Introduction: The High-Litigation Environment in Brazil

Brazil remains a structurally high-litigation jurisdiction, with limited prospects of meaningful short-term change. Recent figures indicate some reduction in the judicial backlog: the Judiciary entered 2026 with approximately 75 million pending cases, the lowest level recorded in the past six years. This improvement, however, must be viewed in context. In 2025, nearly 39.7 million new cases were filed, while approximately 44 million were resolved. These numbers reflect productivity gains, but also confirm the continued pressure placed on the court system. Even excluding stayed or provisionally archived proceedings, the net backlog remained at approximately 58.5 million cases at the end of 2025. More information can be found in Justiça em números 2026/Conselho Nacional de Justiça. – Brasília: CNJ, 2026.

The scale of litigation in Brazil is not merely quantitative. It is driven by regulatory complexity, interpretative instability, overlapping institutional competencies, and the widespread judicialisation of economic, regulatory, and institutional disputes. Tax litigation is one of the clearest examples of this dynamic. The stock of tax disputes is estimated to exceed BRL5.6 trillion, equivalent to approximately 75% of GDP, compared with an OECD (Organisation for Economic Co-operation and Development) average of around 0.28%. More than four million new tax cases are initiated each year, many arising from tax enforcement proceedings brought by public authorities. More information can be found in OECD (2023), OECD Economic Surveys: Brazil 2023, OECD Publishing, Paris, https://doi.org/10.1787/a2d6acac-en.

Tax litigation has therefore evolved from a consequence of individual disputes into a relevant economic variable. Legal uncertainty increases the cost of capital, affects long-term investment decisions, and encourages defensive litigation strategies, particularly in highly regulated and tax-intensive sectors. In this environment, effective dispute resolution increasingly depends on co-ordination between administrative and judicial bodies, as well as on the ability of the higher courts and the Administrative Council of Tax Appeals (Conselho Administrativo de Recursos Fiscais – CARF) to provide consistent and stable guidance. The central challenge remains reducing structural reliance on litigation without undermining taxpayers’ defence rights or the predictability required for efficient revenue collection.

Current Environment: Key Controversies

Against this backdrop, several tax controversies have become central to the agendas of taxpayers, tax authorities, and the Judiciary. These matters combine high economic relevance, significant interpretative divergence, and cross-sector effects. Machado Meyer has been actively involved in leading cases before the CARF, the Superior Court of Justice (Superior Tribunal de Justiça – STJ), and the Supreme Federal Court (Supremo Tribunal Federal STF). The following topics illustrate how recent precedents, legislative developments, and increasingly restrictive positions adopted by the tax authorities are shaping the current litigation landscape.

Goodwill

Goodwill amortisation remains one of the most contentious issues in Brazilian tax law. Disputes generally concern compliance with statutory requirements, the existence of a valid business purpose, and the distinction between legitimate tax planning and structures characterised by the tax authorities as artificial. In 2025, the issue remained highly prominent before the CARF’s First Section, with more than 180 decisions addressing, directly or indirectly, the deductibility of goodwill amortisation for IRPJ – Imposto de Renda sobre Pessoa Jurídica (Corporate Income Tax) and CSLL – Contribuição Social sobre o Lucro Líquido (Social Contribution on Net Profits) purposes.

The case law remains highly fact-sensitive. The CARF has accepted that the use of special-purpose vehicles (SPVs) does not, in itself, prevent goodwill amortisation, particularly where the structure is supported by commercial rationale. Tax assessments have nevertheless continued to be upheld in cases involving goodwill generated through intragroup transactions. The absence of economic substance and the lack of an effective merger of the investor’s and investee’s assets and liabilities have also been relied upon by both the tax authorities and the CARF to challenge deductions.

