Category: Tax

By unanimous decision, the 2nd Panel of the Superior Court of Appeals (STJ) recognized the illegality of the early revocation of the tax incentive provided for in Law 11,196/05, known as the Asset Law. Through the Digital Inclusion Program, the law zeroed the PIS and Cofins rates levied on the revenues of retail companies in the sale of certain computer products. The decision was made on June 21, in the judgment of Special Appeal 1.987.675/SP.

The tax incentive had its validity extended until December 31, 2018, by Executive Order 656/14, converted into Law 13,097/15. However, months later, PM 690/15, converted into Law 13,241/15, prematurely revoked the tax exemption granted by the Asset Law, causing serious losses to taxpayers who had met the legal requirements to qualify for the benefit.

In the judgment, the justices found that premature revocation of the tax incentive violates article 178 of the CTN (National Tax Code), which prohibits modification or revocation of an exemption when granted for a certain period of time and under certain conditions.

The Asset Law conditioned enjoyment of the benefit on a series of counterparts to be observed by both industry and retail. Its early revocation is, therefore, illegal, in attention to the principles of legal security and good faith of the taxpayer who adhered to the tax policy.

The 2nd Panel's position is extremely important, since it consolidates the STJ's case law on the subject. In June of 2021, in judging analogous cases, the 1st Panel also accepted the taxpayers' claim, recognizing that the tax incentive granted by the Asset Law could not be revoked before the deadline determined by the law.

Although this is not a judgment submitted to the system of repetitive appeals, the STJ's uniform understanding should guide the judges in similar cases, especially in attention to article 926 of the CPC (Code of Civil Procedure), which imposes on the courts the duty to keep their case law stable, complete, and consistent.

Besides representing an important precedent for identical cases, this understanding reaffirms the traditional position of the STJ to the effect that the State must guarantee protection to the legitimately created expectation that the benefit will be maintained for a certain period. This ensures predictability and prevents taxpayers who have acted in good faith from being disadvantaged by legislative changes.

The Federal Supreme Court (STF) has been positioning itself to the effect that the competence to examine the issue lies with the STJ, since it would demand analysis of infra-constitutional legislation. Any offense against the Federal Constitution would be merely reflexive. In this scenario, the final decision on the matter must be made by the STJ.

Category: Tax

Can a normative instruction alter the calculation methodology prescribed by law for determining the transfer price in import and export operations involving goods, services, or rights? Must the taxpayer calculate the transfer price pursuant to article 18, II, of Law 9,430/96 or apply the criteria of article 12, paragraphs 10 and 11, of SRF Normative Instruction 243/02 to determine the CSLL and IRPJ calculation basis?

These are questions that multinational groups with subsidiaries or related companies in Brazil have been asking, since the adoption of the methodology provided for in the normative act increases the calculation basis of the IRPJ and CSLL, besides reducing the balances of tax losses and a negative basis.

The answer to the controversy may be about to be given by the Superior Court of Appeals (STJ), which has been receiving appeals to consider the matter.

The transfer pricing arrangement was established in Brazil with the enactment of Law 9,430/96, later amended by Law 9,959/00. Article 18,^[1] already with the new wording, contemplated methods for calculating the parameter price on imports:

• Compared Independent Prices (PIC) method;
• Production Cost Plus 20% Profit (CPL) method;
• Resale Price Less Profit (PRL) method with the 20% margin (PRL 20); and
• Resale Price Less Profit (SRP) method with a 60% margin (SRP 60).

With regard to PRL 60, Normative Instruction 113/00 was issued, later replaced by Normative Instruction 32/01, to regulate the calculation methodology. In its article 12,^[2] the instruction kept the system provided for in Law 9,430/96.

On November 11, 2002, the Federal Revenue Service issued Normative Instruction 243/02, revoking Normative Instruction 32/01 and significantly changing the calculation for determining the parameter price according to the PRL 60 method.

The difference between the way of calculating the PRL 60 provided for in Law 9,430/96 and in the (illegal) Normative Instruction 243/02 concerns mainly the way of calculating the profit margin to be deducted from the net (re)sale price, which will set the concept of the parameter price to be compared with the prices charged in the taxpayers' operations for the purpose of applying or not applying adjustments with tax effects.

As for the profit margin to be discounted from the resale price, Law 9,430/96 provides that it will be obtained by applying a percentage of 60% on the net sales price of the product, less the added value of the country. Normative Instruction 243/02, in turn, provides that the 60% margin must be applied on "the participation of the imported good, service, or right in the sales price of the good produced.

In summary, while Law 9,430/96 provides that the 60% percentage must be applied on the final value of the resale price, which incorporates the added value of the product, Normative Instruction 243/02 imposed the proportionalization criterion by weighting the average and by defining that the 60% percentage must be applied on the participation of the good, service, or right in the resale price. The difference between the parameter price calculations is therefore wide.

The matter was resolved by Law 12,715/12, which incorporated into its text the contents of Normative Instruction 243/02, as to the calculation method, while reducing the profit margin from 60% to the levels of 20% (general rule) to 40% (exceptions).

With this, it evidenced that the previous calculation criterion was based exclusively on the normative act, besides acknowledging the taxpayers' grounds, by demonstrating that the 60% margin is incompatible with the proportionalization criterion of Normative Instruction 234/02, which transforms, in practice, the 60% profit margin into a 150% percentage over cost, by disregarding the value added in the country.

Once the proportionalization criterion of Normative Instruction 243/02 was incorporated into law, the margins were reduced. In any case, the dispute is time-bound because it is limited to 2012, the year when Law 12,715/12 came into effect.

The divergence between the provisions of Normative Instruction 243/02 and Law 9,430/96 raises the discussion about what the limit of regulation of the normative act is and whether it is possible to create new content to clarify the terms of the law.

The Federal Court of Appeals for the 3rd Circuit has been addressing the issue. The 3rd and 6th panels have been in majority in the sense of the legality of the normative instruction for (supposedly) establishing rules to clarify the normative content. The 4th Panel, on the other hand, believes that the normative act is illegal due to its having exceeded its limits by modifying the legal system for determining the price parameter, with consequent implications for the calculation of the IRPJ and CSLL.

The STJ, on May 24, 2022, resumed the judgment of the Interlocutory Appeal in Special Appeal 511.736 in which the following is discussed:

• the (il)legality of Normative Instruction 243/02, which provided for a calculation formula for transfer pricing, for the purposes of identification of the IRPJ and CSLL tax bases, in light of the provisions of article 18, II, of Law 9,430/96; and
• whether the alteration of the methodology, promoted by Normative Instruction 243/02, in substitution for Normative Instruction 32/01, could only produce its effects for taxable events occurring as of the beginning of the 2003 fiscal year, in attention to article 104 of the National Tax Code.

