Category: Tax

Leonardo Martins and João Victor Sadocci

With the publication of Law No. 6,999 on July 14 of this year, the City of Rio de Janeiro instituted tax benefits for the building works framed in the Reviver Centro Program, created to promote the urban, social and economic recovery of part of the central region of the city.

The law grants exemption or suspension of tax credits – enrolled or not in active debt – related to the Property And Urban Land Property Tax (IPTU) and the Household Garbage Collection Fee (TCL), reduction of Property Transfer Tax (ITBI) and exemption from administrative licensing fees for works for buildings and buildings framed in the Reviver Center Program whose purpose is to:

• conversion of regularly constructed and licensed buildings - Retrofit, for multifamily or mixed residential use;
• construction of new residential or mixed buildings;
• financing of social rental, assisted housing and self-management programs;
• restoration, adaptation, complete recovery and completion of works in properties in poor condition, for multifamily or mixed residential use; or
• completion of works paralyzed in structure stage, for multifamily or mixed residential use.

The purpose of the Reviver Centro Program is to attract new inhabitants to this area of the city, encouraging the construction of new housing and the transformation of commercial buildings into residential or mixed use. It is believed that the greater movement of residents in the central area of the city will stimulate socioeconomic activities in the region.

Law No. 6,999/21 also establishes that part of the residential units destined to the Social Rental Program will be exempt from IPTU, while they remain linked to the program.

The granting of these tax benefits is conditional on obtaining:

• license of works within up to 5 years, from 01/08/2021; and
• certificate of Habitor or Acceptance of Works, within the period of 36 months, from the issuance of the respective license of works.

If the established requirements are not met, taxes will be charged with due legal additions, as if the benefits had never been granted. The benefits stipulated by law will not entitle the refund of amounts already paid to the municipality.

This law arrives at an opportune moment for the Real Estate Market in Rio de Janeiro, which, due to several social and economic factors, returns to growth in the acquisition of residential real estate (77.1% increase in the number of transactions in June 2021, compared to the same period in 2020, according to data from the Secovi Rio - Cepai Information Research and Analysis Center). It is a good opportunity for real estate market entrepreneurs to once again direct their attention to downtown Rio and take advantage of the tax incentives offered.

The central region of the city already has good access infrastructure, public transport and leisure capable of serving a public eager for better living and housing conditions. Making the Center a hub of attraction for residents, and not just a region frequented during business hours, will help requalify it urbanly, have a more sustainable occupation, improve policing and security and reduce violence, benefiting all who live, work or frequent the region.

It is, therefore, an important initiative for the upheavement of the central area of Rio. If well executed, it can generate good social and economic fruits for the city and its residents.

Category: Succession planning

The usufruct is a real right (direito real) over something of another that gives a person(usufructuary) the right to use and enjoy the property object of the usufruct as if it were the owner, without changing its characteristics, leaving the actual owner (called bare owner) the right to dispose of the property. Through usufruct, the elements of the right to property are dissociated: it is up to the usufructuary to use and enjoy something of others, while the bare owner, as the holder of the property, has the power to dispose of it.

The products and income of the property will be owned by the  usufructuary , such as the rents of a property or the profits of a company. In addition, decisions on how to use the property are the responsibility of the usufructuary, whose obligations will be to watch over the asset and restore it to the bare owner at the end of the usufruct, which has its duration fixed at the time of the institution.

Among the causes of extinction of the usufruct, established by Art. 1.410 of the Civil Code, are the death of the usufructuary and the time fixed in its creation.

The usufruct may fall on movable property (shares, quotas, fund quotas and others) and real estate. It can be created both directly on the asset in favor of a third party, a hypothesis in which the bare owner retains ownership of the asset and transfer the right to use and enjoy, and through donation, when the donor transfers the property to a third party, but reserves for himself the right to use and enjoy the property.

It is, therefore, a relevant instrument of estate and succession planning, widely used in corporate succession structures, for example, when the patriarch or matriarch of a family company transfers its quotas or shares to successors, reserving for himself/herself the enjoyment, often in a lifetime way, of such corporate participation, in order to maintain control and perception of the fruits (profits) of the company.

Under corporate law, usufruct is a broad right, whose legal nature allows extensive customization in its creation, for example, on all shares or quotas or on part of them. It is also possible to establish the percentage of the products affected by the institute, so that usufruct and bare owner can divide the profits of the company. It is also possible to include rights of a political nature within the scope of the usufruct. However, economic rights must integrate the usufruct as they are part of the essence of the institute.

Perhaps one of the most important points of attention in the use of this legal institute in corporate law is related to voting rights. Law No. 6,404/76 (Corporation Law) regulates the usufruct in five provisions:

• 40 and 100, item I, point "f" (requirement to register the usufruct in the registration book of nominactive shares or in the statements of the financial institution, in case of nominative or book-entry actions, respectively);
• 114 (provides for the right to vote which, if not regulated in the instrument creating the usufruct, can only be exercised by prior agreement between the bare owner and the party entitled to the usufruct);
• 169, §2^nd (establishes that the usufruct extends to shares distributed because of capitalization of profits or reserves); and
• article 171, §5^th (provides that, in case of issuance of shares or securities, the right of first refusal shall be exercised firstly by the bare owner and, provided that if not exercised up to 10 days before the expiration of the established period, the usufructuary will be entitled to exercise the right of first refusal).

In this article, we analyze the main issues related to the voting rights in respect to the shares subject to usufruct.

Voting and participation in shareholders’ meetings

In accordance with Art. 126 of the Corporation Law, the shareholder must prove his/her condition as such to attend the general meeting. A shareholder may be represented by a proxy appointed less than one year before which shall be a shareholder, a manager of the company or lawyer and, in the case of publicly held companies, financial institutions are allowed. Therefore, the shareholder, by him/herself or by proxy, has the right to participate in the general meetings.

In the case of shares subject to usufruct, the law allows the usufructuary and the bare owner to regulate the right to vote among themselves in the instrument creating the usufruct or even verbally. The voting rights can be fully allocated to the usufructuary (provided that the provisions of Article 171, §5, of the Corporation Law regarding the exercise of the right of first refusal shall be complied with) or divided between the parties, according to the matter for example.

Of course, in the parties are silent with respect to voting rights, the subsequent conduct of the parties should be considered for purposes of interpreting the intention intended by those involved.^[1] If the vote is always exercised by the usufructuary, for example, it could be understood that the parties agreed on such a practice.

In this same sense, if there are shareholders' agreements, it is important that the holder of the voting rights in respect of the shares subject to usufruct is bound by any agreement - if it is the will of the contractors – in order to secure that it produces all the intended effects.^[2]

In the absence of agreement between the parties, Article 114 of the Corporation Law provides that the exercise of the right to vote is only possible by prior agreement between the bare owner and the person entitled to the usufruct, under penalty of non-exercise of the right to vote.^[3] It is, in fact, a true extraordinary legitimation that authorizes the vote by a person who is not a shareholder or his/her representative.^[4]

The legislative choice of consensus between usufructuary and the bare owner is intended to address the potential conflict of interest between those involved: on the one hand, the usufructuary, possibly interested in the largest distribution of dividends possible and, on the other, the bare owner, who may prefer, for example, the reinvestment of resources.^[5]

The doctrine and the comparative laws offer other solutions to the voting, establishing, in some cases, that it may be exercised exclusively by the bare owner (as holder of the position of shareholder even if subject to limitations in its full ownership), or, in other cases, by the usufructuary^[6] (as holder of the rights of possession, use, administration and enjoyment of the property). There are also mixed solutions, in which, depending on the matter, the rightholder changes. In the latter case, it is usual to assign to the usufructuary the right to vote on essentially administrative matters, and to the bare owner, on the other matters.^[7]

The conflict arises when there is no agreement between the bare owner and the one entitled to the usufruct. It can be enhanced if the shares represent a relevant percentage of the company's share capital or even control, and when there are rights arising from the vote, such as the right to withdraw.

The exercise of the right to withdraw

Pursuant to Art. 137 of the Corporation Law, the dissenting shareholder has the right to withdraw from the company, upon reimbursement of his/her shares, in the event of the approval of certain matters prescribed by law. Thus, the right to withdraw "consists, therefore, in the legal power to extinguish, by unilateral act, in the cases provided for by law, the relations that bind the shareholder to the company, moving to the position of creditor of the same, in the amount of reimbursement of the shares". It is, therefore, "the right of the shareholder to, by disagreeing with certain resolutions of the General Meeting, in the cases provided for by law, to withdraw from the Company upon reimbursement of the value of its shares".^[8] This is an essential right of the shareholder pursuant to Article 109 of the Corporation Law.

It occurs that the right to withdraw is intrinsically linked to the exercise of the vote, to the extent that this right can be exercised in the situations prescribed by law in which the shareholder: (i) has voted at the general meeting against the proposal approved later and (ii) has not voted in such a resolution.

Thus, in the absence of specific rules on the exercise of the vote, doubts may arise about the legitimacy of the bare owner to exercise the withdrawal of the company, especially in situations of conflict of interest with the usufructuary. For example, if the usufructuary votes in favor of the matters described in Art. 137, but the bare owner disagrees with the subject, could the bare owner exercise the right to withdraw?

In fact, the bare owner is the shareholder of the company registered in the company’s stock records (nominative or book-entry). The bare owner maintains the right to dispose of the shares and the exercise of the right to withdraw can be an act of disposition of the shares. Moreover, even if the vote is exercised by the usufructuary, it does not seem to us that it is possible to prevent the bare owner's access to the general meetings, for example. Even if the bare owner does not hold the right to vote, participation and discussion of the matters should be secured.^[9]

However, considering that the withdrawal affects the rights of the usufructuary and of the bare owner, prior agreement between both of them could be a requirement for the right to withdraw. In such cases, therefore, we believe that the analysis of the circumstances of the case may be decisive in determining who is the holder of the right. In any case, it is necessary to regulate this matter in the instrument of the constitution of the usufruct to improve the treatment of the relations between the bare owner and the person entitled to usufruct.

Rights of supervision and action

Finally, it is also questioned who would be the holder of the right to supervise the management of the company (Art. 109, III, Corporation Law) and to file liability actions against managers and controlling shareholders (Arts. 159 and 246 of the Corporation Law). In principle, in our view, the right of supervision could be able to be exercised by both the bare owner and the person entitled to usufruct: in accordance with the applicable legislation,^[10] the interest of both is unequivocal. As an example, we understand that the participation of the usufructuary and the bare owner in the general meetings should not be prevented, regardless of who is the holder of the right to vote in matters to be resolved.

In relation to the filing of liability actions against managers and controlling shareholders, in principle, we understand that there are arguments to argue that both, bare owner and the person entitled to usufruct, would be legitimate active parties to the action,^[11] but this analysis would depend on the circumstances of the case. However, the lawsuit against the management pursuant to Article 159 of the Corporation Law depends on prior resolution at a shareholders’ meeting. If the holder of the right to vote, for example, does not approve the filing of the lawsuit by the company, it does not seem coherent to us that the other person involved may subsequently file such lawsuit, as an extraordinary legitimate under the law.

Final considerations

As can be seen from the above reflections, the matter is complex, involves several interpretations, there is no jurisprudential uniformity and depends on the analysis of the circumstances of the specific case. In this scenario, a sophisticated legal advice is even more necessary in the drafting of the instrument for the creation of the usufruct, as well as a strong and robust structuring of the operation in which the instrument is included, especially in relation to the clarity of the rights attributed to the bare owner and the person entitled to usufruct.