At the judicial level, the first goodwill amortisation cases have recently reached the STJ, which is expected to play a central role in defining the applicable legal standards. To date, the Court has attached considerable weight to the factual findings and legal conclusions of the lower courts, particularly when assessing whether appeals may be admitted for review, given the procedural restrictions on the reassessment of facts and evidence. In certain cases, the STJ has revisited concepts such as intragroup goodwill, validating intragroup goodwill accrued before Law 12.973/2014, at times departing from the approach adopted by appellate courts. The legal framework, however, remains unsettled, particularly in relation to abuse, business purpose, and artificiality.

The STJ has also indicated that formal compliance with statutory requirements is not necessarily sufficient, on its own, to secure deductibility. Economic substance, arm’s-length conditions, and a reasonable expectation of future profitability supporting the goodwill premium have been treated as relevant factors. At the same time, the Court has not rejected SPV structures as a matter of principle, instead adopting a case-by-case approach. Recent decisions also highlight the importance of procedural issues, including limits on factual review and the evidentiary burden applicable in cases involving allegations of abusive tax planning.

Stock options

Stock option plans have become increasingly prominent in Brazilian tax and labour litigation due to the ongoing debate over their legal characterisation, whether as commercial instruments or compensatory arrangements. The central issue is whether gains arise from an investment opportunity, involving market risk and payment of an exercise price, or from disguised remuneration for services.

At the judicial level, the STJ has addressed the matter under Theme No 1,226. The Court held that the legal nature of stock option plans must be determined by their actual characteristics, rather than by their formal designation or contractual labelling. The STJ emphasised that plans involving voluntariness, consideration through payment of an exercise price, and effective exposure to market risk tend to be classified as commercial arrangements and, therefore, are not treated as remuneration. Conversely, the absence of these elements may allow recharacterisation as compensatory, with corresponding tax and social security consequences.

Each plan, therefore, requires a fact-based assessment, consistent with the STJ’s substance-over-form approach. Contractual terminology and corporate structuring are not determinative. The relevant inquiry concerns the effective allocation of risks and benefits and the existence of a genuine investment dynamic. In this context, detailed contractual, corporate, and accounting documentation is essential to support the intended characterisation and align the plan with the criteria established in STJ case law.

Bonuses and commercial allowances

The tax treatment of bonuses and commercial allowances granted by suppliers to retailers is a significant controversy in PIS – Contribution para o Programa de Integração Social (Contribution for the Social Integration Programme) and COFINS – Contribuição para o Financiamento da Seguridade Social (Contribution for Social Security Financing) litigation. The STJ has selected the matter under the repetitive appeals system, in Theme No 1,412, which will determine whether those amounts should be included in the PIS and COFINS taxable basis under Article 1, Paragraph 3, V, “a”, of Laws No 10,637/2002 and No 10,833/2003.

Theme No 1,412 reflects a clear divergence within the STJ. The First Panel has adopted a more flexible approach, treating bonuses and discounts as reductions in acquisition cost, particularly when linked to pricing dynamics. The Second Panel has taken a stricter view, especially where it identifies commercial consideration, accounting offsets, or in-kind payments, treating such amounts as taxable revenue. The issue therefore requires a case-by-case analysis of the legal and economic nature of each arrangement. In many cases, bonuses reflect price adjustments or volume rebates that reduce acquisition cost without generating new taxable revenue. In others, the Federal Revenue Service (Receita Federal do Brasil – RFB) argues that they represent remuneration for services provided by retailers, such as promotional activities or product placement.

The controversy reflects a broader shift towards a substance-over-form approach, focused on whether there is an effective accession to wealth or merely a pricing adjustment. The STJ’s decision in Theme No 1,412 is expected to establish clearer criteria for distinguishing non-taxable adjustments from taxable revenue, with significant implications for accounting practices, contract structuring, and tax compliance in the retail and consumer sectors.

Government grants

Government grants, particularly those granted by Brazilian states in connection with the ICMS – Imposto sobre Circulação de Mercadorias e Serviços (value-added tax on goods, transportation, and communication services) tax and financial incentives, remain among the most sensitive issues in Brazilian tax litigation. After years of controversy over the exclusion of these benefits from the IRPJ and CSLL taxable bases, Law No 14,789/2023 fundamentally changed the applicable framework. The law revoked Article 30 of Law No 12,973/2014 and, as a general rule, now subjects revenues arising from government grants to the IRPJ, CSLL, PIS, and COFINS, while introducing an IRPJ tax credit subject to specific requirements.