Justice Benedito Gonçalves, the only one to vote so far, understood that the normative act is supported by Law 9,430/96, insofar as the resale price less profit method must be based on the price at which the imported product is resold, and not on the sale price of the product produced.

Although the judgment was suspended due to a new request for review of the record, this is the first time that the STJ has overcome precedential obstacles in order to examine the merits of the dispute. Although the appeal was not submitted to the system for handling repetitive appeals, this precedent will be highly important in guiding future decisions by the federal courts of appeals regarding the correction application of the calculation method and its affects on the IRPJ and CSLL calculation basis.

^[1] “Article 18. The costs, expenses, and charges related to goods, services, and rights, contained in the import or acquisition documents, in the operations carried out with an associated person, will only be deductible in determining the taxable income up to the amount that does not exceed the price determined by one of the following methods:

I - Compared Independent Price Method - PIC: defined as the arithmetic average of the prices of goods, services, or rights, identical or similar, ascertained in the Brazilian market or in other countries, in purchase and sale transactions, under similar conditions of payment; 

II - Resale Price Less Profit Method - PRL: defined as the arithmetic average of the resale prices of goods or rights, less: 

a) the unconditional discounts granted

b) taxes and contributions on sales; 

c) commissions and brokerage paid; 

d) the profit margin of          

1. sixty percent, calculated on the resale price after deducting the amounts mentioned in the previous paragraphs and the added value in the country, in the case of imported goods applied to production; (Text amended by Law No. 9,959, of 2000) 

2. twenty percent, calculated on the resale price, in the other cases. (As amended by Law No. 9,959, of 2000) 

III - Production Cost Plus Profit Method - CPL: defined as the average cost of production of goods, services, or rights, identical or similar, in the country where they were originally produced, plus the taxes and fees charged by that country on exportation and a profit margin of twenty percent, calculated on the cost ascertained. 

Paragraph 1. The arithmetic averages of the prices referred to in subsections I and II and the average production cost referred to in item III shall be calculated considering the prices charged and the costs incurred during the entire ascertainment period of the income tax basis to which the costs, expenses, or charges refer."  

^[2] “Article 12. The determination of the cost of goods, services, or rights, acquired abroad, deductible from the determination of the taxable income, may also be made by the Resale Price Less Profit (PRL) method, defined as the arithmetic average of the resale prices of the goods or rights, less:

I - the unconditional discounts granted;

II - the taxes and contributions levied on sales;

III - the commissions and brokerage paid;

IV - the profit margin of:

a) twenty percent, in the case of resale of goods;

b) sixty percent, in the case of imported goods applied to production.

(...)

Paragraph 10. The method referred to in letter "b" of the subsection IV of the head paragraph will be used in the case of goods applied to production.

Paragraph 11. In the case of the prior paragraph, the price to be used as a comparison parameter shall be the difference between the net sales price and the profit margin of sixty percent, considering, for this purpose:

I - net sales price, the arithmetic average of the sales prices of the goods produced, less unconditional discounts granted, taxes and contributions on sales, and commissions and brokerage paid;

II - profit margin, the result of applying a percentage of sixty percent on the arithmetic average of the sale prices of the goods produced, less unconditional discounts granted, taxes and contributions on sales, commissions and brokerage paid, and the value added to the goods produced in the country."

Category: Litigation

Understanding what the requirements used by the Federal Supreme Court (STF) are to grant reciprocal tax immunity to state-owned companies is certainly one of the most challenging tasks in the realm of academic research. Any attempt at systematization is insufficient due to the recent court decisions.

The Federal Constitution establishes in article 150, subsection VI, paragraph a, that the Federal Government, States, Federal District, and municipalities may not impose taxes on each other's assets, income, or services. This is the basis of what has come to be known generically as reciprocal tax immunity.

The second paragraph of article 150 extends the right of tax immunity to the municipalities and foundations created and maintained by the public power. There is no mention of state-owned enterprises in the Federal Constitution. The application of this right to them derives from case law of the STF.

In the beginning it was simple: the STF granted the right to tax immunity to government-owned companies that provide public services and economic activities considered a state monopoly, requirements that were met by the Post Office and Infraero, the first state-owned companies to be granted tax immunity.

Other public companies that provided public services and in practice acted as true instrumentalities, with loss-making operations and demanding budgetary resources, also obtained tax immunity.

After being prompted several times, the STF issued the understanding that governed-controlled companies would not be entitled to reciprocal tax immunity, even if their purpose was to provide a public service, because their activities are inherently focused on remunerating their shareholders.

In a previous case, when the possibility of granting tax immunity to Sabesp was analyzed (RE 600.867/SP, Topic 508), the STF held that reciprocal tax immunity would not apply to government-controlled companies whose shares are traded on stock exchanges. The trading of the state sanitation company's shares was said to be strong and irrefutable evidence that the company's goal was the remuneration of its investors.

Based on these precedents, requests for granting tax immunity to government-controlled companies are usually denied in the Judiciary.

However, the STF has been rendering decisions that, at first glance, seem to be relaxing the hitherto existing prohibition on extending reciprocal immunity to government-controlled companies. In April of 2022, another decision was handed down in this regard (Original Civil Action - ACO 3.410).

The Federal Supreme Court granted the lawsuit filed by Companhia de Saneamento de Sergipe (Deso) to recognize reciprocal immunity from federal taxes levied on the assets, income, and services provided by state-owned companies.

In the suit, despite being a government-controlled company, Deso contended that it is a company that provides essential public services and works on an exclusive basis for almost all the municipalities in the state (71 of the 75 municipalities in Sergipe). He also stressed that, although it is a government-controlled company, the majority shareholder is the state of Sergipe, which holds 99% of the shares.

Reporting Justice Luis Roberto Barroso found that the company met the requirements for extension of reciprocal tax immunity:

• provision of a public service;
• absence of intention to make a profit; and
• action on an exclusive basis.

The Justice pointed out that Deso, unlike other government-controlled companies, conducts activities that constitute a state public service, as per the terms of article 23, IX, of the Federal Constitution, that is, the supply of drinking water and collection and treatment of sanitary sewage.

The Justice also considered the fact that Deso has exclusive operations in 71 of Sergipe's 75 municipalities and that its capital stock belongs almost entirely to the state (99%).

This is not the first time that the STF has relaxed its own requirements for granting tax immunity. In 2018, reciprocal tax immunity was granted to Serpro, a public company operating in the data processing and technology service segment (ACO 2,658).

The understanding that prevailed in the constitutional court was that Serpro, by exclusively providing information processing and data processing services that aim to modernize and give agility to strategic sectors of the Public Administration, would be able to enjoy tax immunity.

Analyzing the STF's case law, one gets the impression that the requirements have been applied in a very flexible way. Criteria that were objective up to now have been made subjective in order to contemplate some specific and exceptional situations.

