: Litigation

The Brazilian Arbitration Law (Federal Law No. 9,307/1996) enshrines, in its article 8, sole paragraph, the so-called principle of jurisdiction over jurisdiction, according to which it is up to the arbitrators to decide on their own jurisdiction (subject to subsequent analysis by the Judiciary, in the scenarios set forth for annulment of the arbitration award). The principle establishes, therefore, a limit on interference by the state judge, in view of the parties' choice of arbitration.

As a rule, interference by the Judiciary in the scope of arbitration is only authorized in extremely exceptional situations, such as: (i) when there is urgency in the prayer for relief of any of the parties and the arbitral tribunal is not yet constituted; (ii) when one of the parties resists the initiation of arbitration; (iii) when the arbitration agreement entered into is defective and therefore unenforceable; or (iv) when there is an error in the arbitration award that authorizes its annulment.

The case law of the Superior Court of Justice (STJ) has been increasingly favoring arbitration by repeatedly recognizing that the initial jurisdiction to resolve questions regarding the existence, validity, and effectiveness of the arbitration agreement is exclusively that of the arbitrators.

Conflict of Jurisdiction No. 151.130/SP: decision that gives deference to the will of the parties

In a recent decision handed down in Conflict of Jurisdiction No. 151.130/SP on May 9, 2018, Nancy Andrighi, Justice of the Second Section of the STJ, suspended a decision by the Federal Court of Appeals of the 3rd Circuit (TRF3) that exempted the Federal Government from participating in arbitration proceedings instituted by Petrobras' shareholders in the Market Arbitration Chamber - CAM Bovespa.

The arbitration proceedings were instituted by Petrobras minority shareholders against the company and the Federal Government in its capacity as the controlling shareholder in order to seek redress for losses caused to Petrobras' equity that allegedly resulted from the negative impact caused by Operation Carwash to the company in the capital markets.

In response, the Federal Government filed a lawsuit in the São Paulo Federal Court, whereby it requested that its participation in the arbitration be declared null and void, on the argument that the Federal Government, as the controlling shareholder of Petrobras, is not bound by an arbitration clause contained in the company's bylaws and therefore could not have arbitration proceedings instituted against it. The TRF3 granted the prayer for relief and ruled the Federal Government's participation in the arbitration filed by Petrobras’ minority shareholders to be null and void.

In view of the interference by the Judiciary, Petrobras' minority shareholders instituted Conflict of Jurisdiction No. 151.130/SP before the Superior Court of Justice, whereby they raised the lack of jurisdiction of the São Paulo Federal Court and the TRF3 to decide on the participation of the Federal Government in arbitration, by virtue of article 8 of the Arbitration Law, which establishes the principle of jurisdiction over jurisdiction.

In her written opinion, the reporting judge in the conflict of jurisdiction, Justice Nancy Andrighi, argued that, since there was no arbitration tribunal constituted and, consequently, a final decision on the Federal Government's participation in arbitration, interference by the Judiciary would be inappropriate at that moment since decision would offend and disregard the power and autonomy of the arbitrator's decisions.

Justice Andrighi concluded by stating that "it is the duty of the Judiciary to await the competent response by the arbitral tribunal, which will decide such matters in definitive terms." Finally, it ordered a stay in the lawsuits filed by the Federal Government, as well as suspension of the TRF3’s decision that exempted it from participating in the arbitration proceedings.

Conclusion

In a country with continental dimensions and major regional features such as Brazil, standardization of the case law of state courts in matters of arbitration has not been an easy task.

Decisions such as this, however, certainly help to crystallize the case law of Brazilian higher courts and, at the same time, strengthen the confidence of Brazilian and foreign businessmen and investors in arbitration as an efficient and secure method of dispute resolution.

Category: Infrastructure and energy

After the approval and promulgation of Legislative Decree No. 15/2018 by the Federal Senate, on March 20, the Agreement on Air Transport between Brazil and the United States (Open Skies), signed by former presidents Dilma Rousseff and Barak Obama in 2011, awaits only the promulgation of a presidential decree to be enacted.

Under the current rules, in order for an airline of one of these countries to carry passengers or cargo to the other country, it must undergo an administrative process, or designation process, therein complying with technical and security requirements, as well as requirements of the nationality of the company the operator of the aircraft, among others, with the regulators of the other country, in order to obtain frequencies (schedules) on routes determined for the company’s operation.

Open skies agreements aim to simplify this process by allowing airlines in signatory countries to make international flights without the need for a new agreement to change or increase the number of frequencies available, or even without the company's having to undergo the complex designation process as agreed upon in each open skies agreement and the legislation of each country.

This type of agreement aims to reduce bureaucracy in the air travel sector, thereby eliminating barriers to passenger and cargo transportation, increasing the availability of flights between companies in the signatory countries, creating a segmentation of services and, as a side effect, increasing jobs and contributing to greater exchange of professionals with other sectors of the economy and society.

Among the rights and obligations of the companies covered by the agreement between Brazil and the United States, domestic transportation by foreign companies is not allowed. That is, an American company cannot transport passengers between cities in Brazil and vice versa. In addition, the agreement does not change the current limit of participation of foreign companies or individuals in Brazilian airlines, fixed at 20% of shares with voting rights.

Despite the expectation regarding the abovementioned positive results, possible ratification and promulgation of the agreement is not without controversy. The following arguments in favor of non-ratification were raised during the discussions on the issuance of the legislative decree and in forums with the participation of national market players: (i) there are differences between the legal regimes to which airlines are exposed (differences of a tax, labor, environmental nature, among others that may vary according to the legislation and that would give a competitive advantage to North American companies); (ii) submission of US companies to lower costs, such as fuel, aircraft leasing and maintenance, which usually follow a dollar-indexed pattern, and lower or no exchange costs, since they have revenues and expenses in US dollars, thus avoiding costs for protection against currency fluctuation; and (iii) a possible high differentiated pricing practice due to disproportionality of the size of the companies involved, since the American companies are much larger than the Brazilian ones and could practice better commercial conditions in view of the greater number of routes in which they already operate flights.

