Category: Tax

The trilogy on the main topics analyzed in each of the three panels of the Superior Chamber of Tax Appeals (CSRF) of the Administrative Board of Tax Appeals (Carf) in 2022, we analyze in this article the cases decided by the 3rd Panel of the CSRF and the prospects for this year.

A topic of great repercussion analyzed in 2022 was the discussion regarding the inclusion of bonuses and discounts in the calculation basis of the PIS and Cofins. The result was favorable to the taxpayer, with the application of article 19-E of Law 10,522/02 (Appellate Decisions 9303-013.339 and 9303-013.338).

The 3rd Panel of the CSRF prevailed in the understanding that discounts and bonuses do not have the nature of revenue. Both were found to be elements included in the acquisition cost and, therefore, should not be included in the calculation basis of the aforementioned contributions.

Considering that one of the board members representing the taxpayers had voted unfavorably to them, the vote of the then chairman of Carf, Carlos Henrique de Oliveira, in favor of the taxpayers was decisive for the tied vote, a result that gave victory to the taxpayers.

Another case that gained prominence involves the crediting of PIS and Cofins on the freight of finished products between establishments of the same company, for which the case law was unstable.

The cases heard in August and September of 2022 represented an important turning point in the case law of the panel. The result was favorable to the taxpayer, by majority vote, which made it possible to take credits on this expense (Appellate Decisions 9303-013.339, 9303-013.338, and 9303-013.299).

Still with regard to PIS and Cofins credits, the board recognized, by application of article 19-E of Law 10,522/02, the possibility of crediting costs and expenses arising from the resale of fuels, products taxed under the single-phase arrangement (Decision 9303-012.861).

This judgment, however, predates^[1] the precedent set by the 1st Section of the Superior Court of Appeals (STJ), which, in an appeal to resolve a repetitive issue (REsp 1.894.741/RS - Repetitive Topic 1093), held that PIS and Cofins credits cannot be created on the purchase cost components of goods subject to single-phase taxation.

Regarding the discussion involving suspension of the IPI on sales of raw materials, intermediate products, and packaging materials destined for establishments engaged in manufacturing the products specified in article 29 of Law 10,637/02, for the first time, the taxpayer obtained a favorable decision from the board, with recognition of a suspension for establishments equated to industrial establishments, by application of article 19-E of Law 10,522 (Appellate Decision 9303-012.818).

Regarding the concept of billing for financial institutions, the panel maintained its understanding and considered the billing of these institutions to correspond to the total gross revenue earned, including financial revenue, since they would be the main revenue of the banking activity and, therefore, should be included in the billing of banks - the calculation basis of PIS and Cofins (Appellate Decisions 9303-013.369 and 9303-013.370).

The panel also analyzed the possibility of applying an isolated fine of 50% for non-collection of IRPJ and CSLL advances cumulated with an ex-officio fine of 75%.^[2]

Although the 1st Panel of the CSRF has original jurisdiction over this matter, it has also been decided by the 3rd Panel of the CSRF, due to the extension of jurisdiction resulting from Carf Administrative Rule 15.081/20 and Carf Ordinance 12.202/21. The board ruled against the taxpayer and, by majority vote, decided finding for the possibility of maintaining the concomitant collection of penalties for taxable events occurring after 2007 (Appellate Decision 9303-012.015).

Outlook for 2023

Perhaps the biggest challenge taxpayers will face this year is the return of the casting vote in the event of a tie in the Carf's judgments. This new legal provision was established with the promulgation of Executive Order 1.160/23 and the consequent revocation of article 19-E of Law 10,522/02, according to which the judgment should be resolved in favor of the taxpayer in the event of a tie vote.

The new Executive Order 1.160/23 may reverse the results of the judgment of several issues that have been resolved in favor of the taxpayer in administrative litigation.

Specifically in relation to the 3rd Panel of the CSRF, a major change in the official composition of the panel is expected in 2023, since the terms of office of the four members representing taxpayers end in June, with no possibility of reappointment. This circumstance will lead to the appointment of new board members in a proportion that has not occurred since Operation Zelotes in 2016.

Still in relation to the 3rd Panel of the CSRF, responsible for judging issues related to PIS and Cofins, a point that deserves attention is the publication, in December of 2022, of RFB Normative Instruction 2121/22, which consolidates rules on the calculation, collection, inspection, payment, and administration of contributions. The new standard replaces RFB Normative Instruction 1.911/19 and brings in relevant innovations especially on the use of credits, which should have repercussions on the judgments of the panel.

The retrospective of the main cases decided by the Carf's Superior Chamber in 2022 shows that the body has been playing a central role in the formation of theories and case law on tax matters, whether because of the quality and depth of the discussions, the complexity and specificity of the cases, or the amounts involved.

Changes in the case law of some topics are expected for 2023, especially with the return of the casting vote. Attention should be redoubled for those theories that have been decided in favor of the taxpayer based on article 19-E of Law 10,522.

In any case, we hope that the body maintains the quality standard of judgments observed in recent years, so that the institution is strengthened and continues to act as the main mechanism for reviewing administrative acts, with the ultimate goal of reducing judicial disputes.

^[1] The Carf judgment took place in the February 16, 2022 session and the appellate decision was published on April 25, 2022. The STJ's repetitive appeal was heard on April 27, 2022, and the appellate decision was published on May 5, 2022.

^[2] See an article published on Machado Meyer's Legal Intelligence webpage on the subject.

Category: Litigation

The Digital Markets Act (DMA) is the European Union's (EU) new law whose initial purpose is to make the digital marketplace fairer and more competitive. The rule came into effect on November 1, 2022, but the regulation will go through an implementation phase and the law will only be applied in fact from May 2, 2023.

In addition to the DMA, the Digital Services Act (DSA) and the Data Governance Act (DGA) are other pieces of legislation that will soon be put in place and, with the DMA, are part of an ambitious European Union strategy to make the current decade the "Digital Decade". To make this happen, the European Commission has proposed some targets for the digital transformation of Europe by 2030.

In order to achieve the proposed goal, the DMA seeks to limit the power of gatekeepers, companies that provide essential platform services such as online intermediation, search engines, social networking, video sharing, interpersonal communications, operating systems, cloud computing, and advertising.