Take the case of Serpro, for example, where the criteria of "public service" and "exclusivity arrangement" have been flexed to the limit. Serpro did not meet either of the two criteria previously applied by the STF. The activity it performs is an economic activity that is free to any agent of private enterprise. There is no legal exclusivity. The Federal Government has no constitutional or legal mandate to provide these services.

What there is, in reality, is a merely circumstantial exclusivity. Serpro is systematically contracted by the bodies and entities of the Federal Public Administration based on the case of exemption from bidding provided for in Law 8,666/93.

These characteristics were enough for the STF to recognize that the company is entitled to tax immunity when it performs activities aimed at serving public customers.

The same loosening is observed in the "no profit objective" criterion.

Previously, government-controlled companies were denied the right to tax immunity because of their legal status. The mere fact that they were government-controlled companies was an indication that the company aimed at making profit and enriching its shareholders. The presumption was absolute if the government-controlled company traded its shares on the stock exchange.

However, after some dispute, the STF started to issue decisions establishing that government-controlled companies that had the State as majority and practically exclusive shareholder would be entitled to tax immunity.

This is, of course, a rather questionable assumption. It is possible that government-controlled companies, even if with almost exclusive state participation, carry out activities with the intention of profit and enriching the state's wealth, especially in the basic sanitation sector, where the company acts as a true contractor of the municipalities that hold exclusivity for the provision of sanitation services.

The STF's criteria, in the way they have been applied, could create two kinds of problems:

• The need for constant monitoring of the factual situation underlying the decision that conferred reciprocal tax immunity. The tax immunity should be revoked if, for example, Deso changes its shareholder composition or ceases to provide exclusive services in the municipalities. This need, in fact, was pointed out by Justice Roberto Barroso in his opinion in the constitutional action.
• The risk of creating situations of violation of equal protection and perpetuating economic distortions. Currently, government-owned companies or government-controlled companies with almost exclusive state participation that provide public services enjoy reciprocal tax immunity, regardless of the characteristics of their operations. Government-controlled companies with significant private participation, on the other hand, do not have the same benefit.

It is fully possible, therefore, for state-owned companies with consistently high profit margins to continue to enjoy tax immunity. The situation is even more worrying when these companies provide public services that do not belong to the public entity that created the company, as happens in the basic sanitation sector.

Category: Litigation

Since the accidents that occurred in Mariana (2015) and Brumadinho (2019), in the state of Minas Gerais, several topics related to accident prevention and its treatment have gained prominence and raised a debate about the effectiveness of existing legislation.

The Law 14.066/20, with important changes in the standard establishing the National Dam Safety Policy (Law 12.334/10), was enacted in this context. The new text made clear the concern to adopt preventive measures to safeguard human and material losses. Among the changes brought about by Law 14.066/20, the following stand out:

"Art. 4. The foundations of the National Dam Safety Policy (PNSB):

II – information and the stimulus to the direct or indirect participation of the population in preventive and emergency actions, including the preparation and implementation of the Emergency Action Plan (EAP) and access to its content, with the exception of personal information;

Art. 11. The preparation of the EAP is mandatory for all dams classified as:

I - medium and high associated potential damage; or

II - high risk, at the discretion of the supervisory body.

Single paragraph. Regardless of the classification of the associated potential damage and risk, the preparation of the EAP is mandatory for all dams intended for the accumulation or disposal of mining tailings. 

Art. 12.  The PaE shall establish the actions to be carried out by the dam entrepreneur in the event of an emergency situation, as well as identify the agents to be notified of this occurrence, and shall at least:

III - preventive and corrective procedures and actions to respond to emergency situations identified in accidental scenarios;  

• 2 - The entrepreneur must, before the beginning of the first filling of the dam reservoir, prepare, implement and operationalize the PAE and hold meetings with the communities for the presentation of the plan and the implementation of preventive measures provided for therein, in joint work with the municipal authorities and the protection and civil defense agencies.

Art. 15. The PNSB should establish an education and communication program on dam safety, with the objective of making society aware of the importance of dam safety and developing a culture of accident and disaster prevention, which should include the following measures:

Art. 18. [...]

• 3 - It is mandatory, for the entrepreneur or his successor, the monitoring of the safety conditions of the deactivated dams and the implementation of preventive measures of accidents or disasters until their complete mischaracterization."

One of the measures to increase preventive work was the obligation to develop the so-called Emergency Action Plan (EAP) – a preventive plan for cases of risk or disruption of dams. In the previous legal text, the measure was only mandatory for dams considered to have high potential associated damage.

In addition to the laws mentioned, the state of Minas Gerais, through the Law 23.291/19, regulated by the Decree 48,078/20, established rules and obligations for emergency action plans of companies with dams in the state.

The idea of creating an emergency plan observing the particularities of each company, regardless of sector and size, is a strategy that brings more agility, security and economy in coping with a crisis.

Recent air accidents, data leaks – increasingly frequent – complaints of slave-like labor, environmental damage, among other situations that forced companies to spend a lot of money and, mainly, time because they were not prepared to face a crisis, show the importance of having a plan.

Considering the trends of the most modern legal-legislative mechanisms, which aim at preventive and consensual solutions to face and solve crises, developing an emergency plan becomes essential for companies.

Knowing the importance of this feature, how can a company create it?

The first step is to structure committees, form groups for the preparation, monitoring and updating, as necessary, of an emergency plan.

After structuring the committees, it is important to define roles and responsibilities of the members, so that each of them knows exactly what to do in a possible crisis, saving time and money in solving the situation.

In a later step, governance procedures are outlined. Those responsible for conducting any crises are appointed and tasked with implementing and managing the plan.

It will also be necessary to develop business continuity plans focused basically on how the company will behave in the face of a crisis to reduce any impacts on its day-to-day life. This is one of the most important points of preventive work, since it establishes the direction to be followed by the entire organization to overcome the critical moment.

Another relevant point is the adequate flow of information: what data will be passed between the committees and, mainly, what the contact channel will be in case of crisis.

In general, after a serious event, public entities, press and affected parties contact the company to verify what occurred and obtain information about the measures taken. The organization of the flow of information is therefore fundamental.

In addition, periodically reviewing all these procedures is vital for them to stay up-to-date and adequate to the reality of the constantly evolving company.

Preventive planning is not only useful to save the company time and money in emergency situations. It also allows an analysis of the risks to which the organization is exposed. Having these risks scaled and an action plan ready to mitigate impacts can make all the difference in the face of a crisis and even ensure the survival of the company.

Category: Labor and employment

Although much is said about the high unemployment rate in Brazil, little is discussed about booming sectors that need professionals, such as technology. The talent competition in a highly competitive market means that companies must look for various mechanisms to attract qualified candidates.

In a market in which high salaries, long-term incentives and flexible work are the minimum expected, the hiring bonus presents itself as a differential: after all, why would the professional give up on certain rights for something uncertain?

The hiring bonus aims, precisely, to compensate the professional for the loss of potential rights due to the request to resign to accept the new job, such as the loss of shares subject to vesting periods or short-term incentives.