^[1] TJSP, 4th Chamber, Civil Appeal 53.836-4, Rep. Judge Cunha Cintra, j. 08.06.1998, "owners and person entitled to usufruct could regulate the voting exercise later and did so in a tacit manner in the general meetings held, because the usufructuaries always exercised the right to vote with the approval of the bare owners. (...) Contracts must be interpreted in accordance with the parties' conduct, in a kind of authentic interpretation, and it is for the judge to examine their conduct at the implementation stage."

^[2] LAMY, Alfredo and PEDREIRA, José Luiz Bulhões. Companies' Law. Vol. I, 2009, p. 442, "In turn, the Shareholders' Agreement is perfectly valid. It was recognized as being the defendants [person entitled to usufruct] the exercise of the right to vote in respect to the shares given, which grants them legitimacy to subscribe it." TJSP, 4^th Chamber, Civil Appeal 836-4, rep. judge Cunha Cintra, j. 06.08.1998.

^[3] Previously, the matter was regulated by Art. 84 of Decree-Law No. 2,627 of 1940: "In the usufruct of shares, the right to vote may only be exercised by prior agreement between the owner and the person entitled to usufruct".

^[4] LAMY, Alfredo and PEDREIRA, José Luiz Bulhões. Companies' Law. Vol. I, 2009, p. 390, "Your [of the usufructuary who votes] legal position is sui generis. With the fractionation of the property that operates with the institution of the usufruct, the person entitled to usufruct must be considered a person legitimized by law for the exercise of the right to vote. CARVALHOSA, vol. II, 489. As prescribed by JOSÉ LUIZ BULHÕES PEDREIRA (opinion not published), the exercise of the right to vote by the usufructuary, in this case, is also the sole hypothesis in which the law admits that the vote is exercised by those who do not have the quality of shareholder or their representative: the law requires that the shareholder who attends the general meeting proves his position as shareholder (art. 126, Corporations Law) and only admits representation by a proxy appointed less than a year."

^[5] EIZIRIK, Nelson. The Law of S/A Commented. Vol. I. São Paulo: Quartier Latin, 2011, p. 646; CARVALHOSA, Modesto. Comments to the Corporations Act. Vol. II. São Paulo: Saraiva, 2011, p. 488.

^[6] Italian law, for example, assigns the vote to the person entitled to usufruct, unless otherwise agreed between the parties, pursuant to Art. 2352 of the Italian Civil Code.

^[7] CARVALHOSA, Modesto. Comments to the Corporations Act. Vol. II. São Paulo: Saraiva, 2011, p. 487.

^[8] EIZIRIK, Nelson. Reform of the Corporations & Capital Markets. Rio de Janeiro: Renovar, [1997], p. 61.

^[9] COMPARATO, Fabio Konder. "Stock Usufruct And Almost-Usufruct. Limits to the Rights of the Person entitled to Usufruct." In: Essays and Opinions of Business Law. Rio de Janeiro: Forense, 1978, p. 88.

^[10] There are different understandings, such as WALD, Arnoldo. "The Legal Regime for the Use of Limited Liability Company Quotas and Shares of Corporations". Revista de Direito Mercantil, Industrial, Econômico e Financeiro (Journal of Commercial, Industrial, Economic and Financial Law). São Paulo: Ed. Revista dos Tribunais, v. 77, January/March, 1990, p. 10, "The supervision of social business (...) is attributed to the person entitled to usufruct when the political rights are assigned to it".

^[11] There is different case law, e.g. TJMG, AI n° 1.0024.05.827925-8/001, rep. Judge Alberto Aluízio Pacheco de Andrade, j. 14.03.2006, "It is a Corporation, in which the author acquired shares through the "Donation Contract in Advance of Legitimate", requiring the approval of the claims made, in order to suspend resolutions taken in general meetings without its presence. The appellee, bare owner of shares that were given to him, alleges that she is entitled to the full exercise of the rights reserved by law to the shareholders. It occurs, however, when there is usufruct, the bare owner does not have legitimacy to act as shareholder." The divergent vote of the judge Alberto Vilas Boas, however, indicates that "I do not know the argument that, pending the usufruct, the powers of the owner whose domain will only be consolidated on a future occasion are reduced, as the usufruct is the right of use and enjoyment over the other person's thing. However, I do not share the understanding that it would not be possible to the bare owner to exercise the right to supervise the acts of the corporation, despite not having the right to vote in the general meetings that may be held. In fact, art. 114 of the Corporation Law is not applicable, because the appellee does not intend to exercise the right to vote, but only to anticipate the effects of the declaratory decision in relation, among others, to the right to participate in the general meetings of the company, as well as other rights that are compatible with the legal condition it bears. In fact, the condition of bare he nominative shares does not deprive her of the legal power to be summoned to participate in the meetings of the corporation, since she is a shareholder, even if deprived of the voting power".

Category: Litigation

Although doctrine and the Consumer Defense Code (CDC) have afforded protection to "bystanders", identification of this kind of consumer in some cases can still generate doubt. For this reason, the Superior Court of Justice, the highest court for non-constitutional matters, has often been called to rule on the matter, and with each new case, new contours have been identified.

As a rule, only the final recipients of products and/or services can be considered consumers for the purpose of the CDC. This is what Article 2 of the Code states. However, in accordance with Article 17 of the CDC, individuals or intermediaries in the consumer chain who suffer the consequences of a consumer accident can be considered bystanders, even if they are not part of the initial relationship.

The concept of bystander in Brazilian law was inspired by American law, and with time has evolved case by case. Currently, the CDC provides for the possibility of considering bystanders all victims of a particular injurious event, regardless of whether they were a party to the initial consumer relationship.

The subject has been analyzed by the STJ at different times over the past few years, with constant evolution of its interpretation.

In 2012, the STJ ruled on a case involving a vehicle accident between a car and a taxi. At the time, the court held that "the subject of the consumer relationship does not necessarily need to be a contracting party and may also be a third party victimized by this relationship, a party that U.S. law calls a bystander".^[1]

Despite recognizing the bystander in our legal system, the court ruled out its application in that specific case, since the taxi was not in service (no passenger) at the time of the collision. The appellate judges ruled that the taxi driver was no bystander, since there was no previous consumer relationship from which the consumer status of the taxi driver, who was the victim of the accident, could be deemed a bystander.

On another occasion, in a plane crash, the STJ held that all those who were affected by the disaster, regardless of whether they were passengers of the affected aircraft, should be considered consumers. People who were close to the site at the time of the accident and were affected, although only morally, were considered bystanders. The reporting judge stressed that "the victims of aviation accidents not on the aircraft, are consumers by configuration (bystanders), and the rules of the Consumer Defense Code relating to damage from accidents should be extended to them (art. 17, CDC)."^[2]

In another case, involving oil leakage into an environmentally protected area, the STJ applied the CDC to all the victims of the event, considering them bystanders: "The plaintiffs were victims of a consumer accident, since their fishing activities were supposedly impaired by the oil spill that occurred in the state of Rio de Janeiro. The provision of Article 17 of the Consumer Defense Code applies."^[3]

Thus, when a "standard" consumer relationship exists in the injurious event, all other victims involved in the accident should be considered consumers, albeit by configuration, and consequently consumer legislation applies.

Recently, the STJ encountered a peculiar situation. A street sweeper was hit by a bus carrying passengers (customers). He was the only victim of the event and had no relationship with the bus company, that is, he was not part of the original consumer relationship established between the bus company and its passengers, none of whom were injured. Even though the accident did not injure any of the direct consumers of the company, could the street sweeper be considered a bystander? Or would some "direct" consumer of the bus company need to have been injured to talk about equating the street sweeper as a consumer? According to the reporting judge in his leading opinion:

"The fact that the only person victimized by the accident allegedly caused by the bus owned by the appellee, while providing transportation service for people in Rio de Janeiro, was a third party to the consumer relationship does not rule out his bystander status."^[4]

On this occasion, the existence of a consumer relationship was deemed to be sufficient, i.e., the fact that the service/product was being offered within the scope of the CDC, so that the accident resulting from this relationship, by victimizing any individual, whether or not part of the consumer chain, fell under the scope of the consumer legislation and all its protective institutes. Thus, even if none of the direct consumers of the bus company were injured, the court considered that it was possible to expand consumer protection measures to the third party, by configuration.

It is no accident that on more than one opportunity, the STJ has taken the time to deal with the topic of the bystander. The subject is relevant and its legal consequences are even more so. What can be observed is a constant evolution of the issue. The correct and timely identification of bystanders in specific cases is fundamental, since the consequence is the application of consumer legislation, which is protective and seeks to balance the relationship between consumers and suppliers.

The application of consumer legislation alters both the competence to judge lawsuits and the reversal of the burden of proof. The inadequate or late identification of bystanders can, therefore, be catastrophic, so it is essential to know the subject and to monitor the evolution of its interpretation by the courts.

^[1] Special Appeal 1125276/RJ, rel. Reporting Judge Nancy Andrighi, 3^rd Panel, judged on February 28, 2012, published in the DJe on March 7. 2012.

^[2] Special Appeal 1281090/SP, Reporting Judge Luis Felipe Salomão, 4^th Panel, judged on February 7, 2012, published in the DJe on March 15, 2012.

^[3] Conflict of Competence 143.204/RJ, Reporting Judge Ricardo Villas Bôas Cueva, 2^nd Section, judged on February 29, 29, 2016. In the same sense, "According to the jurisprudence of this Superior Court, defined in a case similar to that here, in the present hypothesis, the plaintiffs are comparable to consumers, by configuring the oil spill as a consumer accident, which allegedly harmed the fishing activity of the interested parties" (CC 132.505/RJ, Reporting Judge Ricardo Villas Bôas Cueva, 2^nd Section, judged on February 3, 2015).

^[4] Special Appeal178.731-8, Reporting Judge Paulo De Tarso Sanseverino, 3re Panel, judged on June 16, 2020, published in the DJe on June 18, 2020.

Category: Tax

The recent Answer to Consultation (SC Cosit) no. 99, of June 21 of this year, dealt with the imposition of Withholding Income Tax (IRRF) in the conversion of foreign investment in the Brazilian financial and capital markets via portfolio, pursuant to the Resolution of the National Monetary Council (CMN) no. 4,373/14 (Investment 4,373 - Portfolio) for foreign direct investment, according to Law No. 4,131/62 (Investment 4,131 - Direct).

The taxpayer consultant, as tax responsible of legal entities resident abroad that carry out Investment 4,373 - Portfolio, non-residents or domiciled in a country or dependence considered as a  country with a favorable taxation (Low Tax Jurisdiction - LTJ), wanted to know from the tax authorities:

• if it would be correct to understand that the conversion is not a triggering event of the IRRF, due to the absence of transfer of ownership and disposal in the operation;
• if the conversion was a taxable event, what would be the applicable tax treatment: exempt, because it is a sale carried out in the Brazilian stock exchange by Investment 4.373 - Portfolio not located in LTJ or subject to the rate of 15% of the IRRF, because it is not a sale carried out in the Brazilian stock exchange by Investment 4.373 – Portfolio not located in LTJ; and
• if, in the event that the conversion is understood as a triggering event of the IRRF, who would be responsible for the collection.