All these positive and negative points must be analyzed by the Brazilian President in his decision on whether or not to ratify the agreement that is on his table. The decision is awaited with great expectation, since without doubt, its ratification, or lack thereof, will bring about various changes in the Brazilian aeronautical environment.

Category: Banking, insurance and finance

Heritage funds, also known as endowments or philanthropic funds, have recently been regulated by Presidential Decree No. 851, of September 10, 2018.

These funds are sets of private assets organized, managed, and administered by an asset management 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 proceeds of the donations are applied to projects. The fund serves as a regular and stable source of funding for institutions whose purpose is the development of education, science, technology, research and innovation, culture, health, environment, social assistance, and sports activities. For the time being, such institutions may be public or private non-profits.

The regulation delimited the areas of activity of the institutions supported and left out, for example, human rights. Agents involved in the legislative process of the MP suggest the linking of areas of activity according to the broader scope of article 3 of Law No. 9,790, of March 23, 1999 (the OSCIPs Law).

Nonetheless, the MP has made important advances in encouraging donations in Brazil by improving the corporate governance of the fund management organization, therein providing for a separation of responsibilities between those who manage the fund and the institution supported. Also within the scope of corporate governance, the fund's management organization must include in its bylaws, among other things: 

1. which institutions are supported, and a qualified quorum is needed to change them;
2. the obligation to set up a board of directors (CA) and an audit committee (CF) and, for heritage funds with assets over R$ 5 million, investment committees (CI), as well as the rules of composition, competencies, form of election, or nomination of their members and the possibility regarding whether donors may sit on such bodies;
3. the form of approval of policies of management, investment, redemption, and use of the funds of the heritage fund; and
4. prohibition on the allocation of funds for purposes other than those provided for in the bylaws and the granting of guarantees to third parties using the assets owned by the heritage fund. 

The regulation also obliges heritage funds to adopt internal mechanisms and procedures of integrity, auditing, and incentives for reporting irregularities, as well as the preparation of codes of ethics and conduct for managers and employees. Fund management organizations with shareholders' equity exceeding R$ 20 million must have their financial statements submitted to independent auditors.

The MP also provides that the CA should be composed of at least two independent directors and a maximum of seven members for a term of two years, with the possibility of renewal. The MP provides that it is the responsibility of the CA to deliberate on amendments to the bylaws, contrary to the Civil Code, which considers the general meeting exclusively competent in this regard. Another important measure of transparency for investors is the provision that individuals or representatives of donor legal entities representing more than 10% of the total composition of the fund may participate in deliberative meetings of the CA as observers.

The CI, to be appointed by the CA, is responsible for recommending to the CA the investment policy and the rules for the recovery and use of funds, to coordinate and supervise the actions of those responsible for managing funds, and to prepare an annual report on the management of funds. Another important advance of the MP for the professionalization of management of heritage funds is the possibility of hiring, by the management organization, of an entity to manage funds registered with the Brazilian Securities and Exchange Commission (CVM), allowing for the payment of a performance fee.

The CF must be composed of three members nominated by the CA, and members who sat on the CA may not be nominated. The members of the CA, CF, and CI may be remunerated at an amount limited to the highest remuneration of the highest-ranking leader of the institution supported.

Despite the many positive aspects of corporate governance, there is a tightening and bureaucratization of the structure that may increase costs and inhibit donations from large fortunes. It should be observed that there is room for simplification of the governance structure.

It is important that the optional executive body of the executive organization be a non-profit institution or an international entity recognized and represented in Brazil, which is engaged by the managing organization to assist and coordinate the supported institution in the development of projects and programs.

The new rule regulates the relationship between the supported institution and the management organization, therein requiring the execution of a partnership instrument and the execution of programs, which must establish, respectively, (i) the cooperation link between them and determine the purpose of the public interest to be supported; and (ii) how the funds will be spent.

The MP was published days after the fire at the National Museum of Brazil in Rio de Janeiro and, in order to alleviate the tragedy, included permission for a larger percentage of the donations, not just their income, to be invested in the recovery or preservation of works and heritage and in emergency interventions to maintain the services provided by the supported institution.

One of the main innovations of the MP is the matching of financial donations to management organizations that support cultural projects to donations made to cultural projects for the purposes of article 3 of Law No. 8,313, of December 23, 1991 (the Rouanet Law), it being possible to deduct income tax of up to 6% for individuals and up to 4% for legal entities. The limitation of such tax benefit to only cultural projects may have a perverse effect by inhibiting investments in other areas covered by the heritage funds.

It should be noted that, according to Law No. 9,249, of December 26, 1995, and Presidential Decree No. 2,158-35, dated August 24, 2001, the donor legal entity taxed per the actual income regime may deduct the amount of the donation up to the limit of 2% of operating income, in the case of donations to civil society organizations (OSCs). The extension of this benefit to heritage funds would enable the search for new potential sources of funding for such organizations, which mostly work in the aforementioned social areas, delimited by the MP itself.

It is also observed that, in the State of São Paulo, the Tax on Transferences Causa Mortis and Donation of any Assets or Rights (ITCMD) is the responsibility of the grantee, therein applying a rate of 4% (the maximum rate established by the Federal Senate is 8%) over the amount donated. Entities whose social objectives are to promote human rights, culture, or the environment are exempt 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.^[1] 

Considering that the ITCMD would be applicable to donations to funds and, in most cases, to donations from funds to supported institutions, there is debate regarding possible exemption from the ITCMD in donations to OSCs and heritage funds. 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 Civil 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. By separating the amount raised with ITCMD from the taxable event, it is possible to find that 52% comes from donations, and only 1% of the total collected, or 0.0168% of the net current income of the state, without separating from this amount donations to OSCs.