The lack of legal provision on the subject, however, may generate questions regarding labor/employment and social security charges on this type of payment and should be a point of attention for companies that wish to implement it.

Our Tax Department has already analyzed the theme from a social security point of view in this article. But, and from a labor/employment point of view – is the hiring bonus subject to labor/employment charges and repercussions?

The case law of the Brazilian Labor Courts understands that the amounts paid as hiring bonus should serve as base for labor/employment charges (in this case, for the Severance Guarantee Fund - FGTS) due to its remunerative nature, given that the amount is paid as a result of the provision of agreed services and represents an asset increase for the employee.

On the other hand, according to recent decisions of the Brazilian Labor Courts, including decisions of the Brazilian Superior Labor Court, as the hiring bonus is paid only once, the amounts paid as hiring bonus should be limited to serve as base for the collection of FGTS, and not for the payment of labor repercussions (13th salary, vacation payment plus vacation bonus etc.).

Companies, however, should beware when contractually structuring the payment of the hiring bonus so that its legal nature is not characterized as a retention bonus, both for labor/employment and social security purposes. This situation can happen, for example, by conditioning the payment (or maintenance of the amounts) to a minimum period for the employee to stay employed by the company or to another requirement other than the employee's hiring.

Therefore, companies must pay attention, because, depending on how the hiring bonus is contractually structured by the company, it may be subject to different labor/employment and social security charges and repercussions.

Category: Tax

Sinief Act 26/22 was published on 6 July in the Official Gazette, amending the Sinief Act 01/21, which establishes a differentiated treatment of ICMS applicable to natural gas processing.

The Sinief Act 26/22 aims at improving and bringing greater legal certainty to the activities related to the processing of natural gas hired by third parties, an essential activity for the opening and development of the natural gas market.

Among the changes brought, the following stand out:

• The provision of symbolic transfer operations between establishments of the same taxpayer located in the same state, prior to the shipment of unprocessed natural gas for industrialization, or to enable mutual operations with third parties (clause 2^nd, item XII, clause eleventh, paragraph 2^nd and clause twenty, paragraph 4^th);

• The extension of the deadline for issuing fiscal documents to the 4^th business day of the following month in specific situations (clause twelfth, item I, 'a' and clause sixteenth item I, 'a');

• The suppression of the requirement in the sense that the complementar invoices related to the return of natural gas and by products should be issued in a "proportional" way, in cases in which it is not possible to make reference to all invoices required by the rule in a single invoice related to the return (clause thirteenth, paragraph 3^rd);

• The provision of mutual operations of processed natural gas, with the purpose of making the quantities injected into the pipelines connected to the Natural Gas Processing Unit (UPGN) compatible with the quantities actually allocated to a given player by the manufacturer (i.e., UPGN owner) (clause seventeenth-A);

• The provision of new agents able to obtain accreditation from the Treasury secretariats (twenty-first clause); and

• The inclusion of the systematic of issuance of tax documents and collection of ICMS similar to the provisions of Sinief Act 22/21 (clause twenty-second).

The changes represent an important advance for the opening of the natural gas market in Brazil enabling greater access to essential infrastructure, diversity of agents and greater competition.

Category: Tax

The Constitutional Amendment 123/22, enacted on July 15, made relevant changes to the federal and state tax regime applicable to fuels, especially to establish competitiveness differential for biofuels in relation to fossil alternatives.

Among the tax changes brought by the amendment is the inclusion of a provision in the Federal Constitution that ensures the maintenance of more favorable tax regime for biofuels destined for final consumption. The change gives biofuels lower taxation compared to the on levied on the fossil fuels in order to make it more competitive.

The most favorable tax regime will be regulated by Complementary Law and will include, mainly, the social contributions levied on gross revenue and import (PIS and Cofins), as well as the ICMS.

Until the Complementary Law is published, the competitive differential of biofuels in relation to fossil fuels will be guaranteed by maintaining, in percentage terms, the difference between the tax rates or tax burdens applicable to each fossil fuel and the biofuel that replaces it, at a level equal to or greater than that in force on May 15, 2022.

Therefore, until the effects of the Complementary Lw take place, the immediate reduction in the tax burden applicable to biofuels will be determined according to the tax burdens applicable to fossil fuels to which they replace on the date of May 15, 2022, by assessing the tax difference existing on that date.

The tax regime favored for biofuels in relation to fossil fuels will be ensured for 20 years. Any legislative modification (state or federal) or originated from a court decision with erga omnes effects – that is, valid for all – the rates applicable to a fossil fuel will also result in an immediate and automatic change in the rate applicable to biofuels, preserving the difference in the rates between fuels. The mandatory approval of the ICMS Agreement under the National Council for Business Policy (Confaz) is waived for these rate reductions.

In addition, the Federal Government will deliver to the states and to the Federal District that grant ICMS tax credits to producers or distributors of hydrated ethanol in its territory a financial assistance in the amount of up to R$ 3.8 billion, in five monthly installments, from August to December of 2022, in an amount equivalent to the amount received.

ICMS tax credits and financial assistance will comply with the following main rules:

• They must be granted by December 31, 2022, with the right of the taxpayer to take advantage of them in the subsequent years;
• They aim to reduce the tax burden of the hydrated ethanol production chain, to also maintain a competitive differential in relation to gasoline;
• They will be calculated proportionally to the participation of the states and the Federal District in relation to the total consumption of hydrated ethanol in the country in 2021;
• The receipt of financial assistance by the states or the Federal District will import in the waiver of the right on any action based on any type of compensation due to the possible loss of collection for the granting of the presumed credits in transactions with hydrated ethanol;
• The granting of presumed credits is waived from the ICMS Agreement edition under the Confaz.

Constitutional Amendment 123/22 also authorized to set at zero the rate of taxes levied on gasoline, provided that the rate of the same tax levied on hydrated ethanol is also set at zero.

The amendment enters into force on the date of its publication, producing immediate effects for matters that do not depend on further regulation.

Category: Tax

Since July 1^st, when it was published in the extra edition of the Official Gazette of the State of Rio de Janeiro, it is in force the Decree 48,145/22, which sets the maximum ICMS rate in the State for internal transactions  and  services with fuels, electricity, communication and public transportation.

The Decree arises  from the alignment of the State of Rio de Janeiro with the provisions set forth by  the Complementary Law 194/22, of  June 23th, 2022. The Complementary Law determines that fuels, natural gas, electricity, communications and public transportation are considered as essential and indispensable goods and services.

According to the provisions of Decree 48.145/22, the internal rate in the State of Rio de Janeiro for transactions and services with fuels, electricity, communication and public transportation will be a maximum of 18%. The lower rates established by the Law 2,657/96 (ICMS Law of the State of Rio de Janeiro) will be maintained.