The regulation establishes some criteria to identify a gatekeeper:

• have a strong and active economic position in at least three EU countries;
• operate an essential platform service that serves as a gateway for professional users to reach end users; and
• have a solid market position.

According to the British research institute Center for Economic Policy Research(CEPR), these criteria will not only reach the core businesses of the biggest players such as Google, Amazon, Facebook/Meta, Apple, and Microsoft (Gafam), but also platforms such as Oracle and SAP, which may end up being included in this list.

The list of duties of a gatekeeper covers situations related to conflicts of interest that arise in the relationship between it and its business users. It also deals with preserving the right to challenge in the relevant markets, with encouraging multi-homing, switching, lowering barriers to entry, and increasing transparency.

The prohibition for the gatekeeper to combine personal data, unless a specific choice has been presented to the end user and he has given his consent, is one of the obligations under the regulation, for example.

In this respect, the regulation went in the same direction as the German precedent. In 2019, the German Competition Authority (Bundeskartellamt) banned Facebook from combining user data. At the time, the platform's terms and conditions provided that users could only use the social network under the precondition that Facebook could collect user data off the website, or in smartphone apps, and assign that data to the user's Facebook account.

Another important self-executing obligation is the permission for business users to promote offers and enter into contracts with end users purchased on the platform through off-platform channels.

In this regard, the European Commission announced in 2020 the opening of antitrust investigations aimed at evaluating the rules set by Apple for app developers. The investigation dealt with the mandatory use of the in-app purchase system and the restrictions on iPhone and iPad developers' ability on alternative payment possibilities. In addition to limiting the payment method, Apple was charging a commission fee on transactions.

As for the right to contest, the DMA provides that the gatekeeper must provide advertisers and publishers with information about the price paid by the advertiser and the remuneration paid to the publisher for advertising services. This is to prevent competitors and advertisers from taking advantage and to make the process more transparent.

The regulation also brought in other changes that have been the subject of discussion. The first is the possibility for users to install apps from other distribution stores. With this, Apple users could install apps from Google Play or from websites.

The second is the interoperability of instant messaging programs. This would force, for example, WhatsApp (from Facebook/Meta) to receive messages from competing apps like Signal or Telegram.

In the event of non-compliance with some of the obligations set out in the regulation, the commission may fine the gatekeepers up to 10% of their total turnover in the previous year, and impose daily fines of up to 5% of average daily turnover.

And in Brazil?

The General Superintendence of the Administrative Council for Economic Defense (SG/CADE) recently opened an administrative investigation against Google for practices in the Android operating system. In the document opening the investigation, the SG relies on Google's conviction in the European Commission, which found exclusivity agreements between Google, cell phone manufacturers, and mobile network operators to be unlawful.

In the same competitive line, Mercado Livre reported, on December 5th of this year, the the opening of a case against Apple in CADE for anticompetitive practices. In a communiqué, Mercado Livre claimed that Apple imposes various restrictions on the distribution of digital goods and in-app purchases, including a ban on apps distributing third-party digital products and services, such as movies, music, video games, books, and written content.

Given this recent development and the importance of the DMA, not only for its impacts on large technology companies, but also for promoting a more competitive digital market, there is a high possibility that the Digital Markets Act will inspire similar legislation here in Brazil, much like how the General Data Protection Regulation (GDPR) had a strong influence on the creation of the General Data Protection Law (LGPD). There are even signs in this direction with Bill 2,768/22.

This bill, presented to the steering committee of the Brazilian House of Representatives on November 10, aims to change the Brazilian Civil Rights Framework for the Internet and the General Telecommunications Law, and would give Anatel the power to regulate and supervise digital platforms. The agency would be responsible for issuing rules on the operation of digital platforms that offer services to the Brazilian public, applying sanctions, deciding in the administrative sphere on the interpretation of the legislation applicable to digital platforms, and administratively settling situations related to conflicts of interest.

Although its creation was influenced by the DMA, Bill 2,768/22 presents some distinctions in its initial text.

An example of this is the creation of the Digital Platform Oversight Fund (article 15). To make it up, digital platforms that offer services to the Brazilian public would be required to pay an annual fee equivalent to 2% of their gross operating revenue.

The bill also classifies digital platforms as holders of the power to control essential access when they obtain annual operating revenue equal to or greater than R$70 million from offering services to the Brazilian public (article 9).

As for administrative penalties, the text provides for warnings, a fine of up to 2% of the economic group's revenues in Brazil in its last year of operation, mandatory and prohibitory obligations, temporary suspension of activities, and a ban on conducting activities (article 16).

The trend, therefore, is that although large technology companies have established themselves in a less regulated environment, they will need to adapt to an increasingly regulated environment. Everything indicates that the GDPR is just the tip of the iceberg. Both the DMA and the DSA are coming to sanctify this new reality that, it seems, will not be limited only to European territory.

When it comes to new regulations regarding the digital environment, there are numerous discussions. After all, everyone wants to get the most out of technology and innovation, and regulations somewhat slow down this process. However, establishing measures to combat anti-competitive practices in the digital environment potentially creates a fairer environment, conducive to economic development and beneficial to users.

Category: Tax

The Administrative Council of Tax Appeals (Carf) started 2023 with changes and the expectation that great challenges will be solved. The body is already under the leadership of a new chairman, Carlos Higino Ribeiro de Alencar, appointed on January 5. Already on the 9th he publicized CARF/ME 455, which mandated suspension of all of Carf's judgments sessions for this month.

On January 12, several measures were published with the aim of reducing the fiscal deficit, by increasing tax collection and reducing the backlog of cases pending with Carf. Among the measures that directly impact on the Carf is the return of the casting vote in the event of a tie in the vote of the judging panels, revoking article 19-E of Law 10,522/02, which decided tie votes in favor of taxpayers.

With these relevant changes, and still expecting to maintain the level of debates and decisions at the Carf, we continue the trilogy of articles on the main topics decided by the panels of the Superior Chamber of Tax Appeals (CSRF) of Carf in 2022, with a retrospective of the issues debated by the 2nd Panel of the CSRF.

Responsible mainly for deciding cases involving social security matters and Withholding Income Tax (IRRF), the 2nd Panel of the CSRF also underwent changes in its composition that were reflected in changes in consolidated understandings after 2018.

There were only six meetings in the year 2022, due to the tax auditors' strike. However, these meetings were marked by debates that directly influenced some changes in understandings or even confirmation of others already consolidated by the 2nd Panel of the CSRF.