The MP already has 114 suggestions for amendment. To organize advocacy with respect to the topic, the Institute for Development of Social Investment (IDIS) launched the Coalition for Philanthropic Heritage Funds, of which Machado Meyer is a signatory. Three of the main purposes of the initiative are (i) to expand the area of ​​activity of the supported institutions (article 3 of the OSCIPs Act), (ii) extend the MP tax benefit for all causes; and (iii) reduce governance constraints for managing organizations, in order that large fortunes not be discouraged from donating.

^[1] SPALDING, Erika. Os Fundos Patrimoniais Endowment no Brasil [“Endowment Heritage Funds in Brazil”]. São Paulo, 2016.

Category: Capital markets

CVM Guidance Opinion No. 38, issued on the 25th of this month, deals with the fiduciary duties of managers within the framework of indemnity agreements entered into between publicly-held companies and their management (officers, members of the board of directors or audit committee, members of committees established in bylaws, among others).

This type of agreement aims to ensure payment, reimbursement, or advance of expenses arising from any arbitral, civil, or administrative proceedings instituted to investigate acts carried out in the exercise of the officers and directors' functions. Not provided for in the Brazilian corporate law, this instrument is freely agreed upon between the parties and must always respect the corporate interest of the company.

In recent years, repeated corruption cases involving Brazilian companies have led insurers to raise premiums and reduce D&O insurance coverage or even discontinue the offering of this type of insurance in Brazil. In this scenario, indemnity agreements have come to be seen as a viable alternative to protect officers and directors of companies that are the focus of investigations.

Unlike D&O insurance, in which the company pays only one premium in return for an indemnity offered by the insurer, indemnity agreements can bring about a large financial impact for the company in the event of materialization of an event covered by it, since it effectively obliges it to disburse funds to support the officer or director's risk (whether through advance of amounts or reimbursement). Such instruments also give rise to significant risks of conflicts of interest, since their approval is usually provided by the management bodies that will ultimately be the main beneficiaries of the agreements.

In this context, CVM's new guidance opinion, while recognizing the value of indemnity agreements as a legitimate instrument to attract and retain qualified professionals, recommends the adoption of rules and procedures aimed at ensuring duties assigned to them by Law No. 6,404/76, in order to mitigate the risks of conflicts of interest inherent to this type of agreement and to provide "the necessary balance between, on the one hand, the company's interest in protecting its officers and directors against financial, administrative, or judicial proceedings and, on the other, the company's interest in protecting its assets and ensuring that its officers and directors act in accordance with the standards of conduct expected and required of them by the law."

The guidance opinion provides that indemnities, among other things, are not possible when due to acts carried out by the officers and directors when such acts are:

• conducted in bad faith, willful misconduct, gross negligence, or fraud; or
• in their own interest or those of third parties, to the detriment of the company's corporate interest, including amounts related to indemnities arising from actions for which liability is provided for in or offered under the terms of a consent order.

CVM recommends that the above exceptions be expressly provided for in the indemnity agreement and, when the officer or director requests some disbursement from the company, an investigation of the event in the particular case be conducted before a decision on whether it should be granted.

In the event of advances of expenses by the company before a final decision in the arbitral, judicial, or administrative sphere, the officer or director shall be required to refund the amounts received in the cases in which, after a final decision, it is proved that the act carried out by the officer or director is not indemnifiable.

Regarding the decision-making power to grant an indemnity, the guidance opinion states that the company's management must ensure that the contract includes clear and objective rules, therein specifying:

• the body of the company that will be responsible for evaluating whether the act by the officer or director falls within any of the abovementioned unlawful courses of conduct; and
• the procedures that will be adopted in order to exclude participation by the officers or directors whose expenses may be indemnified from the evaluation process mentioned in the item above, pursuant to article 156 of Law No. 6,404/76.

The officers and directors must, in this case, assess the existence of conflicts of interest and the adoption of additional procedures to protect the independence of decisions on whether to grant an indemnity, which should always be made in the interests of the company.

CVM is of the understanding that additional governance procedures that reinforce the independence of decisions and guidance in the sole interest of the company, such as forwarding of the matter for deliberation by a general meeting, should be considered in situations where:

• more than half of the officers or directors are direct beneficiaries of the resolution regarding the disbursement of funds;
• there is a divergence of understanding regarding the classification of the act by the officer or director as indemnifiable; or
• the financial exposure of the company is significant, considering the amounts involved.

CVM also considers the involvement of shareholders in the decision on the execution of certain contracts to have the potential to mitigate conflicts of interests and decisions made contrary to the company's corporate interest, as well as ensuring the proper disclosure of their main terms and conditions. The participation of the shareholders could be through, for example, the inclusion of a provision in the bylaws authorizing the company to indemnify its officers and directors or to submit the general terms and conditions of the draft agreement to the general meeting.

In addition, CVM recommends that, at a minimum, the following information on the indemnity commitments assumed be disclosed by the Company:

• Whether there is a provision in the bylaws on the indemnity and, if so, its terms;
• If the agreement will have to provide a limit on the amount of the indemnity offered and, if so, what that limit is;
• The coverage period that may be covered by the agreement;
• The officers and directors who may enter into an indemnification agreement with the company;
• The events for which indemnity is excluded;
• The types of expenditure that may be paid, advanced, or reimbursed on the basis of the agreement; and
• The procedures related to decisions regarding the payment, reimbursement, or advance of expenses arising from the indemnity commitment, therein indicating: (i) the company's body that will be responsible for the decisions regarding whether it is granted; and (ii) rules and procedures that will be adopted to mitigate conflicts of interest, ensure the independence of decisions, and ensure that decisions are made in the interests of the company.