According to Complementary Law 194/22, goods and services related to fuels, natural gas, electricity, communications and public transportation cannot be treated as superfluous, therefore:

• It is not allowed to impose ICMS rate higher than the one applicable in internal transactions in general;;
• It is allowed reduce the ICMS rates in order to benefit consumers in general; and
• It is not allowed the increase the ICMS rate to fuels, electricity and natural gas when the ICMS rate applicable at the time of publication of the Complementary Law was lower than the standard one imposed in internal transactions in general.

Regarding the fuels, the rate defined  above will be used as a limit to define specific rates (ad rem) referred in Complementary Law 192/22, of March 11, 2022. It is worth noting that, unlike the provisions of Complementary Law 194/2022, Decree 48.145/2022 does not include the natural gas in the list of goods subject to such tax regime.

The provisions of Complementary Law 194/2022, introduced in the legislation of the State of Rio de Janeiro by Decree No. 48,145/2022, may also lead to discussions on the applicability of the payment of the Fund to Combat Poverty and Social Inequalities (FECP) in transactions and services with such goods and services, in view they do not qualify as superfluous.

Category: Infrastructure and energy

Bill 414/21, which originated from Senate Bill 232/16, aims to implement a few of the motions to modernize the electricity sector. It results not only from years of work of the Federal Government’s but also from civil contributions towards a more competitive and inclusive electricity sector, open to technological innovations that already move the energy industry and deeply affect the relations between the different agents that are part of it.

One of the main objectives of Bill 414/21 is expanding the Free Market^[1], an endeavor that began over 25 years ago with the publication of Law No. 9,074/95, which allowed free consumers with large demands and served at high voltages to freely choose their energy supplier.

Currently, Bill 414/21 is under analysis in the Brazilian House of Representatives and awaits the opinion of the special committee, created on May 31^st this year by the House’s president, Arthur Lira (PP-AL). The case’s designated reporting House Member is Mr. Fernando Coelho Filho (União Brasil-PE). If approved in the House with amendments, the bill will return for the Senate’s deliberation.

The Bill´s approval is certainly awaited within the sector and is among the Federal Government’s priority agenda. Amidst the changes brought by Bill 414/21 is the proposal of the 42-month deadline for the full opening of the Free Energy Market, which would give every electricity consumer the option to freely choose their energy supplier within up to four years. Such measure would allow the Free Market’s expansion for the commercialization of electricity, with the offer of diversified products to which the final consumer does not currently have access.

Bill 414/21 brings changes to the laws on concessions of public services, generation, transmission, distribution, commercialization, among others, and establishes a 24-month deadline for the Executive Branch to present a plan for the Free market’s broadening, which shall include a last-resort supply system for those consumers or end users who are not covered by power purchase agreements.

The Bill also foresees the modification of some rules, such as the extension of electricity concessions and changes in sectorial charges – in the quotas of the Energy Development Account (Conta de Desenvolvimento Energético - CDE), for example. According to Bill 414/21, there will be a change in the proportion of the payment of annual quotas, which will be prorated proportionally in the energy market, serving distribution and transmission companies from 2030 onwards. Another proposed measure is the Energy Development Account’s payment exemption for consumers receiving the Social Tariff.

Initially, low voltage consumers (below 2.3 kV) should not have access to the tariff discounts currently applied to the generation of renewable energy . Nevertheless, currently, the largest source of collection of the Energy Development Account (approximately 79%) comes from the tariffs paid exactly by these consumers, who will now have the possibility to trade their electricity outside the regulated market.

In order to avoid a decrease in the percentage paid by low voltage consumers, it was established that specifically these consumers will not be exempt from this tariff when entering the free energy market.

Bill 414/21 changes the amounts and mandatory allocation of a percentage to research and development, raising the percentage applied to energy efficiency programs to 0.50% and reducing the percentage of investment for research and development by 0.25%.

Currently, the free market is limited to consumers with an energy demand ranging between 500 kW and 1,500 kW (who can contract renewable sources) and above 1,500 kW (free to contract the supply from any source). Under the new proposal, all consumers, including those with a demand below 500kW, will be able to enter the free energy market. This opening to more consumers will likely cause an expansion to the sector.

As a result of the greater possibility of entering the free market, it is expected that many energy consumers will exercise this right. However, this dynamic will generate uncertainty for distributors about the expectation of consumption in the regulated market^[2] and, consequently, about the amount of energy they must contract to uphold this market.

The costs incurred by distributors resulting from this migration between free market and regulated market will be covered by a sector charge to be created to distribute excesses and deficiencies to the entire chain. The fund will be regulated by the National Electric Energy Agency (Agência Nacional de Energia Elétrica - ANEEL).

The costs arising from serving consumers with the right to supply of last resort will also be borne, applicable when the power supply is suspended or when the activities of the energy seller in the free market are terminated, a scenario that will be regulated to define its applicability.

Legislative advances remain incomplete in several different aspects, such as defining what low-voltage consumer representation mechanisms will look like in the free market. It is also discussed whether the expansion of the free energy market will meet expectations of lower electricity prices through increased competition among suppliers.

It is expected that the debates in Congress, with the participation of civilians, agents, sectoral organizations, specialists and other interested parties, will promote a rapid opening in the Brazilian energy market for all consumers.

It is noted that the expansion must be accompanied by measures that seek the energy security and the system’s economic and financial sustainability. The objective is to achieve the expected benefits of the competitive dynamics in the energy market, especially the improvement of energy supply and the reduction of prices.

^[1] In this article, the terms “free market” and “free energy market” refer to the regime under which electric energy trading participants can freely negotiate all commercial conditions, such as suppliers, prices, contracted energy quantities, supply period, and payments. Simply put, the free energy market allows consumers to acquire energy from sources other than their local concessionaires, with far more autonomy to create their own terms and conditions for such.

^[2] The regulated contracted environment refers to the market segment in which power purchase and sale operations are carried out between selling agents and distribution agents, usually preceded by a bidding process.

Category: Litigation

The name given to the Entrepreneur’s Defense Code may suggest that it is a counterweight to the Consumers’ Defense Code, because consumers and entrepreneurs, in general, occupy antagonistic positions in their relations. However, this is not the case.

Established by the Legislative Assembly of the State of São Paulo with the approval of the Bill 838/21^[1], the code was sanctioned (with a few vetoes) by State Governor Rodrigo Garcia and published in the Official Gazette on April 12, 2022 – becoming State Law 17,530/22.

The new legislation has as its main goal to debureaucratize and facilitate the interactions between entrepreneurs and Public Administration, by providing rights to guide entrepreneurs in the exercise of their function, as well as duties of the State in relation to the class.

Article 3 of the code, for example, provides for the guiding principles on the subject: free initiative in economic activities, presumption of good faith of the entrepreneur before the Public Administration and subsidiary and exceptional intervention of the State in economic activities.