As for changes in understanding, we highlight the judgment in favor of taxpayers for the non-levying of social security contributions on profit sharing payments to non-employee directors (Appellate Decision 9202-010.354). The understanding was that there is no distinction between "employer" and "worker" when interpreting Law 10,101/00 or Law 8,212/91.

According to the decision, giving different tax treatment to profit sharing paid to employees and non-employee directors could violate the constitutional principle set forth in article 150, III, of the Federal Constitution. This issue was decided in favor of the taxpayer due to the application of article 19-E of Law 10,522/20 (repealed).

Still with regard to the payment of profit sharing, the Panel recognized, also by applying article 19-E of Law 10,522/20, that execution of a collective bargaining agreement on a date subsequent to the fiscal year to which it refers, by itself, is not a reason to rule out application of Law 10,101/00, i.e., to deconstitute (de-characterize, invalidate, undermine} the agreement and levy social security contributions on the sums (appellate decision 9202-010.357). In this specific case, the plan had already been repeated in previous years and this already indicated the predictability of the rules, necessary for characterization of the payments for profit sharing purposes.

In relation to the matter of incentive bonuses (hiring and retention), the prevailing understanding was that social security contributions are not levied on these amounts, which do not have the nature of remuneration (Appellate Decision 9202-1010.457). The panel found that payment of these bonuses represents fulfillment of civil obligations and not labor contracts, another issue decided due to the application of article 19-E of Law 10,522/02.

In 2023, it is possible for there to be revision of the case law on the issues decided based on application of the former article 19-E of Law 10,522/02. This is because, with the return of the casting vote, the majority of the board members representing the National Treasury have an understanding contrary to the prevailing theory in these specific matters.

With regard to the discussion of taxation of stock option plans offered by the company to its officers and directors and employees (stock options), a topic that will certainly be resumed in future debates with the 2nd Panel of the CSRF, the position was also favorable to the taxpayer (Appellate Decision 9202-010.506).

Until then, the prevailing understanding was that social security contributions should be levied on this amount. It was claimed that the shares were offered to employees in the context of an employment contract, which in itself would constitute a form of indirect remuneration.

In 2022, after much debate, the theory that social security contributions cannot be levied on this amount prevailed, since payments related to stock options are made by a third party. It is understood that stock option plans have a mercantile nature. The value of the share is paid by the market, therefore it is not to be confused with remuneration and should not be subject to social security contribution.

At the six meetings in the year 2022, old positions were maintained without any change in case law. Specifically regarding payment of hiring bonuses, the panel only confirmed the case law of 2021 finding for the impossibility of levying social security contributions (Appellate Decision 9202-009.762).

On the subject of merger of shares, there has been no change in understanding. The historical position (Appellate Decision 9202-010.045) was adopted that the shareholder of the acquired company, upon receiving the shares of the acquiring company with appreciation, will have a capital gain liable to income tax.

Despite the change in the composition of the 2nd Panel of the CSRF, with the return of the casting vote in 2023, continuity in solid decisions is expected, resulting from rich debates and surrounded by legal security.

Category: Tax

Challenge and innovation were words that certainly represented the year 2022 for the Administrative Council of Tax Appeals (Carf). The first months of the year were marked by stoppage of the judgment sessions due to the adherence of part of the board members of the body to the tax auditors' strike. Without the minimum quorum of board members for judgments, the sessions had to be suspended.

Also in the first half of the year, a relevant and unexpected change: the appointment of board member Carlos Henrique de Oliveira to the chairmanship of Carf, replacing board member Adriana Rêgo, who presided over the body during the entire period after Operation Zelotes.

At the beginning of the second half of the year, the tax auditors reached an agreement on extension of the strike and the body's judgment sessions finally resumed. At first, only the Superior Chamber of Tax Appeals (CSRF) resumed its judicial activities (with the new chairman already in charge), but was soon followed by the ordinary panels.

In September, there was an innovation: for the first time in its history, Carf held a session in person outside Brasília. The change was the result of implementation of a measure announced by Chairman Carlos Henrique de Oliveira at the very beginning of his term. The CSRF sessions were held in São Paulo, thus bringing the judgments closer to the taxpayers.

The year 2022 was also marked by innovation in important tax issues, as well as major reversals in the most consolidated case law. Whether by the change in the composition of the CSRF panels or the new tie-breaking criteria in favor of taxpayers, important topics had new debates, which often resulted in new results.

In the trilogy of articles that we will continue in the coming weeks, the main topics of each of the three panels of the Carf's Superior Chamber of Tax Appeals will be addressed. In this first article of the trilogy, we take a look back at judgments by the 1st Panel of the CSRF.

Judgments by the 1st Panel of the CSRF in 2022

In the 1st Panel of the Superior Chamber of Tax Appeals, responsible for deciding cases involving the IRPJ and CSLL, changes in the composition of the panel caused changes in the body's historical understanding.

A big highlight was the changes in the discussions related to the amortization of goodwill on equity acquisitions. The 1st Panel ruled out application of a qualified fine in transactions with goodwill with a "vehicle" company (appellate decision 9101-006.292) and with internal goodwill (appellate decision 9101-006.153). In an absolutely innovative manner, it recognized the possibility of deducting intra-group generated goodwill expenses (appellate decision 9101-006.373) from the IRPJ and CSLL calculation basis.

Specifically with regard to the deductibility of goodwill expenses from the CSLL tax basis, until the beginning of 2022, decisions were favorable to taxpayers, applying a criterion different from the IRPJ (appellate decision 9101-005.894). With the change of the board, the issue became unfavorable to taxpayers in July of 2022 (appellate decision 9101-006.164). This understanding was maintained in the remaining sessions of the year.

The board also recognized the possibility of deducting amounts paid to officers and directors and managers as profit sharing (appellate decision 9101-006.372) from the IRPJ and CSLL calculation basis.

Regarding transfer pricing, the panel decided finding for the possibility of presenting, during tax audits, a new calculation for the purpose of obtaining the parameter price (appellate decision 9101-006.312) and for application of the FOB clause (free on board) for the calculation of the price charged (appellate decision 9101-005.979).

With respect to the issue of profits earned abroad, the case law remained stable throughout the year: the 1st Panel ruled out taxation of profits from foreign subsidiaries and affiliates under MP 2158-35/01 by application of clause 7 of the Treaties (appellate decision 9101-006.247).