SC Cosit concludes that the conversion is not subject to IRRF taxation on any capital gains, considering that:

• there is a regulatory obligation to carry out simultaneous exchange operations (purchase and sale of currency) without effective transfer of resources (section 7, item IV, Resolution CMN no. 4,373/14);
• such transaction is not on the list of exceptions for transactions that can be carried out outside the Brazilian stock exchange (section 19 of Resolution CVM No. 13/20); and
• Section 30 of Circular Bacen No. 3,691/13 considers, for all purposes, simultaneous foreign exchange transactions as effective transactions.

According to SC Cosit, the fact that simultaneous foreign exchange transactions are considered for regulatory purposes as effective transactions, i.e., foreign exchange transactions with physical currency transfer, would be ficticiamente the settlement of the investment, agreement for the sale of foreign currency tied to a remittance of resources abroad and a foreign currency purchase agreement tied to an investment in the country.

Although not expressly stated in SC Cosit, the implicit reasoning would be that these operations, a priori, would be held on the stock exchange. Thus, it concludes by the application of Section 81, § 1, of Law No. 8,981/95, together with Section 16 of MP No. 2,189-49/01, which excludes from the imposition of IRRF capital gains earned in Investments 4,373 – Portfolio in transactions carried out on stock exchanges.

SC Cosit also makes it clear that, after registration, the new Investment 4,131 - Direct is subject to IRRF tax rules on capital gains, pursuant to Section 18 of Law No. 9,249/95, Sections 20 to 23 of the Normative Ruling of the Brazilian Revenue Service No. 1,455/14 and the other regulations in force. Currently, this means progressive rates of 15% to 22.5%, depending on the amount of the capital gain determined, except for situations in which the beneficiary of the capital gain is located in a LTJ. In the latter case, the applicable rate is 25%.

SC Cosit represents an important interpretation of tax authorities favorable to taxpayers, as it recognizes the application of the IRRF exemption regime on capital gains accumulated between the entry date of entry of Investment 4.373 - Portfolio and the date of conversion to Investment 4.131 – Direct.

The theme generated great insecurity, due to the lack of effective stock trading on the stock exchange, a factual condition of the normative hypothesis of the exemption rule. SC Cosit equates concepts of regulatory rules, concluding that there is exemption.

Category: Competition

The possibility of calculating fines for violations of Law No. 12,529/11 (Competition Defense Act) based on the benefit obtained by the infringer was widely discussed by the Court of the Administrative Council of Economic Defense (Cade) between 2015 and 2019, but never prevailed among most councillors. In December 2020, the discussion was reopened by the current councillors, especially in debates related to cartels in public auction markets, and that possibility has gained strength in the Cade Court since then.

Article 37, item I, of the Competition Defense Act determines that Cade may impose on infringing companies a fine of 0.1% to 20% of the value of their gross revenues (in the last year prior to the opening of the administrative proceedings), in the business area in which the infringement occurred. According to the samearticle, the fine mustnever be less than the benefit obtained, when it is possible to set it.

Until recently, Cade's fines hadalways been calculated based on the definition of the fine rate and its application on the gross revenues of the company investigated. However, in three recent cases, this traditional methodology was replaced by the calculation based on the benefit obtained.

In the trial of the case known as "Leech Cartel", which occurred at the end of 2020, the rapporteur councillor Paula Farani decided to calculate the benefit obtained, given the absence of data on the billings of the companies investigated in the administrative process. In that calculation, the councillor adopted the premise that the cartel would have generated an overpricing of 20% on contracts that expired during the cartel practiceand used the amounts received in the bid to calculate the fines to be imposed on the companies, which would be similar to the benefit received by the companies. His vote was accompanied by the majority of the court, defeated the councillors Bandeira Maia, Luiz Hoffmann and Alexandre Barreto that was  president of Cade at that time.

In February 2021, the discussion came back to the fore in a case involving private bids from Telemar and Telefónica. The rapporteur concillor Paula Farani calculated the fine of the investigated company Redex Telecomunicações Ltda. by the traditional methodology, based on the billing data available in the file, and filed the administrative process in relation to the company Araguaia Indústria Comércio e Serviços Ltda.

In a vote-view, the councillor Sergio Ravagnani diverged from the understanding of concillor Paula about Araguaia, and concluding for the condemnation of the company. For the dosimetry of the penalty, the councillor stopped estimating the benefit given to Redex for not having sufficient elements in the case. However, when dealing with Araguaia, the board member estimated the benefit granted on the basis of invoices issued by the company that would demonstrate or how much she would have received as transfers by submission of coverage offers in the bids. After that exercise, Ravagnani voted to convict Araguaia on the basis of the advantage granted, after finding that the maximum possible fine would be less than the advantage granted. His vote was corroborated by a majority of the members of the court, with the exception of the councillors Bandeira Maia, Luiz Hoffmann and the then president of Cade, Alexandre Barreto. The rapporteur councillor added her vote to follow the majority position.

In June, the imposition of a fine based on the calculation of the advantage granted prevailed again in the trial of the cartel in public bids of school materials, under the rapporteurship of counselor Paula Farani. In this case, contrary to what happened in the Leech Cartel, also under his rapporteurship, the company's billing data was available. The rapporteur advisor calculated the maximum fines for each company by imposing the 20% rate on the respective revenues. It also calculated the advantage based on the 20% overpricing assumption adopted when dealing with the Leech Cartel. After completing this exercise, the councillor voted to calculate the fine on the basis of the advantage granted only to Capricorn S.A., after it was clear that, in this case, the maximum possible fine would be less than the advantage granted. His vote was corroborated by a majority of the members of the court, again councillors Maurício Bandeira Maia, Luiz Hoffmann and Alexandre Barreto that was  president of Cade at that time In these precedents, it was adopted the understanding that the amount corresponding to 20% of the gross revenues of the company in the business sector in which the infringement occurred, in the last year prior to the establishment of the administrative procedure, does not correspond to a legal ceiling of fine. It was also understood that the use of the benefit earned confers greater rationality and proportionality to the fine in relation to the severity of the illicit, since it is not limited to amounts earned in only one year, but throughout the duration of the cartel practice.

The prospects of consolidating this new form of fine calculation in the short term are still uncertain, as they will depend on the position of the new president of the Cade Court, Alexandre Cordeiro, and the councillor who will replace Bandeira Maia, whose term has already ended.

Category: Tax

Leonardo Alfradique Martins and André Araújo de Andrade

Budget funds are a classic way to individualize and link revenues for a given purpose. Its use dates back to the time of colonial Brazil and gained more traction with the increasing decentralization of public policies among national political actors (Union, states and municipalities).

These funds were designed to streamline management and secure public resources for purposes of national strategic interest, as Camillo de Moraes Bassi teaches in his study Special funds and public policies: a discussion on the weakening of the financing mechanism:

"Is of course, the funds were created to make the public machine more flexible by decentralising resources for pre-established purposes. In tow, the linked revenues emerged, understood as an 'antidote' to financial uncertainty, a guarantee of resources."

The funds became part of the Constitution of 1934, when the Education Fund was created, mandatory for states, municipalities and the Federal District and formed, according to the constitutional text, by the "leftover budget appropriations plus donations, percentages on the proceeds of public land sales, special fees and other financial resources".

In the period between 1934 and 1988, several funds were created for various purposes, such as the National Development Fund (1986), the School of Business Administration Fund (1971), the Central Medicines Fund (1973) and the Space Activities Fund (1985), among many others at the state and municipal levels.

The Federal Constitution of 1988 deals timidly with the theme, mentioning only the mandatory that the funds are included in the Annual Budget Law (LOA) and the impossibility of binding to tax revenues, as provided for in Articles 165, §4, and 167, IV, respectively.

In addition to these provisions, Article 36 of the current Federal Constitution imposed that all funds in force on the date of its promulgation should be ratified by the National Congress within two years, except those that held revenue stemming from tax exemptions that are part of private property and those of interest to national defense.

However, even with the express constitutional determination, the funds were maintained on the basis of Law No. 4,320/64, received as a complementary law, which regulates the financial and budgetary norms of the Union and other federal entities.

If well managed, with the effective application of the funds raised in their specific purposes, the funds bring encouraging results.

In a study conducted on the Poverty Eradication and Combat Fund in the state of Mato Grosso, the researchers found that "the results of previous research suggest that there is a relationship between the establishment of the Fund for Combating and Eradicating Poverty and the decrease in poverty indicators in the State."^[1]

According to empirical data, however, budget funds no longer have the relevance of the old one.

Decree No. 93,872/86 modernized and streamlined the Brazilian financial system. The creation of the Single National Treasury Account, among other measures, also promoted a direct alignment between the origin and final destination of resources, drastically reducing the delay and bureaucracy for their arrival to their effective destinations.

Actually, the funds are no longer attractive for the management of public resources. As well presented by Camillo de Moraes Bassi, "innovations in public resource management" eventually "making funds expendable both to link revenues and to the accumulation of balances (financial surplus)".

In the study, Camillo de Moraes Bassi comments that "the dependence of the funds for a rapid management of direct administration (financial autonomy of the managing body), another motivation rooted in its use, has completely lost its meaning. In fact, it has become obsolete in the face of advances already commented on in financial management."

Moreover, the lack of transparency in management, the fragile control mechanisms, the little information available about the process of election of expenses to be incurred and the dubious application of resources in the purposes for which the funds were instituted (deviation of purpose), eventually made them outdated.

Added to this is the fact that there is no legal obligation on the need to spend all the resources accumulated in the same financial year of the collection, which causes a large part of the funds to accumulate considerable amounts that end up being passed on for other purposes.

There is also express authorization in the Fiscal Responsibility Law for the accumulation of balances in these budget funds and the use of such amounts in various years:

"Art. 8^or Up to thirty days after the publication of the budgets, in accordance with the provisions of the budget guidelines and c of art. 4 item I^or, the Executive Branch shall establish the financial programming and the schedule for the monthly implementation of disbursement.

Single paragraph. The resources legally linked to the specific purpose will be used exclusively to meet the object of their binding, even if in exercise different from the one in which the entry occurs."

Based on this legal tolerance, a practice that had already been taking place in the management of these funds was legitimized: not necessarily applying the funds raised in the purposes of strategic public interest for which they were instituted.

Or what has been seen is the frequent flexibilization of the laws of creation of funds to allow the accumulated amount to be allocated to the cost of other purposes, including the public machine, as Camillo de Moraes Bassi points out:

"(...) special funds are designed to streamline management and ensure public resources for specific areas/sectors, on the grounds that they are strategic to national interests. In this condition, it makes little (or no) sense for a special titled fund to perform personnel expenditure or compulsory expenditure unrelated to personnel, since these are associated with the cost of the 'public machine'."

The data collected by the researchers Sílvio da Costa Magalhães Filho, Luzinete da Silva Magalhães and Fernanda da Silva Rodrigues are included with this important note, which, although they were examining the FECP/MT, demonstrate that the use of funds for state costing ends up negatively interfering in the promotion of the purposes for which they were instituted:

"However, it is observed that from 2015 onto other links to the cost of the public machine and payment of debt becomes commonplace and the resources to be allocated to the Fund presents (sic) a significant reduction. Thus, in 2015, 25.68% of the total amount collected was allocated to cover the deficit of irradiated effects related to the untying of up to 30% of the funds collected for the payment of the State Public Debt (...).

In 2016, in addition to the links already mentioned, a portion was linked to the collection to be allocated to the payment of expenses with personnel of the Secretary of State for Labor and Social Assistance - ARROWS (...)."