On the other hand, among the duties of Public Administration in relation to entrepreneurs we find guidelines such as simplification of procedures for opening and extinguishing companies, as well as the need to provide clear and accessible information.

The Entrepreneur's Defense Code also provides that entrepreneurs have the right to hold the State as a facilitating agent of their activity. Another right provided by the code is that corporate documentation can be provided electronically, facilitating entrepreneurs’ day-to-day activities.

With this approach of protection to entrepreneurs, the code reaffirms legislative provisions of greater hierarchical stature, such as provisions of the Declaration of Rights of Economic Freedom that guarantee the exercise of business activity. The new law, thus, reinforces the need for observance of concepts already established in Brazilian legal framework and brings them to the daily life of the entrepreneur class from São Paulo.

As mentioned, the Entrepreneur's Defense Code aims to facilitate the daily life of the entrepreneur, stating, for example, that the Administration cannot abuse from discretion in its decisions and that the Administration must take economical aspects into consideration in its decision-making processes. These provisions, in our view, make explicit the applicability of the code in the interactions of entrepreneurs with commercial boards and registration entities in general.

Therefore, the Entrepreneur's Defense Code (applicable to all entrepreneurs in the State of São Paulo) more directly supports small entrepreneurs, who, despite of being an important driving force of the economy, may have difficulties in bureaucratic interplays^[2] with the Administration, either because they have lean structures or because of they lack adequate advice.

In this perspective, it is possible to conclude that the new law demonstrates the effort of the state of São Paulo to help entrepreneurs (especially micro and small entrepreneurs) in their interactions with the Public Administration, by bringing to the state legislative framework important provisions.

In any case, it is necessary to observe the application of article 3, §1 of the code, which provides, in summary, that the good faith of entrepreneurs will be presumed, including in relation to the application of penalties and the judgment of administrative infractions. A hasty interpretation could lead to the understanding that consumers’ rights could be harmed.

At this initial moment, however – based on the context of the promulgation of the code, its provisions, the justifications of the bill, its introductory text, as well as the principles of the law –, we believe that the mentioned provision is predominantly applicable in disputes with the Public Administration, not with consumers. In this sense, it does not seem to us that the provision can be used against consumer protection institutions (such as Senacon and Procon) to presume the entrepreneur's good faith in relation to consumers.

Besides hierarchically superior, the Consumers’ Defense Code specifically governs consumer relations, while the Entrepreneur's Defense Code, as demonstrated so far, aims at relations between entrepreneurs and the State. Thus, it seems to us that the specificity of the laws enable application of both, but in different scenarios.

Therefore, distinctly from the first impression of the Entrepreneur's Defense Code, if the initiative is successful and respects the Consumers’ Defense Code, there may be improvements in the daily performance of entrepreneurs, which can, indirectly, benefit consumers.

^[1] Proposed by Deputies Sergio Victor and Ricardo Mellão, both of the New Party.

^[2] And it is precisely in the sense of debureaucratization the greatest innovation brought by the code: the possibility of a regulatory sandbox. The concept materializes in granting temporary and exceptional authorization so that entrepreneurs can develop innovative activities through business models and experimental technologies, which will potentially bring even more debureaucratization and incentive for certain entrepreneurial initiatives. Although the initiative seems to be valid, only time will reveal if its application in practice will bring actual benefits.

Category: Real estate

Bruno Costa, Gabriela Caetano Andrade and Guilherme Alcântara Nunes

The maintenance of a real estate property generates numerous expenses to the owner, from taxes, condominium expenses, garbage collection fees to renovations / construction works eventually necessary. Given that, it is not uncommon for properties to become financially unviable for the owner.

Even when not used in the economic activities developed by the owner, the properties generate expenses. If it does not present financial advantages to the owner, the natural course is to seek the disposal of the property, but in practice, often the disposal becomes impossible or unfeasible.

The reasons vary and include the existence of tax debts that drive away potential buyers, costs for regularization of the property or even lack of liquidity, as is the case of areas that do not arouse economic interest in third parties due to the location of the property or its state of conservation..

If it is not possible to dispose it, expenses continue to accumulate (especially those related to taxes) and may generate expenses with collection lawsuits or even the filing of a tax foreclosure against the taxpayer, owner of the property.

The Civil Code presents a viable alternative to the owner: the waiver of ownership. The measure is established in item II of the Article 1,275 of the Civil Code, composing the list of situations that cause the loss of property.

It is a unilateral legal act, in which the renouncing owner formally and explicitly declares his intention to give up the right of ownership over the property. No approval is required for the act, whether from public agencies or individuals. There are also less conservative understandings that argue that the approval is not necessary even in the cases of condominium buildings.^[1]

From a practical point of view, the renunciation is made through the drafting of public deeds. It is necessary to check if there is any particularity in the rules of the internal affairs of justice of each locality, but, in general, the followed premise is that, if the value of the property is greater than 30 times the minimum wage in force in the country, the act should be practiced by the execution a public deed, taking into account the provisions of the Article 108 of the Civil Code.

The Civil Code also determines that the waiver is subordinated to the registration of the act in the respective service of real estate registry, with consequent cancellation of its enrollment.^[2] If the properties are irregular from a registral point of view in the registry office, therefore, the waiver cannot be executed due to lack of conditions to cancel the enrollment.

Before the registration of the waiver in the enrollment of the property, the renouncing owner remains with the property in its patrimonial sphere, being even possible to disconstitute the act of renounce, keeping the property to himself or alienating it to third parties.

Another important point is that the act of renunciation can never be executed in favor of third parties, otherwise a donation may be characterized.

Also from a practical point of view, after the formalization of the waiver on the respective enrollment, the property becomes a res nullius (no one's thing) and therefore becomes a vacant property. The government can thus collect it or incorporate it into its assets. After three years of collection, if it is unoccupied, the property will pass to the domain of the municipality, if urban, or Federal Government, if rural.^[3]

With regard to debts of a nature propter rem, such as IPTU and ITR, the renouncing owner remains responsible for the payment of debts whose generating fact is prior to the registration of the waiver on the respective enrollment. There should be no posting of debts after the waiver, since they are linked to the property, which no longer exists. In the event that they are constituted, they may not be charged to the renouncing owner.

Although there are few judged lawsuits concerning the waiver of ownership, it is a fully viable measure for the owner who no longer wishes or is no longer able to own a property and bear all the expenses inherent to the property.

^[1] "The waiver is provided in the article 1275, II, of the Civil Code, only subordinated to the registry and nothing, absolutely nothing, imposes approval of the other condominium building occupants for its validity". Court of Justice of the State of São Paulo, Appeal 1016033-15.2018.8.26.0100, tried on February 27, 2019.

^[2] Art. 1,275. Single paragraph. In the case of items I and II, the effects of the loss of ownership shall be subject to the Registration of the transmissive title or the renouncing act in the Real Estate Registry.