The concomitant requirement of a separate fine on the estimated income tax and an ex-officio fine of 75% on the amount not collected at the end of the calendar year has been the subject of much debate: in precedents in 2021, the body had been deciding for setting aside one of the penalties (appellate decision 9101-005.986).

At the July 2022 session, in a majority decision, the panel confirmed the possibility of concurrent application of the penalties (appellate decision 9101-006.172). In the September session, the board members resumed the understanding that concomitance is impossible, by applying the article 19-E of Law 10,522/02 (appellate decision 9101-006.284).

In 2023, the debates are expected to be renewed due to the change in the composition of the board: at least nine board members of the Superior Chamber of Tax Appeals are expected to leave the body at the end of their terms. The beginning of the year already had a new nomination for the chairmanship of the body, tax auditor Carlos Higino Ribeiro Alencar.

Regardless of the changes in composition, what is expected is continuity in the formation of a fair and open case law, with a guarantee of the adversarial process and full defense. Much more than a simple review of the administrative assessment, Carf, and especially the panels that make up the Superior Chamber of Tax Appeals, perform the noble and essential function of consolidating the Federal Administration's interpretation of tax legislation. In a country with such a complex tangle of regulations, this will never be a small task.

Category: Litigation

The lack of funds to afford the high costs of initiating certain litigation proceedings, judicial or arbitral, can make it very difficult or even impossible to file lawsuits or initiate arbitration proceedings.

To remedy this problem, third-party funding was created. This resource makes it possible for a third party that is not a party to the dispute, be it a financial institution, a company, or even an individual, to bear the costs and expenses of a certain proceeding.^[1]

In return, this third party usually receives a portion or percentage of the financial advantage eventually obtained by the funded party, should the latter win the dispute.^[2]

On the other hand, if the funded party loses, the funder will bear all the costs of the proceeding without receiving any consideration. This is precisely the risk of the deal, and the reason why the arrangement is usually preceded by a careful analysis of the funders' probability of success.

This concept is not yet all that widespread in Brazil, although third-party funding of litigation is already a widely recognized practice in international arbitration and judicial litigation in other countries. In the United States, for example, third-party funding is quite usual, especially in the filing of so-called class actions.

Its use, however, is gradually growing in the Brazilian scenario, especially with the creation of funds for this specific purpose. Those who defend this type of arrangement point out the following as positive points:

• Feasibility of initiating proceedings (especially arbitration) that would be financially unfeasible for the holder of the right;
• Dissemination of the arbitration proceeding among parties with less economic power;
• Reduction in the number of "weak merit" proceedings, as third party funders tend to make an independent and impersonal assessment of the claim, accepting only those that meet their investment criteria, i.e. have a reasonable chance of success;
• The third party investor's concern is that the proceeding be as economical and objective as possible; and
• The unburdening of the Judiciary, as it allows access to other more costly means of dispute resolution.

On the other hand, some counterpoints still generate resistance to third-party funding in Brazil, for example:

• The risk of violating the impartiality of the arbitrators and the judgment, as well as corrupt conduct;
• The possibility of stimulating unnecessary litigation, as a way for funders to profit from the claims;
• The risk of the so-called "minority activism", which could result in the filing of liability lawsuits by the funders against the controller, aiming to receive the premium and fees referred to in article 246 of the Brazilian Corporations Law; and
• The possibility of disagreement between the funded party and the funder during the proceeding.

Another factor that generates insecurity and, consequently, delays consolidation of the practice of third-party funding across Brazil is the absence of any specific regulations on the matter. There are only a few best practice recommendations issued by arbitral chambers.^[3]

A relevant issue to be evaluated and for which there is still no secure definition, for example, is whether or not the funded party is obliged to disclose information about the funding and the identity of the funder(s).

On this point, Brazilian arbitration chambers have recommended that the parties report, at the first opportunity, the full identification of the funder(s) to the arbitral tribunal, which should transmit this data to the arbitrators and other parties. The goal is to prevent impartiality on the part of the arbitrators towards the funder from being compromised in any way.^[4]

Although the case law on the subject is still quite incipient, the Court of Appeals of the State of São Paulo (TJSP) issued a recent decision on the subject and established the first outlines of the information that must be disclosed in third-party funding situations.

In the case, a minority shareholder had filed a liability suit against the controller of a company alleging abuse of power. The controllers began to request that, in addition to the name of the funder, the contracts and documents related to the funding of the litigation by the third party be presented.

The lower court judge ordered that the contracts signed with the those responsible for funding the litigation be submitted to the record. The argument is that it would be necessary to determine whether, in that case, the funded party was being used as a straw man to conceal the identity of the real plaintiffs.

The judges of the 2nd Chamber of Business Law of the TJSP, however, in a unanimous opinion, found irrelevant presentation of the documents related to the funding, as well as disclosure of the identity of other potential funders.

The decision was handed down on September 20 of this year by the reporting judge Natan Zelinschi de Arruda, in Interlocutory Appeal 2153411-63.2022.8.26.0000 filed by the funded party. The judges of the 2nd Chamber of Business Law of the TJSP who reviewed the case found that:

• the funding of litigation is allowed in the legal system, and there is no impediment to the party "seeking the help of others to share the high costs and results of a lawsuit"; and
• investigating the identity of the funders would be totally irrelevant to resolving the merits of the dispute.

The issue will reach the Superior Court of Appeals for the first time, since the appellee has recently filed a special appeal against the appellate decision of the TJSP.

Whether or not one agrees with the resolution of the issue given by the TJSP, the mere fact that the matter is now being faced in our courts is commendable. With the decision, the trend is that funders and funded parties will have greater certainty and a better ability to predict the information that may be disclosed. This will allow these players to make better informed decisions when choosing to fund a particular dispute.

If the international trend is followed, third-party litigation funding in Brazil will be an increasingly frequent and usual practice. Consequently, more controversial issues on the subject will certainly be subject to much discussion in Brazilian courts until the matter is finally regulated or settled in our case law.

^[1] The funding can cover administrative costs, fees for arbitrators, lawyers, experts, and even money judgments.

^[2] Although this is the most common practice, the lender and the funded party are free to decide the funder's remuneration as they see fit.

