Originally published in the November 5 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Supreme Court has taken another step in favor of the taxpayer in its review of the constitutionality of Brazil’s controlled foreign corporation rules.
The issue at stake concerns the moment when Brazilian parent companies should be taxed on the profits of their controlled foreign corporations and foreign affiliates. Article 74 of Provisional Measure 2,158 of 2001 taxes parent companies on the earnings of their CFC at year-end, regardless of whether the profits have been distributed.
Until September 28, 2006, the government was winning the case by a 2-0 vote (of a total of 11 votes), as Justices Nelson Jobim (retired) and Ellen Gracie sided with the government in the dispute. In the September 28 session, Justices Marco Aurélio Mello and Sepúlveda Pertence (also retired) sided in favor of the National Confederation of Industry, which originally filed the lawsuit before the Supreme Court in December 2001 (Case 2,588).
At the time, Justice Ricardo Lewandowski requested the files of the case to deliver a separate opinion. Finally, on October 25, Lewandowski delivered his opinion in favor of the National Confederation of Industry, making the score 3-2 in favor of the taxpayer. Lewandowski said Brazilian parent companies should not be taxed on the profits of their CFCs and controlled foreign affiliates until the foreign profits have been distributed. In that session, Justice Carlos Ayres Britto requested the files to review the issue and deliver his opinion to the court.
David Roberto R. Soares da Silva