^[3] Art. 1,276. The urban property that the owner abandons, with the intention of no longer keeping it in his heritage, and that if it is not in the possession of another, may be collected, as a vacant property, and be transferred, three years later, to the Municipality or to the Federal District, if found in the respective circumscriptions.

• 1 - The property located in the rural area, abandoned in the same circumstances, may be collected, as a vacant property, and be transferred, three years later, to the Federal Government, wherever it is located.
• 2 - The intention referred to in this article shall be presumed in an absolute way, when, once the acts of possession have ceased, the owner ceases to satisfy the tax expenses.

Category: Real estate

Andrea Soubihe, Gabriela Caetano and Guilherme Alcântara Nunes

The National Institute of Colonization and Agrarian Reform (INCRA) released on July 18 the issuance of the Certificate of Registration of Rural Property (CCIR) for the financial year 2022 for owners and possessors of rural properties. The document is available on the electronic platform of the National Rural Registration System (SNCR).

The CCIR is the national register of rural properties, updated annually. It contains key information of registration of the property (such as total area, location, type of operation, land classification, registration number and the competent property registry).

The presentation of the CCIR is mandatory for the performance of annotation and registration acts before Notary Offices and Real Estate Registry Offices, such as the sale, dismemberment, mortgage and lease of the area. The document is also necessary for obtaining agricultural credit from banks and financial institutions.

The issuance of the CCIR takes place exclusively by electronic means, on the SNCR website or in the SNCR Mobile app, available for Android and iOS. The issue will oblige the owner of the property to pay the Cadastral Service Fee, defined according to the area of the property. Payment must be made by August 16, under penalty of payment of fine and interest, in addition to the incidence of monetary correction.

Category: Competition

The Brazilian Competition Law provides that the total or partial consummation of merger transactions prior to the approval of the Administrative Council for Economic Defense (Cade) – a violation known as gun jumping – can be punished with fines ranging between R$ 60,000 and R$ 60 million, as well as non-pecuniary sanctions.

By means of the Resolution 24/19, Cade established a methodology for calculation of fines, aiming at increasing the predictability in the application of sanctions for gun jumping violations. Pursuant to the resolution, the calculation of the total amount of the fine starts with a baseline fine of R$ 60,000, increased according to the time lapse between the closing and the filing of the transaction with Cade, the severity of the violation and the so-called intent of the parties.

The fine may also be reduced depending on the timing of the antitrust filing of the transaction in relation to the launching of an investigation and the condemnation for violating the pre-merger review system.

Three years after the resolution entered in force, Cade imposed gun jumping fines on six occasions, which entailed important developments on the matter, especially with respect to the agency’s interpretation of the parties’ intent when committing the infringement – criterion whereby the fine may be increased by up to 0.4% of the average revenue of the economic groups involved in the transaction.

Cade has already applied the maximum rate for the intent factor in the context of a transaction filed and deliberately closed by the parties before antitrust clearance.

However, in a case in which the merging parties knew they would commit the infringement, but did so for contingency reasons related to a judicial reorganization, the rate applied was considerably lower (0.02%). This indicates that legitimate reasons external to the will of the parties that require early consummation can mitigate the degree of intent of the violators.

The intent rate has been applied even when the violation was committed unintentionally and in good faith. The lowest rate adopted since the referred resolution came into effect (0.001%) took place in a case in which the parties' legal counsel erroneously evaluated that a filing with Cade would not be required.

In another case, in which the infringement resulted from a misunderstanding about the accounting parameters considered for the purposes of turnover calculation to determine whether a filing with Cade was needed, the rate was set at 0.01% on the grounds that the parties did not act with the minimum diligence expected by the authority, albeit in good faith.

There was also a transaction in which the parties claimed not knowing the law and Cade set a rate of 0.04%, exceeding the degree of intent considered in the violation in which the consummation was conscious, but for contingency reasons.

These precedents demonstrate that, in the calculation of gun jumping fines, intent is not exclusively related to the deliberate act of violating the law, as Cade identified that there was intent even in cases in which the parties acted without bad faith, but were not diligent enough in the assessment of whether a transaction should be submitted for antitrust clearance.

Category: Tax

Leonardo Martins and Andre Araujo de Andrade

The Attorney General's Office of the State of Rio de Janeiro (PGE-RJ), through the Joint Service Order - OSC PG-02/PG-03/PG-19 01/2022, regulated the procedures necessary for the administrative settlement of the amounts involved in lawsuits made in court related to the collection of ICMS on the contracted demand for electricity not consumed, pursuant to Summary 391 of the Superior Court of Justice (STJ) and Theme 176 of the Supreme Federal Court (STF).

After intense debate and more than ten years of discussions in the higher courts, the Supreme Court pacified the matter by fixing the thesis that "the demand for electric power is not subject, by itself, to taxation via ICMS, because the calculation base of this tax only includes the amounts related to those operations in which there is effective consumption of electricity by the consumer."

To facilitate and expedite the outcome of the various lawsuits filed by Rio de Janeiro taxpayers, PGE-RJ gave them the possibility of promoting, through administrative means, the settlement of the amounts involved, for subsequent collection of judicial deposits or refund.

It is sufficient for the taxpayer to submit an administrative application to the Attorney General's Office for Appropriate Dispute Settlement and Human Rights (PG-19) – one of the subdivisions of the State Attorney's Office – with all the documentation listed in the act, such as a copy of the application, proof of distribution, copies of the invoices for the five years prior to the action, bank account statement for deposits made (if applicable),  spreadsheet with amounts to be refunded, proof of petition protocol with request for suspension of demand based on the service order itself, among others.

The application will be analyzed by the Tax Attorney (PG-03), which, after verifying the documentation, will forward the request to the Office of Calculations and Accounting Expertise (ACPC) to calculate the portion that can be raised / refunded to the taxpayer.

The taxpayer will then receive a proposal for a consensual settlement on the basis of the calculations drawn up by the ACPC. If accepted, both parties shall file a petition informing about the agreement. At this time, the withdrawal of the amount calculated for the benefit of the taxpayer and the conversion into income to the state of any remaining balance will be required. In the case of a refund, the issuance of a court payment order (“precatório”) or small amount requisition (RPV) will be requested, also according to the agreed calculations.

Interested taxpayers should wait for the public call that will be made on the PGE-RJ website.

It is an innovative initiative, with the clear purpose of giving effectiveness to the decisions from the higher courts and to solve the demands with greater agility and simplification.

Category: Labor and employment

The Federal Senate approved, on August 3rd, Executive Order 1,108/22, which substantially changed the rules regarding meal allowances and remote work, provided for in the Consolidated Labor Laws (CLT). The approved text awaits presidential signature, at which point the executive order will be converted into law. The expectation is that the President fully sanctions the text approved by the Brazilian National Congress.