^[3] Following the example of the guidelines established in Administrative Resolution 18/16, established by the Arbitration and Mediation Centre of the Brazil-Canada Chamber of Commerce (CAM-CCBC) and Administrative Resolution 14/20, issued by the Chamber of Business Mediation and Arbitration - Brazil (Camarb).

^[4] See Administrative Resolution 18/16, established by the Arbitration and Mediation Centre of the Brazil-Canada Chamber of Commerce (CAM-CCBC) and Administrative Resolution 14/20, issued by the Chamber of Business Mediation and Arbitration - Brazil (Camarb).

Category: Tax

On January 12th of this year the federal government published Executive Order 1,160/23 and PGFN/RFB Joint Ordinance 1/23, which bring in a series of proposals for reducing the primary deficit.

The package of measures, called "Zero Litigation", modifies the processing of administrative tax proceedings and establishes new models for settlements or installment plans

On the same date, Executive Order 1,159/23 was published, which contains a specific provision on the calculation basis of PIS and Cofins contributions.

The following points are worth mentioning:

• Revocation of article 19-E of Law 10,522/02 and reinstitution of the casting vote

Executive Order 1.160/23 revoked article 19-E of Law 10,522/02, which established a tie-breaking criterion in favor of taxpayers in the judgments of tax proceedings by the Administrative Council of Tax Appeals (Carf).

This article was introduced in the legal system in 2020 by an act of the Legislative Branch, as part of the conversion of Executive Order 899/19 into Law 13,988/20.

Since then, tax authorities have been trying to reduce the scope of application or even attack the constitutionality of the provision, but without much success. It is important to point out that, in the judgment yet to be concluded of Direct Actions of Unconstitutionality 6,399, 6,403, and 641, which deal with this matter, the Justices of the Federal Supreme Court (STF) have been voting, in their majority, in favor of the constitutionality of the provision.

With the repeal of article 19-E of Law 10,522/02, the tie-breaking criterion of paragraph 9 of article 25 of Decree 70,235/72 returns, namely, the prevalence of the vote of the chairman of the panel ("casting vote"). Per a provision of the internal rules, the chairman of the panel is always a board member from the representation of the National Treasury, which had been generating discussions regarding the existence of a voting tendency in favor of the Tax Authorities, that is, in favor of maintaining assessments, especially for high impact issues.

The reinstatement of the casting vote was announced as a measure that would promote increased tax revenues. However, its most likely effect is an increase in litigation of tax disputes, with a rush to the Judiciary for review of administrative acts that have been upheld in judgments decided by casting vote.

The new judgment tie-breaking system is valid as of now, and should be applied in the Carf's next judgment sessions, scheduled for February.

In any case, the definitive introduction of the casting vote in the legal system will depend on the conversion into law of Executive Order 1,160/23 within the deadline provided for in article 62, paragraph 3, of the Federal Constitution.

• Low value litigation - access to the Carf

Executive Order 1,160/2023 also established a restriction on access to the Carf for disputes involving smaller amounts. The tax assessment or tax dispute that does not exceed one thousand minimum wages must be decided in the last level of appeal by the Regional Judgment Offices.

In practice, the increase in the authority limit will serve as a barrier to the Carf, reducing, in the long run, the backlog of administrative proceedings. The order may, however, result in more lawsuits in the judiciary.

• Increase in the limit for filing an ex-officio appeal with the Carf

The federal government has also announced a change in the limit for filing ex officio appeals with the Carf. This appeal is filed by the National Treasury against decisions by the Regional Judgment Offices that lift, in whole or in part, tax credits.

The new limit established by the Ministry of Finance will be R$15 million. In practical terms, DRJ decisions canceling assessments of up to R$15 million will be final.

• Tax Litigation Reduction Program (PRLF) of the National Treasury Attorney's Office

The federal government's program of measures also included new scenarios for tax settlements. PGFN/RFB Joint Ordinance No. 1, of January 12, 2023, establishes conditions for exceptional settlements in the collection of federal debts under discussion in tax administrative litigation or already entered as outstanding federal debt.

The measure aims to reduce the backlog of pending cases and increase tax collection by granting discounts to individuals, companies, and micro and small enterprises.

For transactions involving individuals, micro and small enterprises, the discounts granted can reduce the total debt by 40% to 50%. The adherence will encompass debts of up to 60 minimum wages.

The transaction involving other legal entities is intended only for debts classified as low recoverability (measured according to the provisions of Chapter II of PGFN Ordinance 6,757/22), but will allow a reduction of up to 100% in the accrual of fines and interest. It is also possible to use tax losses and a negative tax basis to discharge part of the debt.

The ordinance goes into effect on February 1, 2023, and adherence to the program can be done until March 31 of the same year.

• Executive Order 1,159/23 - exclusion of ICMS from the PIS and COFINS tax bases

Executive Order 1,159/23 amended Laws 10,637/02 and 10,833/03 to confirm the exclusion of the ICMS amounts from the PIS and Cofins calculation basis, as decided by the STF in the judgment of Extraordinary Appeal 574.706.

The change was the introduction of a provision establishing that the ICMS is also not included in the calculation basis for the PIS and Cofins credits when determining the cost of acquisition.

Specifically for this provision, which causes a restriction on the right to a credit, the measure will only take effect on the first day of the fourth month following its publication, respecting the ninety day notice period.

We will continue to monitor any other related measures and will inform taxpayers of their impacts.

Category: Environmental

In a decision rendered in November 2022 in the context of Direct Action of Unconstitutionality 4,529 (ADI 4,529) filed by the Attorney General's Office (PGR), the Supreme Federal Court (STF) ruled that a state norm was unconstitutional, as it provided less protection in relation to environmental licensing.

Through the referred ADI, the PGR intended to invalidate regulations of the state of Mato Grosso related to environmental licensing of hydroelectric projects.^[1] For better understanding of the controversy, please find below relevant provisions extracted from Complementary Law 38/95:

"Article 3 The Consema, a collegiate body of the State Environmental System - Sima, has the purpose of advising, evaluating and proposing to the government of the State of Mato Grosso guidelines of the State Environment Policy, as well as deliberating, within the scope of its competence, on rules and standards that are compatible with the ecologically balanced environment and essential to quality of life, having the following attributions:

(...)

