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Brazil: Supreme Court may rule on profit of companies co-connected or controlled from abroad

By Thiago de Aragao.

Ruling on the Direct Unconstitutionality Action (ADI) # 2.588, which provides for the levying of IR (Inland Revenue) and CSLL (Social Contribution over Profit) applicable to profits obtained by companies controlled from or co-connected abroad will be on Brazil's Supreme Federal Court agenda this Thursday.

The suit was filed on December 21, 2001, by the National Confederation of Industry (CNI), in light of Provisional Measure # 2.158-35/01, published during the Fernando Henrique Cardoso administration, against the levying of IR and CSLL on profits obtained by companies controlled from or co-connected abroad, independently from the availability of these amounts to the controlled or co-connected company in Brazil.

In its original petition, the CNI basically alleged the following:

  • The unconstitutionality of § 2, of article 43, of the National Tax Code, plus Complementary Law # 104/01. According to the entity, this provision allows the ordinary legislator to establish the moment of occurrence of the generator factor, and can even do so before the fact has actually taken place, which would be going against the provisions of article 153, subsection III, of the Federal Constitution, and the concept of income contained therein
  • defect pointed out in the heading of article 74 of Provisional Measure (PM) # 2.158-35/01, referring to the difference between co-connected and controlled companies
  • sole paragraph of article 74 of the PM defends the principles of retroactivity and perviousness

Four justices found that the ADI had grounds, or in other words, for the unconstitutionality of article 74 of Provisional Measure 2.158-35/01: Ellen Gracie (partially, considering "unconstitutional only as far as co-connected companies are concerned"), Marco Aurélio, Lewandowiski and Sepúlveda Pertence, the latter retired (substituted by Dias Toffoli).

Two justices found that the ADI did not have grounds, in other words, for the validity of article 74: Nelson Jobim (substituted by Cármen Lúcia) and Eros Grau (substituted by Luiz Fux).

Justices Carlos Britto, Celso de Mello, Joaquim Barbosa and Cezar Peluso have yet to cast their votes. Gilmar Mendes, due to his previous involvement in the Union Legal Offices (AGU), was impeded from voting.

Currently, the mentioned ADI is under request of review by Justice Carlos Britto.