The following are among the main changes introduced for remote work:

• Equating home office to telecommuting

Remote work performed not preponderantly outside the employer's premises (home office) was equated to telework: from now on, the provision of services outside the employer's premises, preponderantly or not, using information and communication technologies, which, by its nature, does not constitute external work, characterizes a telework or remote work arrangement. In this way, telework and remote work become synonymous for all intents and purposes.

• Tracking of work hours

Only remote employees who provide services on a piecework or task basis are exempt from work time tracking. In other words, employers with more than 20 employees must track the working hours of all employees, including those who work remotely and do not work by piecework or task.

• Contractual adjustment

The provision of services in the remote work modality must be expressly stated in the individual employment contract: due to the equation of a home office to telecommuting, the home office must now also be regulated by individual agreement or internal policy with individual adherence of the employees.

• Interns and apprentices

Adoption of a remote work arrangement for interns and apprentices is now expressly allowed: the rule has achieved what already happens in practice.

• Union classification

The provisions set forth in the local legislation and in the collective labor agreements related to the territorial base of the establishment where the employee is based apply to employees who work remotely. With this, the legislation now expressly states that when the place where the services are rendered is not relevant to the work, the labor union affiliation follows the location of the employer's headquarters, in line with the understanding of the case law.

• Work abroad

Brazilian legislation applies to employment agreements of employees hired in Brazil who choose to perform remote work outside Brazilian territory, except for the provisions of Law 7,064/82, unless otherwise agreed: with this, the legislation has removed the risk of finding temporary transfer abroad, preventing potential disputes involving the topic.

The legislation also brought in some clarifications about remote work:

• the attendance, even if habitually, at the employer's facilities for the performance of specific activities, which require presence at the establishment, does not undo the remote work arrangement.

• employees submitted to remote work arrangements may render services by the day or by piecework or task.

• an individual agreement may determine the hours and means of communication between employee and employer, as long as the legal rest periods are assured.

• employers must give priority to employees with disabilities and employees with children or a child under legal guardianship up to 4 years of age when allocating to remote work or remote work vacancies.

• employers will not be responsible for expenses resulting from the return to live work if the employee has chosen to perform remote work outside the location provided for in the contract, unless otherwise agreed upon.

• the time of use of technological equipment and necessary infrastructure, and software, digital tools, or internet applications used for remote work, outside the employee's normal working hours, does not constitute time on standby, available, or on call, unless there is a provision in an individual agreement or in a collective bargaining agreement, that is, for activities in a remote work arrangement that require employees to be on standby or on call, it would be possible to adjust payment of amounts without undoing the remote work and the system for tracking only exceptions to normal hours to the tracking of the working hours of employees who work by piecemeal or task.

• the remote work arrangement is not to be confused with, nor equated to, the occupation of telemarketing or call center operator.

With the conversion of the executive order into law, the changes introduced by it will produce effects for an indefinite period of time.

Due to the substantial changes introduced, companies that have already implemented telecommuting, home office, or remote work policies (including anywhere office policies) must reevaluate and adjust their practices to bring them into line with the new rules, if they have not already done so.

In addition to the changes to remote work, the legal text also introduced changes regarding the granting of food and meal vouchers. We addressed this topic in other article, also published in the Legal Intelligence Center. Click here and check it out!

Machado Meyer Advogados will continue to monitor the evolution of the matter and its potential developments. Keep up with our publications by subscribing to our newsletter.

Category: Digital Law

Frauds with crypto assets increase day by day. Criminals take advantage of vulnerabilities found in exchanges and smart contracts to transfer crypto assets to digital wallets – which, although monitored, have no personal data linked, which makes it difficult to identify the authorship of the illicit and recover the assets.

To this day, for example, it is not clear what happened in one of the most emblematic cases of crypto theft. In 2014, the Japanese exchange Mt. Gox was reportedly the target of an attack hacker that embezzled more than $322 million in cryptocurrencies, mainly bitcoins.

Brazilian case law has applied consumer law rules in similar cases.^[1] In the understanding of the Court of Justice of São Paulo (TJSP),  the crypto exchange fits into the vendor definition contained in the Article 3 of the Consumer Code (CDC), as a provider of crypto assets intermediation and custody service. For the TJSP, this type of broker must respond objectively for the damages generated by defects related to the provision of the services, as determined by the Article 14.

When it can be pointed out that the exchange provided a defective service that resulted in injury, therefore, civil liability for damages falls on it. But how to set the responsibility when the damage was caused by failure or attack – the so-called hack - on the blockchain itself?

In March of this year, the Ronin network – a sidechain which functions as a kind of bridge between different blockchains, including the one running the game Axie Infinity – suffered one of the biggest attacks already registered in the crypto universe. The hacker took advantage of a vulnerability and hacked private keys from at least four of the network's nine nodes. With this, it managed to drain about $625 million in cryptocurrencies, including ether and USDC.

Such attacks are rare in the crypto world, but they spark an alert above all for underscoring the integrity of the blockchain. Despite the low frequency with which they occur, problems of this nature raise questions about what a secure blockchain would be and to whom to attribute the effective responsibility for the damage suffered.

In order to understand the question it is necessary to establish whether the crypto assets are:

• kept in custody of an Exchange; or
• being negotiated in decentralized finance protocols (DeFi), without being able to identify a custodian organization.

If the assets are in custody of exchanges, the possible loss resulting from an attack on the blockchain can hardly generate any responsibility for the broker. It can be argued, however, that there would be joint and several liability for the losses, since the exchange is inserted in the consumer chain.

Given the case presented, however, there is no way to identify a clear causal link between the service provided by the exchange and the injury. The lack of causal link may also raise the hypothesis of excluding liability for the absence of a defect in the service (art. 14, paragraph 3, I of the CDC) or, by case of fortuitous (art. 393 of the Civil Code).

The situation changes slightly when the crypto assets whose blockchain has been hacked are being traded on DeFi protocols. In this case, the difficulty in assigning liability stems less from legal uncertainty than from the difficulty of identifying the organization responsible for offering the trading and custody structure of crypto assets.

The fact that the registration in blockchain being decentralised does not mean that it is impossible to identify an institution or someone behind the creation of the protocol and its maintenance. In general, this role is played by foundations or even by a group of persons without legal personality.

It is difficult, however, to identify exactly the role of these agents in the creation or maintenance of the protocol. It is also difficult to establish whether the activities performed can characterize the organization or group of people as "suppliers" and thereby attract responsibility for damage to the consumer.

The arrival of new asset and technology modalities raises legal issues that need to be better addressed. Until it is clearly established who is responsible for the damage in cases such as the Ronin network, or even if it is possible to establish some kind of liability in these cases, it can be difficult to find support in the law to obtain compensation for damages caused by hacker attacks.

^[1] Civil Appeal TJ/SP 1001913-90.2019.8.26.0080; Civil Appeal TJ/DF 0730396-17.2018.8.07.0001; Civil Innominated Appeal TJ/SP Case 0011980-92.2016.8.26.0127