Also in the guidance opinion, CVM considers it desirable that the execution of the indemnification agreement be backed by a prior detailed opinion prepared by the board of executive officers and approved by the company's board of directors, explaining the reasons why they believe that the terms and conditions of the agreement mitigate the risks of inherent conflicts of interest.

Regarding the medium for disclosure, CVM recommends that indemnification agreements (accompanied by any exhibits) be sent, within seven business days of signing, to the electronic system available on the agency’s page. The category “Indemnification Agreements" has already been created in the IPE Module of the Empresas.Net System in order to send the aforementioned agreements.

Although the opinion has no normative force, it is recommended that its provisions be followed by companies in order to reduce the risk of investigative actions and/or penalties that may be imposed by CVM. 

Category: Tax

Companies were surprised last September with the enactment of ICMS Convention 106, which aims to regulate the procedures for collection of ICMS applied to transactions with digital goods and merchandise, traded through electronic data transfer, and grants exemption for withdrawals intended for final consumers.

Before discussing the constitutionality of the convention, it is important to point out that the discussion of the possibility of charging ICMS on software made available electronically has long been discussed by state revenue services.

In fact, the states adopt the position that all standardized software, programs, electronic games, applications, electronic files and the like, even if they have been or can be customized, are classified within the concept of merchandise. This is even the logic behind Convention No. 106/2017

In this sense, once classified as merchandise, the marketing and provision of software must follow the general rule of taxation set forth in applicable ICMS legislation.

Considering this logic, it is easy to understand why the states understood that Convention No. 106/2017 did not change the legal framework with respect to taxation of the marketing and provision of software (considering its equivalence to the merchandise). The only exception is the establishment of an exemption in transactions that precede the arrival of the merchandise to the final consumer, per the terms of the section two of the convention.

It so happens, however, that the issue requires much more discussion, in our opinion, especially because of: (i) its establishing the presumption that all transactions with software are internal; (ii) its defining the taxpayers; and (ii) its holding third parties liable without any relation with the ICMS taxable event for the collection of ICMS due on the transaction.

Specifically with respect to items "i" and "ii", the sections three and four of Convention No. 106/2017 provide that:

Section three. The tax shall be collected on internal withdrawals and on imports made through a website or electronic platform that sells or makes available, even if through periodic payment, digital goods and merchandise through electronic transfer of data, in the state where the purchaser of the digital goods or merchandise is domiciled or established.

Section four. Legal entities that own a website or an electronic platform that sells or makes available, even if through periodic payment, digital goods and merchandise through electronic transfer of data, shall be the taxpayer in the transaction and must register with the state in which they carry out the internal withdrawals or importation destined to final consumer, being offered, at the discretion of each state: (...)

From an analysis of the section transcribed above, we believe it possible to argue that Convention 106/2017 invades the jurisdiction of the complementary law by fixing not only the place of transactions for the purpose of collection but also the taxable person, in this case the taxpayer, thus violating article 155, paragraph 2, item XII, "d", of the Federal Constitution.

In this sense, it is worth remembering that, under the terms of article 155, paragraph 2, item XII, "g", of the Federal Constitution, and of article 1 of Complementary Law No. 24/1975, conventions may only govern the granting or revocation of exemptions, incentives, and tax benefits, and this type of regulation is not permitted to govern the method of collecting ICMS or determining who the taxpayer is.

In our view, the convention aims to institute a state taxation system based on the consumption of merchandise (taxation on the destination). However, due to economic and fiscal policies, these taxes are restricted to oil transactions, including lubricants, liquid and gaseous fuels derived from them, and electric energy, according to article 155, X, 'b' of the Federal Constitution.

We understand, therefore, that there are arguments supporting an allegation that Convention No. 106/2017 is unconstitutional due to its attempting to transform a so-called "interstate transaction" into an "internal transaction" without a basis in complementary law. Also because this measure would indirectly violate the jurisdiction of the Federal Senate to define the ICMS rates levied on interstate transactions with goods (under the terms of article 155, paragraph 2, IV, of the Federal Constitution).

Regarding the liability of third parties not related to the ICMS taxable event for collection of the ICMS tax due on the transaction, the Federal Constitution assigns the jurisdiction over defining components of tax rules, such as identity of the taxpayer, taxable event, obligation, among others, to complementary law.

Regarding the ICMS, the Federal Constitution, in order to guarantee greater legal certainty, assigns to complementary law various issues of the overarching rule on application of state tax, among them, the taxpayer, as already explained.

On this point, Article 128 of the National Tax Code stipulates that the law may expressly assign liability for the tax credit to third parties linked to the taxable event.

Thus, there are two requirements for assigning of tax liability, which are: (i) obligation to enact a law; and (ii) the person responsible must be related to the triggering event.

From an analysis of Convention No. 106/2017, we found in its section five an express assignment to third parties of liability for the collection of ICMS. However, in our view, there are arguments to support an allegation of illegality of the convention, in view of the absence of a law authorizing such liability.

In addition, from an analysis of the persons responsible listed in section five, it is our opinion that this link with the taxable event with the state tax is questionable, since in some cases legal entities are only responsible for the mere monetary pass-through.

Considering the above, and despite our understanding on the correct taxation of marketing and provision of software (ISS vs. ICMS), we understand that there are arguments to support an allegation that the form of collection imposed by Convention No. 106/2017 is unconstitutional.

This conclusion is corroborated by the recent injunction granted in the collective application for mandamus presented by Brasscom - Brazilian Association of Information and Communication Technology Companies, against Convention No. 106/2017.

Category: Tax

The 2nd Panel of the Superior Court of Justice (“STJ”) granted a taxpayer’s appeal to recognize that the ICMS cannot be included in the calculation basis of the Social Security Contribution on Gross Revenue (CPRB). The decision was issued in the judgment on Special Appeal No. 1.732.000/SP, on May 3.