This flexibility has also been carried out by the jurisprudence of the courts. There are decisions, for example, that exempt the constitutional imposition of a prior state supplementary law establishing the conditions for the institution and operation of the fund:

DIRECT ACTION OF UNCONSTITUTIONALITY - STATE LAW 2,826/03 - TAX AND EXTRA TAX INCENTIVES LAW - FINANCIAL CONTRIBUTION TO THE FTI - FORMAL UNCONSTITUTIONALITY - IMPROCEDENCE - MATERIAL UNCONSTITUTIONALITY - IMPROCEDÊNCIA - CONSTITUTIONALITY OF THE CONTESTED PROVISIONS. 1. Preliminary loss of the object received, to deem prejudiced the present direct action of unconstitutionality, in connection with Article 43, § 1, item III, Article 47, § 2, Article 45, Article 25, § 27, and Article 47, all of Law 2.826/03. 2. Regarding the claim of formal unconstitutionality, it is verified that the requirement of complementary law is met with the edition of the law 4.320/64, which provides for general rules on Financial Law, dealing generically with the institution of funds, and the specific law is responsible for establishing the rules on the institution of a given fund, having law 2.826/03, compatibility with the Brazilian legal system. 3. With regard to material unconstitutionality, the submission of the allegations is unproven, because the financial contribution questioned here does not fit the definition of tax, which is made by Article 3 of the National Tax Code and Article 9 of Law 4.320/1964. 4. Compulsoriety is essential to characterize the tax obligation, since the practice of fact provided for in a tax legal rule automatically and independently of the taxpayer's will, the duty of a cash benefit. 5. The financial contribution provided for in Article 19(XIII) (c) of the contested law is only a condition for a given company to benefit from the policy of tax incentives of the State of Amazonas. 6. Direct action of unconstitutionality partially extinguished, without resolution of merit and, at the other point, dismissed. (TJ-AM 00015708720108040000 AM 0001570-87.2010.8.04.0000, Rapporteur: Jorge Manoel Lopes Lins, Trial Date: 22/09/14, Full Court)^[2]

However, even with the great problematization about the use of funds, what is currently seen is that "The Brazilian States have increasingly instituted funds aimed at their maintenance, costing and investment", as it comments Igor Bastos de Almeida Dias in your article The establishment of "state funds" as an alternative to collect revenue for public safety.

As an example, one can cite the recent debate in the Legislative Assembly of the State of Rio de Janeiro (Alerj) for the untying of revenues from state funds and alteration of the mandatory application of its resources, so that, if not applied to the end of the exercise of its collection, its destination is at the discretion of the governor of the state. This allows the funds raised to be applied to the salary payment of the servers.

There is light at the end of the tunnel when one sees in the Rio de Janeiro parliament itself initiatives to extinguish budget funds, precisely because of their obsolescence, as well placed in the explanaming of the Complementary Bill No. 18/20 for the extinction of one of the State funds:

"What many forget is that by ending revenue linkage does not mean that a particular body will no longer receive the funds, but that it should demonstrate that its expenses are more priority than others. Thus, the good practice recognized internationally through the budgetary principle of non-allocation of revenues (non-linking of resources), is that priorities should be discussed each year when drafting and discussing the budget law.

The most intriguing is to observe parliamentarians in favor of funds when the final word on any allocation of resources should be from the legislator of the present (not from the past). In this way, one of the practical consequences of the extinction of the funds is the strengthening of the role of the current parliament.

In addition, the existence of a fund is in advance allocating resources, in a fixed and continuous way, without knowing what future priorities will be.

In general, the legislation of the funds prevents the resources from being used for other purposes that are not related to the activities of the bodies that administer them. The Special Funds of the Powers (Assemblies and Chambers, Courts of Accounts, Public Prosecutor's Office) and others linked to organs (Attorney, Ombudsman,for example), that is, without ties to priority social areas such as safety, health, education and social assistance should be the first to be extinguished. This is an aberration under the moral context as well as contrary to good budgetary practices.

The extinction of these funds will allow the transfer of resources to the State Treasury considering the free cash balances at the end of 2019 of r$ 1.5 billion already deducted from existing financial obligations."

It is, therefore, more than the time to prevent the funds raised from being used deliberately for the general cost of the public machine to the detriment of the relevant social purposes for which they were instituted.

If there is repeated jurisprudence of the Supreme Court so that the service fees are to be paid to the state activity for which they were created, in the same way the commoner redirect of the collection of funds for the general cost of the public administration can be legitimized, under penalty of transforming the funds into a new source of funding for the fundry – a function that is typical of taxes.

A different scenario would be to allow the allocation of leftovers (surplus) of the collection of funds for the general cost of the fund, when it is proven that the specific purpose connected to this fund was fully met.

^[1] FILHO, Sílvio da C.M., MAGALHÃES, Luzinete da S. and RODRIGUES, Fernanda da S. "Collection and Investments of the State Fund for Combating and Eradicating Poverty in the State of Mato Grosso: An investigation of the period 2013-2016". Anais of the 16th National Meeting of Researchers in Social Work, see 16 n. 1 (2018), ABEPSS.

^[2] Quoted by Igor Bastos de Almeida Dias in his article The establishment of "state funds" as an alternative to collect revenue for public safety

Category: Institutional

Category: Banking, insurance and finance

Raphael Zono, Renan Valverde Granja and Paula Lumi Sonoki

Created and regulated by Law No. 14,130, of March 29 of this year, the Investment Fund in Agroindustrial Production Chains (Fiagro) emerges to help develop the agribusiness sector. Its enactment amended Law No. 8,668/93, which provides for the creation and tax regime of Real Estate Investment Funds (FII).

"The new type of fund allows domestic and foreign investors to invest in the sector through investments in agribusiness assets (such as credit or securitization securities issued by companies in agro-industrial production chains) or purchase of properties, which can then be leased or sold to producers." reporting by Janary Júnior, published on the website of the Brazilian House of Representatives.

The high indebtedness of the federal government, fiscal restrictions, and socioeconomic issues suggest an increasing shortage of public resources for the agribusiness sector in the coming years. These difficulties make room for private investors to make a strategic contribution to Brazil's productive sector through instruments such as the new fund.

Fiagro allows investments directly related to agribusiness financing, to be organized in the form of a condominium of a special nature intended for the investment, alone or jointly, in:^[1]

• rural real estate;
• participation in companies that conduct activities that are part of the agro-industrial production chain;
• financial assets, securities, or paper issued by individuals and legal entities that are part of the agro-industrial production chain;
• agribusiness credit rights and securitization securities issued backed by agribusiness credit rights, including Agribusiness Receivables Certificates (CRAs) and units of Investment Funds in Credit Rights (FIDCs) – standardized and non-standard – that invest more than 50% of their equity in agribusiness credit rights;
• real estate credit rights related to rural real estate and securitization securities issued with backing in these credit rights, including CRAs and quotas of FIDCs – standardized and non-standard – that invest more than 50% of their assets in real estate credit rights; and
• investment fund shares that invest more than 50% of their equity to the above assets.

Overriding of presidential vetoes

When enacted, Bill No. 5191/20, proposed by Federal Deputy Arnaldo Jardim (Cidadania/SP) to create the new fund, it lost its main tax characteristics, considered one of the biggest attractions for Fiagro investors. Vetoes done by the Brazilian President and proposed by the Ministry of Economy, based on the claim of the Federal Revenue Service that the law would generate loss of revenue, eliminated tax benefits that sought, above all, to equate Fiagro to the FII.

The vetoes, however, did not resist the pressures of the Parliamentary Agricultural Front (FPA) and were overridden by the Brazilian Congress on June 1, 2021.

Collection of and exemption from the IR

With the overriding of the veto, it was established that rural producers can pay off the real estate asset in Fiagro in return for the receipt of units. In the event of disposal or redemption of units, the income tax (IR) will be proportional to the amount of the units sold, which brings about greater immediate liquidity. The mechanism aims to favor the capitalization of members of the Brazilian agribusiness chain, including family groups.

Another benefit reincorporated after the overriding of presidential vetoes was the exemption from IR for income distributed by Fiagro – remuneration produced by Agricultural Deposit Certificate (CDA), Agricultural Warrant (WA), Agribusiness Credit Rights Certificate (CDCA), Agribusiness Letter of Credit (LCA), and CRA.^[2] Individual investors are entitled to this benefit when:^[3]

• the fund has more than 50 individual unitholders; and
• no individual unitholder owns more than 10% of the shares issued by Fiagro or the right to obtain more than 10% of the fund's income.

By providing for non-application of IR at the source for income and gains obtained from fixed income or variable income financial investments, fiagro is truly equated with FII. There are, however, some differences between the two funds.

While the FII makes investments in the real estate sector, such as investments in assets specifically related to the real estate market without having to buy a property, Fiagro is intended for investments related to the agribusiness sector in various ways, as in the assets already mentioned – rural real estate, participations in companies that conduct activities that are part of the agro-industrial production chain, real estate credit rights related to rural real estate, securities or paper issued by individuals and legal entities that are part of the agro-industrial production chain, among others.

The expectation is that the new fund will stimulate the entry of rural producers, national and international, into the financial market, creating important alternatives for rural credit.

For Congressman Arnaldo Jardim, rural credit is an indispensable tool to keep Brazilian agriculture among the most productive in the world. "We believe that the Fiagro has the potential to boost the Brazilian land market, giving it greater transparency and liquidity, making the price of land formed by market forces in a more fluid and transparent way, which would benefit current landowners in the event of a need to sell their properties", opined the deputy.

With the creation of the fund, investors gain a safe and flexible option, which will bring the agribusiness capital market closer together and encourage other innovations.

The law establishes that it is up to the Brazilian Securities and Exchange Commission (CVM) to authorize, discipline, and supervise the creation, operation, and administration of Fiagro, and, because it is real estate,^[4] future discussions and instructions on the new fund should be expected.

^[1] See Article 20-A of Law No. 8,668/93, as amended by Law No. 14,130/21

^[2] See Article 3 of Law No. 11,033/04, as amended by Law No. 14,130/21.

^[3] See Article 3, sole paragraph, of Law No. 11,033/04, as amended by Law No. 14,130/21.

^[4] See Article 3 of Law No. 11,033, as amended by Law No. 14,130.

Category: Infrastructure and energy

Created in the second half of 2020, B3's seal of confidence for the free electricity market aims to contribute to the formation of a securer, more efficient, transparent, and, consequently, more liquid market, thanks to increased participation by market participants.

To this end, B3 has implemented its own evaluation methodology that identifies the risk inherent to the contract portfolio of market participants voluntarily registered in a specific system. This methodology uses economic, financial, and transactional data to establish indicators that enable a better ability to read and manage risks, especially in relation to the potential loss in the portfolio of each participant registered.

There are two main elements used in this evaluation: submission of the documentation provided for in the regulation for the seal and risk analysis for the portfolio of participants registered, considering the limits of financial exposure.

The main documents provided for in the regulation for the seal that are factored into B3's assessment of market participants are:

• financial statements and the respective audit reports
• contracts for the purchase and sale of electricity
• documents proving the existence of an advisory board and board of directors
• the existence of a corporate governance program, especially in relation to risk management policy
• the existence of a risk management and internal audit area

In practical terms, each document provided for in the Regulation represents a certain score value which, at the end of B3’s review, results in a total score obtained for the participant’s classification into one of the levels provided for registration of the (1, 2, or 3).

Only global data and information of registered agents may be publicly disclosed by B3. This means that the category (level) assigned to the participant is disclosed in the B3 system and website, whereas the specific score assigned to each agent is privately disclosed to the respective participant.