XII – express its opinion on the environmental licensing of thermal or hydroelectric plants with a capacity above 30 MW, for which, mandatorily, the preparation of an Environmental Impact Study - EIA and presentation of the respective Environmental Impact Report -Rima will be required, depending on the validity of the approval license by the Legislative Assembly".

"Art. 24. The licensing of the implementation of the following environment modifying activities shall depend on the preparation of the EIA and its respective Rima, to be submitted for Fema approval:

(...)

VII- hydraulic works for the exploitation of water resources, comprising a flood area above 13 km² (thirteen square kilometers), sanitation or irrigation, opening of canals for navigation, drainage, rectification of watercourses, opening of bars and inlets, transposition of basins and dikes.

(...)

XI- electricity generation plants, whatever the primary energy source above 30 (thirty) MW" (emphasis added).

The wording of the abovementioned provisions implies exemption from the drafting of environmental impact study (EIA) and its respective environmental impact report (Rima) for all hydroelectric works with a potential of 10 to 30 megawatts and with an extension of flooded area inferior to 13 square kilometers. The PGR argued that the provisions would result in insufficient protection of the ecologically balanced environment, which would violate Article 225, caput and § 1, IV, of the Federal Constitution.

The PGR also argued that the legal regulations in question go against the Resolution 01/86 issued by the National Council for the Environment (Conama) – the authority competent to establish standards and criteria for the licensing of effective or potentially polluting activities according to Federal Law 6,838/81 (National Environment Policy - PNMA).

According to Resolution 01/86, "[i]t shall depend on the preparation of Environmental Impact Study and its Environmental Impact Report – Rima, to be submitted for the approval of the competent state agency, and the Special Secretariat for the Environment - Sema in a supplementary nature, the licensing of environmental modifying activities, such as: (...) VII - hydraulic works for the exploitation of water resources, such as: dam for any hydroelectric purpose, above 10 MW, sanitation or irrigation, opening of canals for navigation, drainage and irrigation, rectification of watercourses, opening of bars and inlets, transposition of basins, dikes" (emphasis added).

The PGR, therefore, argued that the rules of the state of Mato Grosso could not establish less protective parameters than those provided for in federal norm. The authority concluded that "[the] Member State, even though it has concurrent competence, must comply with the already set out standards in general rules, using it as a minimum standard. In such a way that it would only be authorized to act beyond such normative framework; never short of what has been previously established by law".

The unconstitutionality of the mentioned normative provisions would be based on two main points:

• the usurpation of the competence from the Federal Union, considering that Conama Resolution 01/86, general environmental regulation, does not authorize hydroelectric projects with a potential of more than 10 megawatts, even with a reduced flood area, to be exempt from the presentation of EIA and Rima; and
• insufficient protection of the environment and setback in the handling of the subject, by making the minimum protection parameter more flexible when the flood area is reduced – which would not be supported by federal legislation.

Amongst several other points, the reporting judge of the case, Minister Rosa Weber, pointed out in her majority opinion that the wording of Conama Resolution 01/86 "was elaborated as a way of giving density to the command provided by Article 225, § 1, IV, of the Federal Constitution and, therefore, enable the exercise of police power to control the effective or potentially polluting activities".

The minister also understood that the "State of Mato Grosso increased the minimum requirement for the conduction of the environmental licensing, since it modified its legal enforcement for projects with a primary energy source above 10 MW as provided for in Resolution 01/86, and established it as a compulsory requirement only for those enterprises with a capacity above 30 MW" and that it "inserted new criterion relating to requirement for licensing of hydraulic works for the exploration of water resources, i.e.: flood area above 13 km² (thirteen square kilometers), as stated in the original wording, or 300 ha, according to the current text" (emphasis added).

On the subject, concluded the minister that the state of Mato Grosso "did not limit itself to its role, within the framework of concurrent competences, of developing rules that are complementary to the general rules issued by the Union in environmental matters (Article 24, VI, §§ 1 and 2). In fact, it innovated, by increasing the minimum primary energy source suitable to create a presumption of significant environmental degradation, and by establishing a diverse licensing requirement, relating to the extent of flooded area. Created a different rule and exceeded, therefore, the federal legislation on the treatment of the subject. It has occurred, therefore, an invasion of the general competence of the Federal Union" (emphasis added).

Hence, the Minister decided on the "formal unconstitutionality of the contested provisions and expressions".

Minister Rosa Weber also addressed the unconstitutionality of the legal devices challenged by the PGR by the material perspective and stressed that "[the] exemption of licensing of potentially polluting enterprises violates article 225 of the Republic’s Constitution. That happens due to the fact that economic activities, such as the exploitation of water resources for hydroelectric purposes, shall only be considered lawful and constitutional when subordinated to the environmental protection rules" (emphasis added).

In the end, the minister pointed out that the normative action of the State of Mato Grosso entails "insufficient protection, in non-compliance with the principles of the prohibition of setbacks on socio-environmental issues, prevention and precaution" (emphasis added).

The decision of the Supreme Court is aligned with the latest trends and logic observed in the main courts when facing disputes involving environmental issues, such as the decision issued by the Superior Court of Justice (STJ) in the context of repetitive special appeals (Theme 1010/STJ), which discussed which rule should be taken into account for permanent preservation areas (PPAs) located in urban areas - Forest Code or the Urban Land Installment Law.

At the time, the STJ decided to enforce the most protective norm, that is, the prevalence of the Forest Code – which allows the conservation of a greater extension of ciliary PPAs.

The relationship between the subjects of environmental licensing and competence of the entities is constantly at the center of legal discussions and may present new developments in the future, considering that  ADI 4,757 has also been filed before the Supreme Court, by which the validity of various legal provisions contained in the Complementary Law 140/11 are being challenged.

These provisions include Article 14, §4, which, in summary, grants the extension of the term of licenses automatically in the event the request for renewal of a license was timely filed, until manifestation of the relevant authority. Article 17, § 3, is also under discussion, which established the supervisory competence of an enterprise to its licensing authority.

This discussion is viewed with concern by some sectors and there is great expectation regarding the outcome of the controversy, since Complementary Law 140/11 is one of the most relevant and consolidated norms that regulate the role of federative entities in the environmental sphere, playing an important part in settling conflicts of competence.

^[1] The provisions discussed in the ADI are Articles 3, XII, and 24, XI, complementary law 38/95 and subsequent Supplementary Law 70/00. The proceeding also involves the validity of the expression contained in Article 24, VII, of Complementary Law 38/95, both in the current wording, given by Complementary Law 189/04, and in Complementary Law 70/00.