The reporting judge, Justice Herman Benjamin, stressed that, although the case under analysis deals with the substitutionary contribution established by Law No. 12,546/11, the Federal Supreme Court (“STF”) and the STJ understand that the debate is similar to Topic of General Repercussion 69 (dealing with exclusion of the ICMS from the PIS/Cofins basis), whose controlling case is Special Appeal RE No. 574.706. The other justices of the 2nd Panel concurred with the Justice’s opinion.

With the decision, the 2nd Panel aligns itself with the position already declared by the 1st Panel and, consequently, unifies the understanding of the panels that make up the 1st Section to the effect that the logic adopted by the STF applies to the CPRB, since, likewise, it deals with taxation that includes the ICMS (which is effectively not part of the taxpayer's assets) in determining the calculation basis for the tax.

The issue may be reviewed by the 1st Section in the judgment on Motion to Harmonize Case Law No. 1.694.357/CE, the written opinion of which is to be drafted by Justice Og Fernandes.

Category: Labor and employment

One of the greatest labor challenges facing the Brazilian business community today is compliance with the minimum quotas for the hiring of apprentices and people with disabilities or rehabilitated workers.

Under Brazilian law, to meet their minimum quota, companies are required to employ a number equivalent to: 

• at least 5% (and, at most, 15%) of apprentices, a percentage calculated over the total number of employees in each establishment, as long their duties require professional training; and 

• from 2 to 5% of rehabilitated or disabled employees, calculated over the total number of employees of the company throughout Brazil.

The goal of the legislator in creating such obligations was to enforce the social function of companies and to provide effective means for the proper integration, inclusion, and vocational training of young people and persons with disabilities. However, the collective repercussions of noncompliance with these obligations are often very burdensome for companies.

This is because, in addition to the possibility of fines and the application of large penalties by the Ministry of Labor, companies that do not meet the minimum hiring percentages are also subject to the intervention of the Public Labor Prosecutor's Office (MPT).

The intervention of this agency, in turn, usually results in the filing of a public civil action or the signing of a consent order, pursuant to which companies, under penalty of imposition of additional fines, undertake to comply with the quotas for apprentices and people with disabilities.

This scenario is even more sensitive for companies that, due to their economic activity, do not have positions or sectors in their structure that allow for the absorption of the minimum number of apprentices or disabled persons, as required by the legislation. This is because, although some positions require specific skills, competencies, or training, often incompatible with apprenticeships and/or physical and intellectual limitations, they will still be considered for quota enforcement purposes.

In this context, the intervention of the Ministry of Labor and the MPT has been recurrent in recent years, given the real difficulties faced by companies in achieving minimum hiring percentages, either due to the peculiarities of their economic activity or the lack of trained professionals or persons interested in occupying such positions.

Given this scenario, some professional and economic categories have included, in their collective rules, specific provisions to address the particularities of their economic activity, thus easing the rules in order to comply with legal quotas.

This easing generally occurs through a recognition of the incompatibility of a given position with its occupation by employees without proper training or specific ability or full physical or intellectual ability to hold it.

Once this incompatibility is recognized, such positions are excluded from the calculation basis for the legal quota, thus reducing the minimum number of places to be allocated to apprentices or persons with disabilities.

The legal validity of this adjustment at the collective level was the subject of various debates in the Judiciary, which, in turn, reacted by adopting contradictory positions, sometimes recognizing its legality, sometimes ruling it out.

However, shortly before the enactment of Federal Law No. 13,467/2017 (the Labor Reform), this subject was meticulously examined by the Section Specialized in Collective Bargaining of the Superior Labor Court (TST). On that occasion, the section upheld the validity of a provision in a Collective Labor Agreement (CCT) entered into between the unions of the companies and workers of private security of Tocantins, which restricted the calculation basis of disabled employees to only the employees in the administrative areas, excluding, therefore, the security guards themselves:

"ORDINARY APPEAL - ANNULMENT SUIT - SECTION 16 - HIRING OF CARRIER OF PHYSICAL DEFICIENCY QUALIFIED OR REHABILITATED - SECURITY SERVICE.

A collective bargaining provision that changes the calculation basis for the legal reserve of vacancies for persons with disabilities (article 93 of Law No. 8,213/1991) is valid for positions compatible with their abilities, in accordance with the reality of the industry. Deference to the autonomous instrument, pursuant to article 7, XXVI, of the Federal Constitution. Ordinary Appeal heard and not granted relief.”

(Case No. 76-64.2016.5.10.0000, Reporting Judge: Maria Cristina Irigoyen Peduzzi, Date of decision: March 13, 2017, Subsection I Specialized in Individual Disputes, Publication Date: April 11, 2017).

In sum, the TST’s decision was based on two main grounds:

• The incompatibility between the hiring of persons with disabilities and the particularities of the category of security guards, which requires: (i) a professional training course, which includes personal defense, weapons, and shooting, among others; and (ii) passing examinations attesting to the guard’s physical health and mental and psychological and technical capacity; 

• The prevalence of collective bargaining over general labor rules, since they may more precisely and adequately reflect the particularities of each professional category. 

However, a few months after this decision, the subject again gained prominence with the entrance into force of the Labor Reform, which recognized the prevalence of that which is negotiated over that which is legislated, except for the topics protected at the constitutional level.

Although one could take the position that collective bargaining on this issue would be strengthened by the Labor Reform, the discussion returned to the spotlight. Also based on the new law, the MPT went on to argue that the quotas for apprentices and people with disabilities could not be subject to an agreement in collective rules.

Contrary to what one might imagine, the expectation is that this controversy may not take that long to be reviewed. This is because the subject is already pending the TST’s review since, on August 29, 2018, the MPT filed a suit for declaratory relief in order to nullify a collective bargaining provision, assigned the case No. 1000639-49.2018.5.00.0000.