To carry out risk analysis of participants’ portfolios, B3 uses a specific market model to calculate the market risk and liquidity of its participants. The model is based on economic and financial elements, such as generation assets of electric power generating participants, physical guarantee values of these assets and load assets of electricity-consuming agents.

As a result of this risk analysis, the participant may be classified as adherent or non-adherent, and this classification will be disclosed in the B3 system for access by other registered participants. Still under the rules for the seal, B3 does not assign a status to free or special consumers, distributors, and transmitters of electricity.

After analyzing the information and documents forwarded by participants requesting registration, B3 indicates the category assigned to the participant, who may respond and opt for continuation or cancellation of the certification process. Reconsideration of the classification assigned by B3 may also be requested.

Legal entities registered in the Electric Energy Trading Chamber (CCEE) may join the seal system, in addition to the obligations to maintain the authorizations necessary for the exercise of their activities, execution of an association agreement with the system, payment of the applicable costs and charges, submission to B3's rules and procedures for monitoring, and indication of an officer responsible for the relationship with B3.

Although it is applicable only to participants who enter the platform on an optional basis, B3's seal of confidence for the free electricity market represents an advance for modernization of the sector, as it implements a mechanism that strengthens legal certainty and the reliability of the free electricity market.

Category: Litigation

Globalization increasingly demands regulation on cross-border insolvency, and Brazil is no exception. Considering this reality and driven by the Covid-19 crisis, which required rapid responses to the deterioration of the country's economy, Law No. 14,112/20 introduced in Law No. 11,101/05 (Reorganizations and Bankruptcies Law – LRF) an entire chapter dedicated to cross-border insolvency. The amendments were largely inspired by the Model Law on cross-border Insolvency of the United Nations Commission on International Trade Law (Uncitral).

According to article 167a of the LRF, the purpose of cross-border insolvency rules is to provide effective mechanisms for:

• promote cooperation between Brazilian and foreign judges and authorities;
• increase legal certainty for economic activity and investments;
• ensure the fair and efficient administration of cross-border processes, thereby protecting the interests of all those involved (creditors and debtors, as well as other stakeholders);
• protect and maximize the value of the debtor's assets;
• promote recovery of debtors in crisis, protecting investments and preserving jobs; and
• promote the liquidation of the debtor's assets, preserving and optimizing the productive use of the company's assets, property, and productive resources.

In line with the amendments introduced in the LRF, on June 4, 2021, the National Council of Justice (CNJ) published Resolution No. 394/21, establishing rules for cooperation and direct communication with foreign insolvency courts for processing and adjudicating cross-border insolvencies.

Resolution No. 394/21, based on the guide for cooperation and direct communication between insolvency courts issued by the Judicial Insolvency Network (JIN), takes into account especially articles 167-P and 167-S of the LRF. They establish, respectively, that:

• the judge shall cooperate directly or through the judicial administrator with the foreign authority/foreign representatives, and may communicate directly with foreign authorities/foreign representatives, without the need to send letters rogatory, direct assistance proceedings, or other similar formalities; and
• where foreign proceedings and a process of judicial reorganization, extrajudicial reorganization, or bankruptcy relating to the same debtor are ongoing simultaneously, the judge shall seek cooperation and coordination between them.

According to the resolution, direct communication between Brazilian and foreign courts needs to be regulated by rules established in insolvency protocols to be signed by the courts, as allowed in Article 167-Q, subsection IV, of the LRF. These protocols should comply with the guidelines provided for by the JIN, which are even included as an annex to the resolution. However, it is worth mentioning that the JIN guidelines expressly establish that its precepts must be applied by the jurisdictions at the discretion of each court, thus considering the particularities of the specific case.

JIN’s resolution and guidelines are similar to the provisions in the LRF and aim to promote:

• the efficient and timely coordination and administration of cross-border insolvency proceedings (called competing proceedings);
• the management of competing proceedings with the purpose of ensuring respect for the interests of the relevant parties;
• the identification, preservation, and maximization of the value of the debtor's assets, including its business;
• the management of the debtor's assets in proportion to the amount involved, the nature of the case, the complexity of the issues, the number of creditors, and the number of jurisdictions responsible for competing proceedings;
• the sharing of information to reduce costs; and
• prevention or reduction of litigation, costs, and disorder for the parties to competing proceedings.

The direct reporting mechanisms provided for in the resolution need to be regulated by insolvency protocols, which they should also have information on the coordination of certain acts, the holding of joint hearings, and communication with creditors and other stakeholders in competing proceedings.

Insolvency protocols only regulate procedural issues. They cannot change or dispose of substantive issues. According to the JIN, judgments should direct the parties to request implementation of insolvency protocols or decisions derived from JIN guidelines.

These protocols may be modified as needed to reflect any changes in competing proceedings. In such cases, the foreign court should be notified of the change as soon as possible.

An important rule deserves to be highlighted: unless provided for otherwise, the parties may be present as listeners when direct communication between courts is carried out. To ensure their participation, the parties must be summoned at least five days before the communication takes place.

Another important rule that contributes to the transparency and publicity of the acts is the obligation to record and transcribe communications. Copies of the recording and/or a transcript may be joined to the record of the proceedings and made available to interested parties (subject, however, to confidentiality, as determined by the respective court).

In relation to joint hearings, courts may communicate directly, without the presence of the parties, to define procedural rules regarding the insolvency protocol. They may, for example, establish the sequence of acts to be implemented, how foreign courts and/or representatives will participate, the order in which the arguments are made, how decisions will be reached, and what the procedure for coordinating and resolving procedural, administrative, or preliminary issues relating to the joint hearing will be.

After the joint hearing, courts may also communicate directly without the parties present to resolve outstanding issues. However, the insolvency protocol should establish expeditious procedures in order to avoid unnecessary and costly hearings as far as possible.

Attentive to the sovereignty and authority of each of the courts involved, the resolution expressly disclaims that the respective jurisdictions of the courts remain preserved in order to conduct hearings in accordance with the applicable procedural rules.

For all issues presented, the resolution created to regulate the issue of cross-border insolvency is timely and welcome, and especially because it includes important issues such as broad stakeholder participation and procedural efficiency combined with cost reduction.

Category: Real estate

Constitutionally guaranteed (article 5, XXII, Federal Constitution of 1988), the right to property is defined as the right of the owner to use, enjoy, dispose of, and claim the thing (article 1,228, Civil Code).

When the right of ownership is exercised by two or more people over the same property, the so-called common condominium or co-ownership is given, in which the owners become owners of an ideal fraction of the whole. Thus, it is not possible for the co-owners to exercise their rights independently over the entirety of the thing, but only their ideal parts.

In the light of article 87 of the Civil Code, assets that cannot be fractioned without changes in their substance, considerable decrease in their value or impairment of the use for which they are intended, such as buildings, especially urban buildings, and housing units are indivisible. Co-ownership is assigned, for example, to properties acquired by couples (in the proportion of half for each spouse) or properties allocated in inventory to various heirs (in the proportion attributed to each of them in the division).

In a recent decision, the Third Panel of the Superior Court of Appeals (STJ) assessed the limit of the exercise of ownership on indivisible real property when one of the co-owners has debt that, collected in court, gives rise to attachment of the property.

The decision modified the judgment handed down by the Court of Appeals of the Federal District and Territories (TJDFT), which ruling for the impossibility of full expropriation via judicial auction of property held in a condominium pro indiviso, on the grounds that the attachment fell only on the share (50%), not on the entire property. Thus, the STJ allowed full judicial auction of indivisible property duly registered under co-ownership and whose attachment recorded only the debtor's share.

In her opinion, Justice Nancy Andrighi pointed out that banning foreclosure on the good makes attachment ineffective, since it prevents satisfaction of the creditor. On the other hand, article 655-B of the Code of Civil Procedure provides that the right of the co-owner when the attachment is executed must be observed. A very relevant point of the decision handed down by the Supreme Court is the clear protection of the real right of ownership of the condominium unrelated to the execution, stating that the attachment cannot advance on the share of the party that is not a debtor in the proceedings, even if this fact does not prevent the disposal of the entire property.

In clear grammatical and declarative interpretation of the rule, the decision also demonstrates the intention of the civil procedural legislature to (i) give greater effectiveness to the foreclosure procedure to satisfy the creditor's right by removing formal obstacles and expanding the foreclosure measures and (ii) safeguarding the ownership right of the co-owner.

The precedent of the STJ gives the co-owner direct of preference in the auction of the property in equal positions or, if it does not want or is not able to exercise such right, the possibility of being compensated financially for the proportion of ownership it holds in the property, considered to be the value established in the judicial appraisal for the purposes of the auction and not that which is actually obtained in the judicial auction.

In fact, when analyzing article 843 of the Code of Civil Procedure, which upheld the decision handed down by the Supreme Court, it is clear that the legislature intended to protect the assets of the co-owner foreign to the foreclosure process by the measures listed above.

Thus, the STJ ruled that the creditor cannot have his credit right reduced due to the co-ownership, provided that the right of the co-owner is protected.

In practice, although the attachment falls only on the debtor's part, the co-owner may not prevent the sale of the property as a whole, unless he exercises his right of preference and acquires the entirety of the property. If he does not do so, the co-owner will then be reimbursed for the value attributed to the property in the judicial assessment, proportionally to his share.

This decision emphasizes the need to carry out rigorous due diligence when acquiring real property, since a request for a freeze to prevent continuation of foreclosure, brought by the co-owner outside of it, now has a significant precedent in the opposite direction, which allows continuation of the judicial sale and possible conversion of the co-owner's real property right in the equivalent in cash.

Category: Infrastructure and energy

Laura Souza, Gabriel Rapoport Furtado, Ana Clara Gemeinder de Mendonça and Fernanda Quiroga.

Introduction

Global concern regarding the acceleration of the foray of renewable and sustainable energy sources in the energy matrix has contributed strongly to the rise of the green hydrogen (Green H2) market. To the same extent, the number of working groups and initiatives aimed at the promotion, production, distribution, and export of green H2, such as the green h2 hubs, is growing

The goal of the hubs is to enable the use of green hydrogen as a new source of sustainable energy, concentrating private and governmental efforts (local and international) in the definition and implementation of effective policies: partnerships are formed with a view to sharing expertise, technology, and resources that allow the installation of projects supplied with clean energy in strategic locations.

Several countries have mobilized to develop preliminary and feasibility studies in order to effectively implement innovative projects aimed at the production and/or export of green H2. We highlight below some countries that deserve special attention in the development of these projects, in addition to similar initiatives in Brazil and practical aspects of the viability of hubs. A brief summary of relevant international experiences may also be accessed in our Electronic book Green Hydrogen heating up.

The international experience

An important project in Europe is the hydrogen hub in Hamburg, Germany. It arose with the signing of a letter of intent between the giants Shell, Mitsubishi Heavy Industries, Vattenfall, and Wärme Hamburg. In order to enable large-scale green hydrogen production and decarbonization of the energy system and base industries by 2025, the feasibility study for this project includes the transformation of a coal-based plant to the production of green hydrogen with an initial potential of 100 MW, fed by photovoltaic and wind plants.

Also in Europe, the Dutch government estimates that the green hydrogen sector has regulations similar to the electricity and natural gas sectors. The country is conducting research for the use of existing gas networks for the transportation of hydrogen, connected to neighboring countries. This structural advantage is expected to highlight the Netherlands as a relevant hub in north-western Europe.