Category: Litigation

Appropriate methods for conflict resolution are becoming increasingly relevant in the national scenario of alternatives available for dispute resolution. These methods include mediation and conciliation, governed by the Law 13.140/15. In addition, the Article165 of the Code of Civil Procedure (CPC) brings a basic concept by distinguishing the two techniques.

Regardless of the legal conception, the nature of the conflict may favor the adoption of one of the alternatives. Conciliation is usually indicated for situations where the parties do not have personal relationships, which means that the object of the conflict is punctual and there is no past relationships that needs to be harmonized before discussion about the conflict.

Conciliation, thus, must be used when the parties do not have a previous relationship, as occurs in consumer relations, in which there is acquisition of a product or service, default of payment, the consequent registration of the consumer in credit protection agencies and, subsequently, the possibility of debt negotiation.

It is also common to adopt conciliation in consumer relations involving the airline industry, in cases of unjustified cancellation or delays and in cases of baggage loss.

Mediation, on the other hand, is indicated for cases in which the parties have a previous bond, such as in situations where there is a conflict between partners involving business matters. This is because the goal of mediation is to restore communication between the parties involved and enable the construction of a solution.

Mediation, therefore, allows to mitigate possible personal disagreements and resolve the existing conflict in order to re-establish the relationship in the future, if possible and necessary.

With regard to mediation, Law 13.140/15 establishes some guiding principles:

• impartiality of the mediator;
• isonomy between the parties;
• orality;
• informality;
• autonomy of the parties' will;
• search for consensus;
• confidentiality; and
• good faith.

The mediators, an impartial third party, have no decision-making power. They play an important role of encouraging the parties to identify or develop consensual solutions to the controversy. In other words, the mediator aims to attract the trust of those involved by stimulating dialogue, understanding the needs of the parties, assisting them in understanding each other's reasons and leading the situation so that the parties themselves can reach a resolution.

It is also worth mentioning the principle of "search for consensus", which does not limit mediation to mere "agreements". Based on this principle, the parties have the chance to know better the controversies they discuss and, as far as possible, strengthen the bond between them so that they can resolve the issue through dialogue.

The mediator, in such a case, shall ensure clear communication between the parties and lay down rules so that the negotiation can be carried out with the necessary frankness. In this way, the parties must be able to present their arguments and objectives fluidly, reach a consensus and avoid a judicial dispute.

The mediation process, when well carried out, can bring numerous advantages, such as flexibility, speed, and reduction of direct and indirect expenses with the conflict – compared to a judicial or arbitration process. In addition, mediation creates an environment more conducive to the maintenance of personal and commercial relationships.

In the business environment, mediation can be used both in an "intraorganizational" way (to resolve disputes involving employees, departments, directors, or partners) to harmonize relations between the company and the outside world.

Business mediation has two aspects: preventive, since it aims to anticipate situations of conflict, and resolutive, which proposes solutions to situations in which there is conflict established.

The confidentiality of dealings is also important for companies, especially for the preservation of the image and security of sensitive information.

Business mediation has been getting prominence since the covid-19 pandemic period, because of the economic crisis generated, which involved companies, employees, suppliers, and the market itself.

Given this scenario, many companies found in mediation a way to resolve conflicts and avoid even greater financial impacts – especially considering that, for much of the period, judicial deadlines were suspended and, therefore, access to justice became even slower.

Therefore, the pandemic indirectly helped to demystify mediation and expanded access to appropriate conflict resolution methods.

To meet the  increased demand, it was necessary to implement technological solutions that would adapt the application of these alternative methods to the reality of that period, especially regarding to social isolation norms.

Renowned arbitral institutions, such as International Chamber of Commerce (ICC) and the Chartered Institute of Arbitrators (CIARb), published guides with practical recommendations to mitigate the effects of the pandemic, suggesting changes that would adapt the processes to the new remote reality.

In Brazil, the Chamber of Mediation and Business Arbitration (Camarb) issued the Resolution 15/20, which determined the suspension of face-to-face activities, prioritizing virtual meetings.

The pandemic emphasized preventive and collaborative action to the detriment of conflict and antagonism, which, in a way, was the posture adopted most of the time to face conflicts in the country.

The modernization of the methods brought celerity, practicality and cost containment. Negotiation meetings in a virtual environment as a rule tends to remain, even with the end of social isolation measures.

Thus, it is important to prioritize mediation as a measure of conflict resolution. The method allows optimizing the treatment of disagreements and solving them more efficiently because of the existence of the mediators. With them, it is possible to establish a better dialogue between the parties and, consequently, to reach consensus.

Category: Venture Capital and Startups

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

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

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

What does it mean go through a down round?

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

Who’s affected the most in down rounds?

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

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

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

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

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

What are the main consequences of a down round?

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

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

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

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

The anti-dilution clause

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

There are two types of anti-dilution mechanism:

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

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

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

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

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

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

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

Role of management in down rounds

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

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

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

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

Preparation is key

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

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

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

Category: Tax

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

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

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

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

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

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

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

III - collect taxes: (...)

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

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

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

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

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

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

III. - R.E. not accepted.

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

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

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

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

Category: Tax

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

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

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

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

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

III - collect taxes: (...)

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

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

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

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

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

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

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

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

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

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

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

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

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

Category: Real estate

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

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

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

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

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

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

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

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

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

(...)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The reasons for the authorities' missteps are varied.

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

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

• Civil Code:

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

I - celebrated by an absolutely incapable person;

II - its object is unlawful, impossible or indeterminable;

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

IV - does not take the form prescribed by law;

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

VI - aims to defraud mandatory law;

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

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

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

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

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

III - particular instruments are dated or post-dated.

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

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

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

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

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

• Civil Procedural Code:

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

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

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

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

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

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

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

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

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

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

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

I - the analogy;

II - the general principles of tax law;

III - the general principles of public law;

IV - equity.

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

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

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

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

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

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

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

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

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

III - to respond to good faith;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Category: Labor and employment

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

Why is this discussion relevant in Brazil?

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

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

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

What changes with the STF's decision?