The purpose of the proceeding is annulment of the provisions of the CCT signed between the National Union of Airline Companies (SNEA) and the National Union of Aeronauts (SNA), which exclude pilots, flight attendants and flight mechanics from the calculation basis for the minimum quotas for hiring apprentices and disabled or rehabilitated people.

According to the MPT, the legislation on the subject is governed by public policy rules, which cannot be subject to collective bargaining with a view to a reduction of rights, not least because they are protected by the exceptions of article 611-B of the Consolidated Labor Laws, subsections XXII, XXIII, and XIV.^[1]

On the other hand, trade unions defend their position under the same arguments that have been accepted by TST in the past, such that the court will have a new opportunity to review the prevalence of the collective rule over the legislation, as well as the incompatibility of certain positions with the legal quotas.

In a superficial analysis of the controversy, the reporting judge in the case, Justice Katia Magalhaes Arruda, considered that the contested provisions apparently violated cogent state norms, whose easing through collective bargaining was supposedly inviable.

However, before considering the petition for preliminary injunctive relief submitted by the MPT, the parties were summoned to a prior justification hearing in order to clarify the controversies presented in the claim.

The hearing was held on October 30, 2018, at which time the Justice pointed out that the case law of the TST supposedly included in the calculation basis also employees allocated in positions that require technical training and physical and intellectual fitness.

She also pointed out that other professional categories with similar problems, such as security guards, used alternative means of meeting the quota, such as the signing of partnerships with host houses, public agencies, and vocational training institutions.

In this scenario, the justice proposed that the trade unions meet with the employees and the companies they represent to study the possibility of excluding the provisions in question from the next CCT, such that the parties agreed to hold a new hearing on November 21.

On this opportunity, the trade unions ratified their understanding about the legality of the CCT and the Justice suspended the suit for 90 more days for the parties to attempt to conciliate.

In case there is no agreement, it is expected that the TST will have a new opportunity to review the controversy surrounding the validity of normative provisions that ease the form of fulfillment of the quotas, especially in light of the changes promoted by the Labor Reform.

In order to do so, it will have to face issues that are sensitive for both sides, such as the social function of companies, the prevalence of that which is negotiated over that which is legislated, the incompatibility of certain activities with the hiring of apprentices and the disabled and the possibility of fulfilling these obligations by alternative means.

However, regardless of the position to be adopted by the TST, the new decision should radiate to all other professional categories that face equal difficulty, marking the limits of collective bargaining to be initiated in the coming years.

^[1] Article 611-B. The suppression or reduction of exclusively the following rights constitutes unlawful subjects of a collective agreement or collective bargaining instrument:

XXII - prohibition of any discrimination regarding salary and hiring criteria for disabled workers;

XXIII - prohibition on night work, dangerous, or unhealthy for minors under eighteen years of age and any work for minors under the age of sixteen, except as an apprentice, from the age of fourteen;

XXIV - measures for the legal protection of children and adolescents; 

Category: Real estate

The Court of Appeals of São Paulo decided in favor of the sale of rural property mortgaged in favor of a Brazilian financial institution equated to a foreign entity, despite the current restrictions on the acquisition and leasing of rural properties by Brazilian companies equated to foreigner entities, as they have a majority of their capital stock and/or control held by foreigners. The appellate decision was published on July 17, by the 23rd Chamber of Private Law of the TJ/SP, in the context of interlocutory appeal No. 2024029-90.2017.8.26.0000, of the District of São Paulo.

Since August of 2010, with the publication of Opinion AGU/LA 01/2010, the acquisition of rural properties by Brazilian companies equated to foreign entities is subject to a series of restrictions provided for in Law No. 5,709/1971, Decree No. 74,965/1974 and Law No. 8,629/1993. These restrictions concern, for example, the extent of the area that can be acquired, the limitation of the percentage of areas by nationality, the requirement to obtain prior approval from INCRA, the National Congress and/or the National Defense Council, and the need for prior approval of the projects that will be developed in the areas to be acquired, among other issues.

The creation of real estate guarantees, such as a mortgage, is not prohibited by law, but given that the acquisition is restricted, the execution of the mortgage guarantee in the event of non-payment of the debt is subject to such restrictions, since the mortgagee could not auction off the rural property if there were no other interested purchasers and thus become its owner without all the restrictions resulting from the AGU Opinion being observed.

In the case of financial institutions, the obligation to sell properties received in settlement of loans granted has been used as a basis in the argument that the restrictions resulting from the AGU Opinion would not be applicable to rural property foreclosures by Brazilian financial institutions equated to foreign entities. The justifications are the fact that (i) the financial institution is not acquiring the property for its own use and has a legal obligation to sell the property and (ii) the restriction on the sale of the property could end up hollowing out the real estate guarantee itself, which would have a significant impact on the concession of new credit lines by these banks, especially those intended for the agribusiness sector. However, the issue is not settled and still needs a final response.

The recent decision by the 23rd Chamber of Private Law of the TJ/SP is just one more chapter of this story and gives light and direction to the discussions on the foreclosure on (execution of) real estate guarantees for rural properties, although it still does not resolve the issue completely. The judges who decided favorably to the issuance of the auction approval letter in favor of the bank (it was not a unanimous decision) argued that since the issuance of the letter by itself would not be enough to transfer ownership of the rural property, as only its registration with the competent real estate registry office would be able to materialize the transfer of ownership of the property, there would be no legal prohibition on the issuance of the auction approval letter despite the restrictions arising from Law No. 5,709/1971. In addition, it was argued that the sale of the rural property by the bank equated to a foreign entity would not be a risk to national security precisely because the financial institution has an obligation to sell the asset auctioned and because the goal of the auction is to guarantee its right to credit. Finally, despite the fact that a recommendation was made in favor of completion of the auction, it was pointed out that it is up to the real estate registry official to evaluate whether or not the respective auction authorization letter is void, given the particular circumstances of the case and the feasibility of registering it in favor of such a financial institution.