In the UK, the North of Scotland Hydrogen Programme at the Port of Cromarty Firth is intended for the development of a state-of-the-art hub to produce, store, and distribute hydrogen to the region and other parts of the UK and Europe. The nearest distilleries and ports should be the first to benefit from the clean fuel.

In Saudi Arabia, a green hydrogen project with investment valued at US$5 billion is underway. The proposal is to produce around 650 tons of green hydrogen per day, in an integrated way with the project of the smart city of Neom, close to the country's borders with Egypt and Jordan.

Asia's most relevant project is developed by the state-owned firm Sinopec, China's largest hydrogen producer. The launch is scheduled for no later than 2022 in Inner Mongolia. The estimated production of the project, whose approximate investment is 2.6 billion yuan, is 20,000 tons of green H2. The initial phase of production is valued at 10,000 tons and supported by a solar power station with a capacity of 270 MW and a wind farm of 50 MW.

Sinopec also plans to develop a green hydrogen plant with the same annual capacity in northwest China in Xinjiang, supported by a 1,000 MW solar power station.

In South America, Chile has already demonstrated its intention to become an internationally recognized green hydrogen hub, having presented its National Green Hydrogen Strategy in 2020. The Chilean Ministry of Energy expects that the Region of Magellan (Magallanes), in the south of the country, can use its great wind potential and petrochemical and port experience to become a reference in the production and export of green hydrogen. It is also expected that the northern region of the country, focused on solar energy production, will be a reference in the production of green H2.

Hubs in Brazil

Also in Brazil one can perceive formation of the first productive agglomerations aimed at the production, distribution, and export of green hydrogen. Despite the still incipient regulation of the activity in Brazil, they are gaining relevance, among them the recent initiatives led by the Industrial and Port Complex of Pecém/CE and the Port of Suape/PE.

With regard to the Pecém Complex, a port industrial complex and logistics hub created in order to develop industrial production in the Northeast region of Brazil, notably in Ceará, we highlight the memoranda of understanding (MoUs) entered into with companies interested in installing in the complex, especially White Martins and Fortescue, to explore an on-site hydrogen hub, with investments expected at US$ 6 billion, and produce more than 15 million tons of green H2 by 2030.

To make the venture possible, the Pecém Complex has a vantageous location, which provides competitive logistics costs for the interconnection of the country to relevant consumer centers, such as Europe and the United States, and has a partnership with the Port of Rotterdam, perhaps the main green hydrogen hub in Europe. Other advantages are a sophisticated business ecosystem and an export processing zone capable of reducing costs for local production of green H2.

The Pecém Complex is the result of a coordinated state effort, exemplified by the publication of State Decree No. 34,003/21, which established a strategic working group of which the Federal University of Ceará, the Federation of Industries of the State of Ceará (Fiec), and the government of the State of Ceará are a part. This group was responsible for developing and presenting an action plan focused on the development of public policies for renewable energies aimed at sustainable development and the configuration and implementation of the future green H2 hub in Ceará.

Similar efforts have been conducted by the State of Pernambuco, with a view to securing its position among the global hubs of green H2. State Decree No. 50,731, issued on May 18, 2021, established a multilateral working group within the state executive branch with the purpose of discussing and defining the guidelines for the development of green H2 production projects.

The orbital axis of Pernambuco's efforts also passes through its main port asset, the Port of Suape, one of the largest and most relevant public ports in the Northeast Region, located in the Metropolitan Region of Recife and also found within a port industrial complex aimed at promoting regional economic development. Recently, the Port of Suape published Ordinance No. 62/2021, which grants discounts on its tariff table for vessels powered by green H2.

Pernambuco's efforts seem to have an effect: feasibility studies have already begun on the Green H2 Plant of Pernambuco, headed by Oair Brasil, a French company whose main activity is the production of electricity from alternative sources. It is estimated that the project will be able to mobilize investments in the order of US$ 3.8 billion, which makes it one of the most relevant projects underway throughout the state.

Practical aspects of enabling hubs

Green H2 hubs gain greater relevance in a context where production costs of green H2 are still much larger than those of production of gray or blue H2 (gray H2 is that originating from fossil sources such as natural gas, oil, and coal, and blue H2 is generated by fossil sources, but whose carbon emissions are captured to neutralize the pollution generated).

The production of 1 kg of green H2 via industrial production costs about 5 euros, compared to only 1.5 euro costs for the production of 1 kg of gray H2.^[1] The competitive disadvantage of green H2 continues to be in comparison with blue H2, with the cost of local production of the latter valued at half to one third of that registered with the first.^[2]

To change this reality, the public and private sectors will need to join forces and make heavy investments. Published in January of 2020, the latest Hydrogen Council report entitled Path to Hydrogen Competitiveness: A Cost Perspective, shows that with the robust increase in investment in the sector, the cost of green hydrogen production, storage, and distribution solutions is expected to fall by 50% by 2030.

With more than 80% of its renewable electric matrix, Brazil is a strong candidate for the world's leading player in the production and export of green H2.^[3] For this to be feasible in the near future, it is essential to create public and private mechanisms to support and encourage production and marketing of that fuel. The creation of green H2 hubs thus represents an important pillar to make it economically competitive in relation to other energy sources.

The following are some mechanisms that can be adopted under green H2 hubs:

1. Creation of special areas with tax incentives

Regional, state, and/or municipal tax incentives are important mechanisms to promote investment, as they contribute to reducing costs and increasing the competitiveness of green H2. To this end, it is essential that public and private efforts be combined, as well as alignment of incentive interests in the sector.

In this sense, the Pecém Complex has proved to be a reference of success: in addition to regional tax incentives (because they are located in the region of the Northeast Development Board (Sudene)), state^[4] and municipal, companies installed in export processing zones (MRAs) also have some other taxes and contributions suspended, such as Import Tax and Tax on Industrialized Products.

Tariff incentives for companies that use green H2 as a productive input, in the Hub itself, are also strategies to promote the sector. In this sense, Ordinance No. 62/21, highlighted earlier, confers tariff discounts for vessels powered by green H2.

2. Integration with other industries

The feasibility of green hydrogen projects in strategic areas, where other infrastructure projects (such as hydroelectric, thermoelectric, ports, water, and/or sewage treatment plants) are already located, can be an interesting mechanism to make green H2 projects even more economically attractive.

One possibility would be cogeneration of electricity, within the scope of hydroelectric and thermoelectric plants, in a dynamic similar to that of cogeneration in the production of sugar and ethanol, in which the energy produced from biomass is used in the plant itself and sold to the market.

The production of green hydrogen can also be integrated with port concessions, in which there is remunerated assignment of a certain area for the implementation of green H2 production plants or concession that provides for the implementation of pipelines, to enable the internal transport of green H2. A successful example of port concession integration with green H2 projects is the Port of Suape.

An alternative would be in the context of concessions for water and sewage treatment services, also with the provision of remunerated assignment of an area for the construction of a green H2 production plant or even the integration of sewage treatment plants with power plants by biomass or solid waste.

3. Fostering partnerships between public and private entities

Cooperation and constant dialogue between the public sector (through states, municipalities, and their respective funding agencies) and private partners are essential to make green hydrogen more competitive. It is of interest that states and municipalities establish MoUs with private partners and that promote public policies to assist in the development of regional industry.

The Pecém Complex has as its shareholders the government of Ceará (70%) and the Port of Rotterdam (30%), a partnership that brings in a competitive advantage for the project, as the Port of Rotterdam has been working with various partners to develop a large-scale hydrogen network with the intention of transforming itself into an international hub for the production, import, application, and transport of hydrogen to Europe.

At the international level, fostering public-private partnerships has also proved to be sufficiently effective: in March of 2020, the European Commission launched the European Clean Hydrogen Alliance, a public-private partnership bringing together investors and government, institutional, and industrial partners.

Next steps

The attempt to make green H2 economically attractive and competitive requires time, joint effort of the public and private sectors, and targeted mechanisms for market promotion.

In December of 2021, the National Hydrogen Plan will be announced, which is expected to regulate the development of the hydrogen production chain. The coming months will therefore be decisive in the construction of the public policy of the sector.

Considering this scenario, it is essential that the private sector make effort to study possible regulatory designs to promote green H2, dialogue with public agencies, and provide input to the Ministry of Mines and Energy (MME), the Ministry of Science, Technology, Innovations, and Communications (MCTI), the Ministry of Regional Development (MDR), and the Energy Research Company (EPE).

The series of articles on the green H2 sector, the result of studies by the Machado Meyer Advogados legal team, is a small example of what can be done to foster the sector.

^[1]    The Agillity Effect. Green Hydrogen will soon be competitive. Available at: https://www.theagilityeffect.com/br/article/o-hidrogenio-verde-em-breve-sera-competitivo/. Accessed: July 9, 2021.

^[2]    EPBR Agency. Green hydrogen could stay competitive by 2030, with renewables more economical. Available at: https://epbr.com.br/hidrogenio-verde-pode-ficar-competitivo-ate-2030-com-renovaveis-mais-em-conta/. Accessed: July 10, 2021.

^[3]    Brazilian Hydrogen Association. Available at: http://abh2.com.br/index.php/pt/. Accessed on July 9, 2021.

^[4]    Details on state incentives can be found at the Investor's Guide to Tax Incentives, Investor's Guide - Environmental Licensing and Investor's Guide - Financing Lines, developed by the Economic Development Agency of the State of Ceará (Adece), and in State Decree No. 32,438/17, information about the Industrial Development Fund of Ceará (IFRI).

Category: Litigation

Although it has been recognized in Brazil’s legal system for many years, the institute of the procedural legal deal (NJP) had its adoption formalized and systematized only with the new Code of Civil Procedure (Federal Law No. 13,105/15 - CPC).

From the perspective of autonomy of will, the head paragraph of article 190 of the CPC expressly provides, in the causes that deal with rights that admit voluntary settlement, that it is lawful for the parties to stipulate changes in the procedure, to adjust it to the specificities of the dispute, and to agree on burdens, powers, prerogatives, and procedural duties, in a preparatory or incidental manner.

In the words of Fredie Didier Junior,^[1] the NJP is "the voluntary legal fact, which grants factual support for the litigant to be granted the power to regulate, within the limits set in the legal system itself, certain procedural legal situations or change the procedure". Adriana Buchmann affirms the NJP as "instrument of instruments" inasmuch as it is a kind of "agreement entered into in the midst of discord, but not as an equation of it, but with the sole need to organize the terms in which the deal will take place".

From the moment it is entered into, provided it is lawful, precise, and determined, regardless of any judicial approval, the NJP already produces its due effects. In fact, in the NJP, "the judicial evaluation takes place after the case dealt with has been consummated, and is not presented as a requirement for its improvement, but only to verify its legality".^[2]

As an instrument resulting from the autonomy of the parties' will, the NJP is not subject to the judge's assessment of suitability. So much so that the sole paragraph of article 190 of the CPC provides that the terms of the NJP will only have their application prevented "in cases of nullity or misuse in an adhesion contract or where any party is in a clear situation of vulnerability". The interference of the Judiciary, according to the CPC, would only be possible in these scenarios.

Recently, the Superior Court of Appeals (STJ) reinforced this understanding upon deciding REsp No. 1,810,444/SP, decided by the 4th Panel with Justice Luis Felipe Salomão drafting the opinion. It was established that, "when the exclusive prerogatives and interests of the parties are at stake, it will be up to the judge to interfere only to supervise their legality". And concluding: "if, however, in some way, the convention entails restriction or conditioning on the judge’s legal situation, it is intuitive that the deal will only be validly consummated if the judge himself acquiesces".