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

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

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

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

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

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

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

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

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

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

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

Category: Labor and employment

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

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

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

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

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

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

Category: Capital markets

On November 29, 2022, the Brazilian Securities and Exchange Commission (CVM) announced the CVM Resolution 173, which will  become effective on January 2, 2023 and provides, among other topics, on the amendment of Article 25 of the CVM Resolution 80, regarding the registration and periodic and eventual provision of information of securities issuers, including relating to the reference form.

CVM Resolution 173 deals with the waiver of the resubmission of the reference form by publicly held companies, categories A and B, with the latest accounting information disclosed by the issuer, in case of a public offering for the distribution of securities that  follow the automatic registration procedure and is intended exclusively for professional investors, in accordance with CVM Resolution 160.

Released on July 13, 2022, CVM Resolution 160 comes into force on January 2, 2023 and set the standards for public offerings for primary or secondary distribution of securities and the trading of securities offered on regulated markets.

The amendment introduced by CVM Resolution 173 is of great relevance to the Brazilian capital market and represents a response of the CVM to the market's questions on the subject.

The measure will provide greater agility to such offers, in line with public offerings of distribution of securities with limited efforts, in accordance with the CVM Instruction 476 – which will be revoked as soon as CVM Resolution 160 takes effect.

To understand the changes brought by CVM Resolution 160, click here.

Category: Real estate

The Superior Court of Justice (STJ) recently set the thesis related to Theme 1,095 to assess whether, in case of default of contract for the purchase and sale of real estate property with guarantee of fiduciary disposal, it would be correct to apply specific law, the Law 9,514/97 – which provides for the Real Estate Financial System and instituted the fiduciary alienation of real estate property (Fiduciary Alienation Law) – or law of a general nature, the Law 8,078/90 – establishing the Consumer Protection Code (CDC).

The Second Section of STJ unanimity decided, on 26 October 2022, that "in the purchase and sale agreement of real estate property with guarantee of fiduciary alienation, duly registered, the resolution of the agreement, in the event of default of the debtor duly constituted in arrears, must observe the form provided in Law 9.514/97, the specific legislation, dismissing from the application of the Consumer Protection Code".

By affecting the Special Appeals 1,891,498 and 1.894.504 for the rite of repetitive appeals, STJ suspended the processing, throughout the national territory, of proceedings on identical legal issues, both in the first and second instances and the claims before STJ.

In one of these cases, the debtor claimed that there was illicit enrichment of the creditor, since, after being recovered by the creditor, the real estate property was disposed of at full value after only one year. On the other hand, the creditor reinforced the existence and the need to apply a specific rule regulating the contractual relationship in fiduciary alienation.

In practice, the STJ sought to resolve the controversy regarding the application of the Fiduciary Alienation Law or the CDC in purchase and sale agreements of real estate property in which the fiduciary alienation is constituted as a guarantee, duly registered in the competent real estate registry office, even due to a mistaken equivalence between separate legal businesses.

In purchase and sale agreements with guarantee of fiduciary alienation duly registered in the real estate registry office, until there is full compliance with the obligation contracted by the debtor, the resoluble property of the real estate property – the one that is not full and is tied to the resolution of a condition – is transferred to the creditor as a guarantee of the obligation assumed by the debtor.

In this way, the Fiduciary Alienation Law establishes that, once the debt is due without payment in full or in part of the agreed value, the property of the real estate property is consolidated on behalf of the fiduciary creditor, who shall promote the public auction of the real estate property within 30 days, with the aim of repaying the debt (pursuant to Articles 26 and 27 of the Fiduciary Disposal Law).

In case of default, the creditor seeks the satisfaction of the amounts spent for the financing of real estate property, guaranteed through the constitution of fiduciary alienation. Therefore, it should not be mentioned that the refund of amounts already paid by the buyer (the debtor), but rather satisfaction of the credit provided by the creditor, since it is a debt collection arising from the granting of credit.

In order to avoid illicit enrichment, the Fiduciary Alienation Law determines that, after the public auction, the debtor will be handed the excess amount obtained, if any, provided that the amounts related to the amount of the debt, expenses, insurance premiums, legal charges – including taxes – and condominium contributions are satisfied. In fact, the structure of the Fiduciary Alienation Law seeks to incite economic balance at the time of the foreclosure of the secured guarantee.

On the other hand, if the CDC’s impact on the purchase and sale agreements guaranteed by fiduciary alienation clause were considered, it would be mandatory to recognize the need to refund the amounts paid up to the time of default of the debtor (in accordance with Article 53 of the CDC), with the application of a fine (limited, including, by the STJ itself). This could be a shock to the legal certainty of real estate market operations and, in particular, the debtor's dismissal of a number of consequences of default.

The matter dealt with in Theme 1,095 was restricted to the form of refund of the parcels, and not to the legality of the foreclosure of the of the secured guarantee itself.

According to the recent understanding of STJ, because it is a specific rule and subsequent to the CDC, the application of the Fiduciary Alienation Law must prevail. The only requirement is that all legal requirements be present, which are: (i) the fiduciary alienation must be duly registered in the enrollment of the real estate property in the competent real estate registry office; and (ii) the debtor must be properly constituted in arrears.

In his decision, The Minister reporting judge Marco Buzzi alluded to the principle of specificity of legal norms, which determines the prevalence of the special rule over the general rule. As there is specific legislation regulating fiduciary guarantee, the CDC, as a more extensive legislation, could not be used to object it.

According to the Brazilian Association of Real Estate Developers, more than 90% of real estate financing was guaranteed by fiduciary alienation in 2020. This is the main form of guarantee used in Brazil since at least 2001.

This milestone is due to the fact that, in fiduciary alienation, there is security for the creditor as to the restitution of the amount borrowed, in addition to the ease of execution of the debt by extrajudicial and swift procedure.

Another risk mitigator is that the guarantee used for the payment of the amounts agreed between the parties is the real estate property, itself from which it intends to obtain full ownership, which would result, at least in theory, greater commitment and incentive of the debtor to fulfill the obligations assumed within the time limit.

In this context, and from the perspective of the STJ, the judgment of Theme 1,095 was relevant to the extent that it represents the guarantee of economic stability and legal security for the purchase and sale agreements entered into, especially with regard to the application of a specific rule of the Brazilian legal system.

After the due publication of the judgment, Theme 1,095 will have the erga omnes, i.e. it will apply to all suspended cases, as well as to those that have been supervened on an identical issue by the ordinary courts.