This decision, although not unanimous, was positive in indicating that financial institutions equated to foreign entities will be able to foreclose on real estate guarantees granted over rural properties. However, it is a timid decision and did not address the issue completely. It failed to decide whether or not to register the registration was null and delegated to real estate registries the decision on how to proceed, guided by the rules of their respective ombudsman’s offices and subject to further civil and criminal liability for their acts.

Moreover, even if such auction authorization letters come to be effectively registered, thus transferring the ownership of such rural properties to financial institutions equated to foreign entities, the doubt about the legality of such acquisition (which may affect the whole of the ownership chain of the property from then on) will continue to exist and generate legal uncertainty. Unfortunately, we will still have to wait for the new chapters and the course of the discussion to effectively end the legal uncertainty still facing the foreclosure on of these real estate guarantees.

Category: Tax

Abuses by the State and especially by the tax authorities to impose taxes without proper legal support are not uncommon. This routine fact, in addition to the excessive tax burden, the enormity of instrumental duties, and the extremely high interest rates on arrears and fines, creates a very difficult environment for Brazil's economic development.

Specifically in the case of ISS, in addition to the intense discussions about the place of provision of service, conflicts of jurisdiction between taxing political authorities, and the constitutionality of various items and subitems brought in by the List of Services of Supplementary Law No. 116/2003, the controversies were aggravated by the publication of Supplementary Law No. 157/2016 and the decision on Extraordinary Appeal No. 651.703/PR, admitted on the basis of general repercussion, the written opinion of which was drafted by Justice Luiz Fux.

In the aforementioned judgment, the Federal Supreme Court (STF) innovated, breaking with concepts previously established in case law and legal scholarship, with respect to what should be understood as “services."

Distancing itself from the traditional concept in civil law of services as an "obligation to act," the STF understood that the concept of services is related "to the offering of utility to others based on a set of material or immaterial activities, provided habitually and for the purpose of profit." This conception created by the STF unpredictably extends ISS overarching rule governing application of ISS, insofar as it introduces extremely broad and unsettled semantic concepts.

With respect to Supplementary Law No. 157/2016, Article 3 of Supplementary Law No. 116/2003 provides that, as a general rule, the service is considered provided and ISS is considered due at the place of establishment of the provider.[1] However, Supplementary Law No. 157/2016 included new provisions in article 3, creating more exceptions to the general rule, in addition to the existing ones.

Two of the most relevant changes specifically affect the financial sector and shift the collection of ISS to the municipality where the recipient of the services is located in relation to leasing services and services provided by credit and debit card management companies and client funds and portfolios.

The President of Brazil rightly vetoed the above-mentioned amendments based on two important arguments:[2] (i) in relation to leasing services, shift in collection of ISS is contrary to the logic of taxation of these services, which must occur at the place where review of the registration, granting, and oversight of the financing granted occurs” and, (ii) in relation to the services rendered by credit and debit card management companies and client funds and portfolios, displacement would generate "a potential loss of tax efficiency and collection, in addition to increasing costs for companies in the industry."

Nevertheless, in response to pressure from various municipal authorities, the National Congress overturned the presidential veto. Considering that the last publication of Supplementary Law No. 157/2016 occurred on June 1, 2017, as well as in compliance with the principle of tax anteriority, the changes came into effect, in theory, on January 1, 2018.

In addition to difficult and costly practical applicability, which undermines the principle of reasonableness, since leasing companies and fund managers and client portfolios are required to register in all municipalities in which they have clients domiciled (Brazil has more than 5,500 municipalities), the new rules also bring in laconic wording that gives rise to various questions. They also deviate from the theory for tax assessment set forth in the Constitution.

On this point, it may be argued that the amendments introduced by Supplementary Law No. 157/2016 are unconstitutional, since the law may not shift tax collection at will for the purpose of collecting revenue for less favored municipalities at the expense of instrumental duties for taxpayers. Likewise, tax authorities are not permitted to decide the best interpretation of the rule on tax jurisdiction in the event of doubts.

So much so is this the case that, taking as an example portfolio management services and client portfolios, the legal loophole gives rise to a number of dubious interpretations, such as whether the recipient of the service of fund management is the fund itself or the shareholder of the fund. Clear delimitation of the recipient of the service will have a highly relevant impact on the taxpayer, who must collect ISS in this or that municipality.

In addition, the exceptions to the general rule of collection of ISS, originally provided for in Supplementary Law No. 116/2003, are related to services that have concrete results in other municipalities. Therefore, the amendments introduced by Supplementary Law No. 157/2016 further enhance another debate that has long occupied the courts regarding ISS on exportation of services: what is the concept of result and where does it occur.

In relation to the export of fund and portfolio management services, for example, the tax authorities maintain that, even if the recipient is located abroad, the result will be in Brazil if the asset is located here. Based on the new rules, however, it is possible to sustain that, regardless of the location of the asset, the result would occur at the location of the recipient of the service, since, supposedly, the law moved payment of ISS to the recipient's municipality.

Whatever the future unfolding of the new rules, they are not self-enforcing. According to the text of the Constitution, ISS is a tax under municipal jurisdiction and, although its guidelines are established in supplementary laws, municipalities must introduce their own legislation to regulate the collection of ISS.

For this reason, municipalities should incorporate the changes brought in by Supplementary Law No. 157/2016 into their internal lawmaking. This fact has also generated controversy. As long as their legislation is unchanged, municipalities cannot collect ISS and, when it does, they must respect the principle of anteriority.

There are also those who maintain that there is a lapse of ISS “untaxability" between the date of publication of Supplementary Law No. 157/2016 and the date of adaptation of the municipal legislation to the new rules, subject to the principle of anteriority. This is because the municipalities where the service providers are located may no longer require ISS in the former manner.