The STJ denied relief to the special appeal brought, on the grounds that the subject matter of the NJP transcended the limits for which the concept was conceived. In that case, the parties agreed that if a certain debt were to be in default, "the creditor would be authorized to obtain an injunction freezing the debtor party's financial assets, 'on an ex parte and without the need to post a bond".

The 4th Panel of the STJ, maintaining an understanding of the Court of Appeals of the State of São Paulo (TJSP), denied relief to the special appeal because it found that the subject matter of the NJP was deferral of the adversarial process to a moment after the analysis and assessment of the interim remedy of freeze if assets, which, at least in this case, sounded like a direct affront to the powers and acts inherent to the magistrate , among them the general power of discretion.

Highlighting the case of a transaction involving the adversarial process does not make one of the parties vulnerable, which will necessarily require a case-by-case assessment of the situation under discussion, the judgment established that "every time suppression of the adversarial process leads to an inequality of weapons in the case, the procedural deal, or the clause that provides for such a situation, should be considered invalid".

As can be seen, the STJ has not completely ruled out the possibility for the parties signing an NJP that aims to discuss aspects related to the adversarial process. For the High Court, provided that "the transaction about the adversarial process does not make one of the parties vulnerable, given the peculiarities of the case, it is possible to recognize its validity". Given what was decided in REsp No. 1,810,444/SP, the vulnerability or lack thereof of one of the parties should require prior and targeted analysis.

There are other decisions that have been discussing the limits and guidelines of NJPs. The TJSP, for example, on some occasions, has already rejected the possibility for the parties to establish NJPs that have the purpose of agreeing on:

• clauses electing foreign jurisdictions (AI No. 2094625-02.2017.8.26.0000^[3] and 2127099-89.2018.8.26.0000);^[4]
• service of process by delivery of a letter with acknowledgement of receipt at the defendant's address, without the need for a personal signature of the defendant (AI No. 2281669-96.2019.8.26.0000);^[5]
• judicial seal (AI No. 2030704-64.2020.8.26.0000);^[6] and
• percentage of attorneys' fees in litigation (AI No. 2096891-20.2021.8.26.0000).^[7]

Are the above cases found within the scenarios in which the judiciary should interfere in NJPs? Or rather, would the subject matters of these transactions be, in fact, based on the premise established in the sole paragraph of article 190 of the CPC and corroborated by the STJ in REsp No. 1,810,444/SP, interfering in some way with the powers inherent to the judge or, still, contributing to a possible and inapposite vulnerability of one of the parties? The answer to these questions is unknown, since the case law has not yet presented a settled position on the guidelines for NJPs.

^[1] DIDIER JR., Fredie. Civil Procedural Law Course: general part and the cognizance process. 20 ed. Salvador: JusPodivm, 2018, p. 439.

^[2] THEODORO JR., Humberto. Course of civil procedural law. v. 1. 59. ed. (2. Reimp.) rev., current. and expanded, Rio de Janeiro: Forense, 2018, p. 502.

^[3] TJ/SP, Interlocutory Appeal No. 2094625-02.2017.8.26.0000, Opinion drafted by Appellate Judge Hélio Nogueira, 22nd Chamber of Private Law, decided on September 21, 2017, DJe October 6, 2017.

^[4] TJ/SP, Interlocutory Appeal No. 2127099-89.2018.8.26.0000, Opinion drafted by Appellate Judge Jairo Brazil Fontes Oliveira, 15th Chamber of Private Law, decided on October 6, 2020, DJe October 7, 2020.

^[5] TJ/SP, Interlocutory Appeal No. 2281669-96.2019.8.26.0000, Opinion drafted by Appellate Judge Almeida Sampaio, 25th Chamber of Private Law, decided on January 28, 2021, DJe February 2, 2021.

^[6] TJ/SP, Interlocutory Appeal No. 2030704-64.2020.8.26.0000, Opinion drafted by Appellate Judge Cesar Ciampolini, 1st Chamber Reserved for Business Law, decided on August 20, 2020, DJe August 20, 2020.

^[7] TJ/SP, Interlocutory Appeal No. 2096891-20.2021.8.26.0000, Opinion drafted by Appellate Judge Ana Lucia Romanhole Martucci, 33rd Chamber of Private Law, j. May 18, 2021, DJe May 18, 2021.

Category: Tax

Since the promulgation of the Federal Constitution of 1988 (CF/88), a widely discussed topic has been the selectivity applicable to the Tax on Circulation of Goods and Services (ICMS). Amid wide-ranging debates regarding tax reform and changes in the constitutional tax system – including a proposal that aims to end the selectivity of the consumption tax – the question of the scope of selectivity for the ICMS has not yet been settled.

The CF/88 adopted the selectivity technique for the ICMS and for the Tax on Industrialized Products (IPI). However, the constitutional text used different expressions when dealing with the application of this technique for each tax, providing that the IPI "may be selective, depending on the essentiality of the product" (art. 153, paragraph 3, I) and the ICMS "may be selective, depending on the essentiality of the goods and services" (article 155, paragraph 2, III).

In both cases, the criterion selected by the framers of the Constitution to guide the implementation of selectivity by political entities was essentiality, that is, essential products should be taxed in a less burdensome manner, while less essential (superfluous) products will be subject to more burdensome taxation.

Analyzing the constitutional text, the main question is: when using the word "may", the CF/88 would have conferred on the state legislature the power to adopt selectivity in the setting of ICMS rates? If so, what would be the reach of this option?

This important controversy is being reviewed by the Federal Supreme Court (STF) in Extraordinary Appeal (RE) No. 714.139, Topic 745 of the General Repercussion.

In the specific case, the taxpayer requires recognition of the unconstitutionality of the rate of 25% levied on the supply of electricity and the provision of communication services, instituted by the state of Santa Catarina (SC), where the general rate is 17%. In other words, electricity and communication services are taxed with a much higher burden than general taxation, applying the same level adopted for products expressly considered superfluous by the legislation (weapons, ammunition, perfumes, cigarettes, etc.).^[1]

This practice is not restricted to Santa Catarina. Other states rely on the argument that selectivity is an optional technique for the ICMS and set up increased rates for products that are clearly essential.

The recurring taxpayer in Topic 745 maintains the unconstitutionality of the legislation of Santa Catarina that uses the onerous rate applicable to superfluous products to also tax electricity and communication services, in violation of the selectivity imposed by the CF/88. In the taxpayer's view, even if the adoption of selectivity is optional for the ICMS, once differentiated rates are established (to the detriment of a single rate), essentiality is a mandatory criterion to be followed by the states. Based on this same argument, the laws of various states that impose exorbitant rates on essential items are questioned in the judiciary. The states argue that, in the case of ICMS, the CF/88 gave the state legislatures the power to choose whether or not to follow the technique of selectivity when setting rates.

The Federal Attorney General's Office presented an opinion in favor of partial granting of relief to the appeal, agreeing that the legislation of Santa Catarina is incompatible with the principle of selectivity due to essentiality when providing rates higher than the general rate for electricity and communication services. It also recommended modulating the effects of the decision.

Thus far, Justice Marco Aurélio (reporting judge), Justice Alexandre de Moraes (who inaugurated a dissenting opinion), Justice Dias Toffoli, and Justice Carmen Lucia (who concurred with the reporting jdge) voted. The judgment was suspended due to request for a review of the record by Justice Gilmar Mendes and should be resumed soon.

The reporting judge, Justice Marco Aurelio, ruled unconstitutional the legislation of Santa Catarina that set the rate of 25% for electricity and communication services as he considered them a clearly essential good and service, ordering the levy of the general rate of 17%. In the Justice's view, "the option to use the method does not mean that there is no essential nucleus in the precept to be preserved" such that "once selectivity is adopted, the criterion may be nothing other than essentiality". From the moment the state legislature began to encompass differentiated rates for the ICMS, the gradation of the rates must necessarily be determined by the essentiality.

Justice Alexandre de Moraes voted to partially grant relief to the appeal and rejected only the application of the 25% tax rate on the communication services. With regard to electricity, the Justice considered the state legislation to have "applied the principle of selectivity of the ICMS (...) together with the principle of contributory capacity by establishing extra-taxation effects for it" by setting the 12% rate for classes in which consumption is considered essential, disincentivizing rampant consumption and energy waste.

The higher levels of more significant and relevant energy consumption, however, do not reflect waste, but industrial, commercial, and productive use, reinforcing and not subtracting from its essentiality.

The vote of Justice Marco Aurelio, with Justice Dias Toffoli and Justice Carmen Lucia concurring, reflected the unquestionable essentiality of electricity and communication services, which became even more evident during the pandemic.

Of course, in the middle of the application of selectivity, the principle of contributory capacity and extra-taxation are contemplated to some extent, because superfluous products purchased by the more affluent classes are taxed more heavily. However, one cannot rely on these other precepts of the CF/88 to allow electricity and other essential products to be taxed at levels equivalent, and sometimes higher, to those of obviously superfluous products such as weapons, cosmetics, cigarettes, alcoholic beverages, among others.

Despite concurring with the reporting judge on the merits, Justice Dias Toffoli proposed softening the effects of the decision so that it is effective only as of the beginning of the next fiscal year, leaving out lawsuits filed up to the eve of publication of the judgment on the merits.

This discussion is not only relevant for electricity and communication services. States often institute heavy taxation for other clearly essential products, ignoring the CF/88.

In this sense, Justice Marco Aurelio himself, when presenting justifications that confirm the essentiality of electricity and communication services (justifications that are even expendable), brings to light Law No. 7,883/89, which deals with limitations on the right to strike. This law, in article 10, subsection I, considers as essential services or activities "water treatment and supply, production and distribution of electricity, gas and fuels", in addition to other activities listed in the other subsections.

Fuels are an example of products often taxed at very high levels. The state of Amazonas, for example, applies the rate of 25% for operations with natural gas, gasoline, and fuel alcohol, in the same point that includes jewelry, luxury cars, weapons, ammunition and other superfluous goods. Several other examples can be found in the laws of all states.

Taxpayers should be aware of the outcome of this important case and evaluate their strategy for seeking judicial measures to avoid the unconstitutional levying of increased ICMS rates for the products stated, especially considering the possibility of softening the effects of any final decision by the Federal Supreme Court.

^[1] In relation to the supply of electricity, in addition to the general rate of 25%, the state of Santa Catarina established a more beneficial treatment for some specific situations.

Category: Tax

"The ignorant affirm, the wise doubt, the sensible reflect", said the Greek philosopher Aristotle, stating that it fits well to the context of recent tax disputes reviewed by the Federal Supreme Court (STF) and deserves to be remembered because of the decision handed down in the record of Declaratory Action of Constitutionality (ADC) No. 49. ADC 49 reaffirms the settled case law of the higher courts: mere displacement of goods from one to another establishment of the same taxpayer is not a taxable event for the ICMS (ARE No. 1,255,885/MS – Topic 1,099, ARE No. 1,213,482/RS-AgR, Precedent of STJ No. 166, REsp No. 1,704,133/DF-AgInt, REsp No. 1,125,133/SP – Topic 259, among others).