An investment fund management company located in Curitiba recently obtained a favorable injunction in State Court to suspend collection of ISS in relation to services rendered to recipients located in other municipalities. The company based its petition for a preliminary injunction on the fear of being taxed twice for the same service. The Attorney General of the Municipality of Curitiba appealed the decision and is awaiting a ruling on the matter by the Court of Justice of the State of Paraná.

[1] In a brief summary, Article 4 of the aforementioned law defines a “establishment of the provider" as the place where the taxpayer carries out the activity of rendering services, either permanently or temporarily, and which constitutes an economic or professional unit, regardless of what it is called (headquarters, branch office, etc.).

[2] Available at: http://www.planalto.gov.br/ccivil_03/_Ato2015-2018/2016/Msg/VEP-720.htm.

Category: Compliance, investigations and corporate governance

In September, the Ministry of Transparency and Comptroller-General of the Union (MTCGU) published the Practical Handbook for the Evaluation of Integrity Programs in the Administrative Accountability Procedure of Legal Entities (PAR). The document seeks to provide guidance and assurance for public servants with the Federal Executive Branch responsible for conducting the PAR, instituted by Law No. 12,846/2013 (the Anti-Corruption Law), especially members of the Administrative Accountability Procedure Committee (CPAR).

While the manual is intended for members of the Federal Executive Branch, its user-friendly format and easy-to-use language helps the market to more clearly understand how authorities intend to evaluate integrity programs promoted by the Anti-Corruption Law in the context of the PAR.

The publication also tends to be freely used by authorities of other powers that may be responsible for conducting accountability procedures, which might bring greater security to this work and to the authority itself. The text does not have the status of law and should be considered a guiding document, just as the document "Integrity Program - Guidelines for Private Companies", also released by the MTCGU in 2015 (at the time, known as CGU).

The manual reinforces the idea that integrity programs aim, mainly, at preventing, detecting, and remedying irregularities and that, although potentially reducing the fine applicable to legal entities that commit unlawful acts, they do not exempt them from liability. Hence, the existence of an integrity program has no bearing on the analysis of the legal entity's liability. An evaluation of the program will be carried out, therefore, if it is deemed useful to determine the amount of the fine to be proposed.

Thus, the CPAR will evaluate a legal entity’s integrity program only when three situations simultaneously apply to the specific case: (a) if the PAR concludes that a fine will in fact be applied to the legal entity; (b) if the calculation parameters of the fine (articles 17 and 18 of Decree No. 8,420/2015) lead to an amount above zero on the percentage applicable to the gross revenue of the legal entity subject to the fine; and (c) if the benefit accrued by the irregularity committed by the legal entity is equivalent to less than 20% of its gross annual revenue.

Item (a) arises, for example, from the possibility that the legal entity may be considered innocent of the allegations made, a situation in which a fine would not be applied and therefore an evaluation of the integrity program would not be necessary.

Item (b) relates to the fact that it is impossible for a legal entity found guilty in the PAR to be exempt from a fine – therefore, it does not make sense to evaluate the integrity program in order to reduce the fine if it is already the minimum amount – which is 0.1% of gross annual revenue (even if the calculation results in an amount equal to or less than 0).

Item (c) is due to the fact that the fine will never be less than the advantage received by the legal entity when the illegal act was committed. Thus, if the advantage obtained in committing the irregularity is more than 20% of gross revenue (the maximum percentage of the fine), the fine will be equal to the value of the advantage (and reduction of the fine will not be applicable). With this provision, the legislation seeks to ensure that commission of an offense is never beneficial to the legal entity.

In any case, the information regarding the integrity program must be demonstrated together with the first written defense presented by the legal entity participating in the PAR, even if the program is not evaluated at that moment and might, depending on the specific case, not ever be evaluated. This demonstration should be carried out according to the profile report and compliance reporting models (available in the manual and stipulated by the ordinance CGU No. 909/2015).

Claiming that Article 42 of Decree No. 8,420/2015 presents vague parameters for evaluating integrity programs (which is also our view), the manual creates a methodology for evaluating programs, to be applied by means of a spreadsheet (which can be accessed at link).

As stipulated in this worksheet, therefore, the evaluation will be divided into three blocks:

1. Organizational culture of integrity (COI);
2. Integrity mechanisms, policies, and procedure (MPI); and
3. Actions by the legal entity in relation to the injurious act (APJ)

The calculation will be done as follows: [(COI x MPI) + APJ] = percentage by which the fine is reduced. We describe below what each block refers to:

1. COI, whose value varies from 0 to 1.8: it identifies the company's culture regarding integrity issues, engagement of professionals, etc.
2. MPI, whose value varies from 0 to 1.5: evaluates the instruments used to prevent, detect, and remedy irregularities (policies, procedures, controls, processes, etc.).
3. APJ, whose value varies from -0.6 to 1.3 (for programs existing before the injurious act) or to 0.3 (for programs established after the harmful act): aims to verify the role of the integrity program in the prevention, detection, and remediation of the irregularity that is the subject of the PAR, as well as what the reaction of the legal entity was with respect to the occurrence of this specific irregularity, that is, what measures were taken internally to remedy the specific case and to ensure that the situation does not occur again.

The values ​​of each of the blocks will be automatically calculated by the worksheet based on the answers provided by the CPAR, that is: 0 will be "no", 1 will be "partially”, and 2 will be "yes".

The manual reinforces the need for a careful evaluation so that only legal entities whose integrity programs have effective capacity to prevent, detect, and remedy harmful acts to the public administration will bring about benefits, since the primary objective of these programs is to avoid irregularities.

In conclusion, these more objective parameters provided by the manual give greater legal certainty in the evaluation of the integrity programs in the context of the PAR, in addition to guiding more clearly the very preparation and structuring of the programs themselves, which contributes to the prevention of unlawful practices, since it helps legal entities to have have internal tools that are indeed effective in combating the problem.