In issuing its decision, the Federal Supreme Court ruled that the levying of the tax presupposes transfer of ownership of the asset, with its collection in the event of displacement of the goods between establishments of the same legal entity being undue, whether in internal operations or in interstate operations.[1] To this end, it was established that the movement of goods must be legal (and not merely physical), which presupposes an actual act of trade, for which the goal is profit and the transfer of possession or ownership contributes.

From this perspective, in the context of ADC 49, unconstitutionality was declared of articles 11, paragraph 3, II, 12, I, in the section "even if to another establishment of the same holder", and 13, paragraph 4, of Complementary Law No. 87/96.[2]

If this is a well-known and settled position in case law, what differentiates the judgment in ADC 49 from the other cases reviewed by the higher courts?

In this regard, it should be recalled that the decision handed down in a declaratory action of constitutionality does not present itself as a mere precedent. This is because, for the first time, the High Court reviewed the matter under the system of concentrated control, which, consequently, guarantees the erga omnes effect of the judgment. The recent understanding stated by the Federal Supreme Court binds not only the parties involved in the course of or in other cases in which the matter is discussed, but also all ICMS taxpayers (even without a legal action). In this sense, the immediate consequence of this new judgment is the setting aside of the rule declared unconstitutional from the Brazilian legal system.

Another question posed is: what are the actual impacts of ADC 49 on goods transfer operations between the same holder's establishments? The question takes into account the debates regarding the write-off of ICMS debt, the emptying of certain special ICMS regimes/tax benefits, and the autonomy of establishments. Let's take a closer look at each of these points.

With regard to the first, the question pertains to the need to reverse the credit arising from these transactions, since tax is not levied on the exit of the goods under transfer. This inquiry stems from an interpretation of the constitutional text itself, or better stated, from the assertion that exemption or non-levy will result in the annulment of the credit for prior transactions – article 155, paragraph 2, II, 'b'.[3]

Despite the risk of the absence of any express ruling on the subject, there seem to be arguments to contend that the transfer of goods between establishments of the same taxpayer is nothing more than a physical exit, and does not show itself to be a "circulation operation" of the product in the economic chain. It doesn't even constitute a "non-levy of the ICMS", since the constitutional rule providing for reversal in cases such as this presupposes that there would be the closure of the chain of taxation of the product (which does not occur in the case of an exit transfer, considering that the next operation in the shipment would be subject to the levying of ICMS).

This conclusion reinforces the fact that Complementary Law No. 87/96 (article 21, paragraph 3)[4] ensures that exemption or non-taxation in the prior stage of the chain does not prevent the use of the ICMS credit resulting from subsequent transactions, subject to tax, with the same goods.

Thus, there seems to be arguments to contend that reversal of credit – in the case of transfer of goods – would violate the fundamental principle of non-cumulation, since it imposes on taxpayers full payment of the tax without the possibility of a credit, due to the simple physical movement of the good.

Another major debate involves the possible losses that the Federal Supreme Court’s decision may bring about for the ICMS tax incentives conditioned on the payment of the tax at the time of the transfer. Regarding this second point, the discussion derives from the fact that various States grant tax benefits whose effectiveness does not dispense with the prominence the ICMS has in the exit of goods to be transferred to establishments of the same taxpayer.

Despite the peculiarities of each case, upon a first analysis, we believe it is possible to argue that the beneficiaries of these differentiated tax treatments could continue to benefit from these tax incentives. Therefore, there seem to be two legal grounds that foster this possibility:

• Normative and/or granting acts of ICMS benefits are specific standards and, as such, should prevail over the general standards; and
• Compliance with the requirements established by Complementary Law 160/17 and ICMS AgreementNo. 190/2017 should ensure the constitutionality of the ICMS benefits, per the terms reintroduced into the legal system.

Finally, another important point of discussion concerns the repercussions on the validity of the precept of autonomy of establishments in the face of the declaration of the unconstitutionality of article 11, paragraph 3, II, of Complementary Law No. 87/96. We believe there are grounds for contending that, once the article expressly providing for this autonomy was declared unconstitutional, the possibility to concentrate ICMS debts and credits in the parent establishment of the legal entity (or in another establishment) would arise. However, despite this possibility, the Public Administration could claim that:

• ADC 49 does not set aside the rule of independence of establishments, whereas other rules of the aforementioned supplementary law were not affected by the decision – in particular articles 17 and 25;[5] and
• regardless of the alleged absence of the principle of autonomy of establishments, the fundamental principles of the federative pact and the tax order are still in effect, which would set aside the duty of the state to accept ICMS credits related to payments made in other states.

Given this context, it is clear that the position established by the Federal Supreme Court in ADC 49, in addition to reiterating settled case law, has led to the confrontation of possible new judicial obstacles, if the Federal Supreme Court does not clarify the scope of its decision – in the context of motions for clarification pending judgment – from an integrated analysis of the Brazilian tax system.

For now, taxpayers must wait patiently for the final deliberation on the matter, in order to mitigate some of the discussions raised above, by examining the scope of the decision regarding autonomy of establishments and possible moderation of effects. Alternatively, they can implement complex restructurings that, to a large extent, tend to increase the tax burden on their operations and which, in the event of a favorable judgment on the motion for clarification, should be revised and amended.

^[1] Headnotes of the judgment handed down in the record of ADC 49: CONSTITUTIONAL AND TAX LAW. DECLARATORY ACTION OF CONSTITUTIONALITY. ICMS. PHYSICAL DISPLACEMENT OF GOODS FROM ONE ESTABLISHMENT TO ANOTHER OF THE SAME OWNERSHIP. NO TAXABLE EVENT. PRECEDENTS OF THE COURT. NEED FOR LEGAL OPERATION WITH TRANSFER OF POSSESSION AND OWNERSHIP OF PROPERTY. SUIT DISMISSED. 1. While the law under analysis provides that the ICMS tax is subject to the departure of goods to an establishment located in another State, belonging to the same holder, the Judiciary has an understanding in favor of non-levying, a situation that exemplifies, immediately, clear legal uncertainty in the tax area. Therefore, the requirements provided for by Law No. 9,868/1999 for the processing and judgment of this ADC are fulfilled. 2. The displacement of goods between establishments of the same holder does not constitute a fact that triggers the levying of the ICMS, even if it is interstate circulation. Precedents. 3. The case of tax levy is a legal transaction carried out by a trader that entails circulation of goods and transmission of ownership to the final consumer. 4. Declaratory action dismissed, declaring the unconstitutionality of articles 11, paragraph 3, II, 12, I, in the section "even if to another establishment of the same holder", and 13, Paragraph4, of The Federal Supplementary Law No. 87, of September 13, 1996.

^[2] For didactic purposes, see what each of the above-mentioned legal provisions establishes:

Article 11. The place of operation or supply, for the purposes of collecting the tax and defining the responsible establishment, is: [...] Paragraph3 - For the purpose of this Supplementary Law, an establishment is the place, private or public, built or not, owned or belonging to third parties, where individuals or legal entities perform their activities on a temporary or permanent basis, as well as where goods are stored, also observing the following: [...] II - each establishment of the same holder is autonomous; [...]

Article 12. The triggering event of the tax is considered to be the moment of: I - the departure of goods from the taxpayer's establishment, even if to another establishment of the same holder; [...]

Article 13. The basis for calculating the tax is: [...] Paragraph 4 - At the exit of the goods to an establishment located in another State, belonging to the same holder, the basis for calculating the tax is: I - the amount corresponding to the most recent entry of the goods; II - the cost of the goods produced, thus understood as sum of the cost of raw material, secondary material, labor and packaging; III - in the case of non-industrialised goods, their current price on the wholesale market of the sending establishment. [...]

^[3] Article 155. [...] Paragraph 2 - The tax provided for in subsection II shall comply with the following: I. it shall be non-cumulative, offsetting what is due in each operation relating to the movement of goods or services with the amount charged in the previous ones by the same or another State or the Federal District; II. exemption or non-levying, unless otherwise determined by law: (a) it shall not entail credit for offsetting with the amount due in the following transactions or services; (b) it shall result in cancellation of the claim relating to prior transactions; [...]

^[4] Art. 21. The taxable person shall perform reversal of the tax for which he has been credited whenever the service is received or the goods enter into the establishment: [...] Paragraph 3 - The non-crediting or reversal referred to in paragraph 3 of article 20 and the head paragraph of this article do not prevent the use of the same credits in subsequent transactions, subject to tax, with the same goods.

^[5] Article 17. Where the freight amount, charged by establishment belonging to the same holder of the goods or by another establishment of a venture that maintains a relationship of interdependence with it, exceeds the normal price levels in force on the local market for similar service, contained in tables drawn up by the competent bodies, the excess value shall be made part of the price of the goods.

Sole paragraph. Two companies shall be considered interdependent when:

I - one of them, by itself, its partners, or shareholders, and their spouses or minor children, holds more than fifty percent of the other's capital;

II - the same person is part of both, as director, or partner with management functions, even if exercised under another denomination;

III - one of them leases or transfers to the other, in any way, a vehicle intended for the carriage of goods.

Article 25. For the purposes of the application of article 24, the debts and credits must be calculated for each establishment, offsetting the credit and debt balances between the establishments of the same taxable person located in the State.

Paragraph 1 - Credit balances accumulated from the date of publication of this Complementary Law by establishments that carry out transactions and services dealt with in subsection II of article 3 and its sole paragraph may be, in the proportion that these exits represent of the total of the exits performed by the establishment:

I - imputed by the taxable person to any establishment of his in the State;

II - if there is a remaining balance, transferred by the taxable person to other taxpayers of the same State, by issuing by the competent authority a document that recognizes the claim.

Paragraph 2 - State law may, in other cases of credit balances accumulated from the enactment of this Complementary Law, allow:

I - are imputed by the taxable person to any establishment of his in the State;

II - are transferred, under the conditions it defines, to other taxpayers of the same State.

Category: Tax

Leonardo Martins, Carolina Stephanie Borges de Amorim and Pedro de Lima Souza Alves

The Federal Supreme Court (STF) recently reaffirmed its position in relation to the unconstitutionality of the institution of a fire safety fee by the states. The decision on the subject was handed down in the judgment on a motion to resolve a divergence in the record of Extraordinary Appeal No. 1.179.245/MT.

As shown in the opinion of the Justice Carmen Lucia, the Federal Supreme Court ruled that "the public service of fire fighting and prevention cannot be taxed as a fee because it is a general and indivisible service related to public safety".

The judgment, which refers to the fee charged by Mato Grosso, follows the line of decisions established on previous occasions by the Federal Supreme Court, with an emphasis on the decisions issued in Extraordinary Appeal No. 643.247/RG and in direct actions of unconstitutionality No. 2,424/EC and 2,908/SE, in which the Federal Supreme Court found in favor of:

• the impossibility of institution of a fee aimed at the prevention of fires by municipalities;
• the exclusivity of the tax as a fee suited to pay for public security activities; and
• that the annual fire safety fee would have as a triggering fact the provision of a general and indivisible essential activity by the Fire Department, being of generic utility and to be funded by the revenue from

The position of the Federal Supreme Court has been replicated by the country's circuit courts. The Court of Appeals of Mato Grosso, for example, maintained in limine injunctive relief regarding a direct action of state unconstitutionality in order to suspend the collection of the Fire Safety Fee (Tacin) since January of 2020.

Despite the understanding in the case law, many states still require the annual fire safety fee for the Fire Department. This is the case, for example, of the State of Rio de Janeiro, where the fee is calculated based on the square footage of residential and non-residential properties, as provided for in Decree No. 3,856/80.