This legislative change has reignited disputes, particularly because it interacts directly with prior STJ precedents. In EREsp – Embargos Em Recurso Especial (Special appeal motions staying the proceedings) No 1,517,492/PR, the Court held that the taxation of presumed ICMS credits by the IRPJ and the CSLL could violate the federative pact. In Theme No 1,182, the STJ established criteria for excluding other ICMS-related tax benefits from the federal taxable base. The new statutory regime therefore raises questions as to its compatibility with established case law and constitutional principles governing the allocation of taxing powers.

Several cases currently challenge the constitutionality of levying the PIS, COFINS, IRPJ, and CSLL on financial credits granted as government incentives. From the taxpayers’ perspective, there are consistent arguments that such amounts do not qualify as taxable revenue or available income, particularly where they derive from state public policies aimed at reducing tax burdens, fostering economic activity, or promoting regional development. The dispute also turns on the distinction between accounting recognition and taxable materiality. Even where such benefits are recognised in financial statements as revenue or as a reduction of liabilities, this does not necessarily imply a definitive inflow of wealth or an increase in income capable of inclusion in the PIS, COFINS, or income tax bases. The appropriate tax treatment therefore depends on whether there is an effective accession to wealth, as opposed to a mere accounting adjustment linked to public policy mechanisms.

Given the tension between Law No 14,789/2023, STJ precedents, and constitutional limits related to the concepts of revenue, income, and the federative pact, government grants are expected to remain a central issue in Brazilian tax litigation in the coming years. This relevance has been reinforced by the STJ’s selection of REsp – Recurso Especial (Special Appeal) No 2,221,127, No 2,171,374, No 2,188,361, and No 2,188,282, reported by Justice Regina Helena Costa, for judgment under the repetitive appeals regime (Theme No 1,416), which will result in a binding precedent on the matter.

Social economic subsidy in the ICMS taxable basis

Another significant controversy pending before the STF concerns the inclusion of economic subsidies granted to low-income electricity consumers in the ICMS taxable basis. The issue has been recognised as having general repercussions under Theme No 1,113, in RE – Recurso Extraordinário (Extraordinary Appeal) No 990,115/SP, a leading case conducted by Machado Meyer. The central question is whether Brazilian states may constitutionally tax amounts transferred under the federal public policy established by Law No 10,604/2002. In the decision under appeal, the lower court upheld the inclusion of the subsidy in the ICMS taxable basis on the grounds that the tax should apply to the total value of the electricity transaction, including the subsidised portion, which it considered part of the final tariff price.

The controversy has legal, economic, and social dimensions. From a legal perspective, the key issue is whether the subsidy, intended to compensate electricity distributors for applying reduced tariffs to low-income consumers, can be treated as part of the transaction price for ICMS purposes, or whether its inclusion violates constitutional limits on state taxing powers, principles of tax legality, and the federal regulatory framework governing the electricity sector. From an economic and social standpoint, the STF’s recognition of general repercussions already acknowledges that the outcome may impact state revenues, taxpayers, and, indirectly, the low-income consumers targeted by the policy.

The case is expected to have implications beyond the electricity sector, as it may define broader constitutional limits on the inclusion of subsidies and public-policy transfers in the taxable basis of consumption taxes. Taxpayers argue that the subsidy does not represent new wealth arising from a commercial transaction, but rather a regulatory and financial mechanism designed to preserve the economic and financial balance of concessions while implementing federal tariff policy. The STF’s forthcoming decision is therefore likely to provide relevant guidance on the interaction between state taxation, federal regulation, and sector-specific public policies, in a context where the ICMS continues to generate significant, high-stakes litigation.

Future Challenges: Emerging Areas of Litigation

In addition to ongoing disputes, Brazilian tax litigation is expected to be significantly shaped by emerging challenges arising from recent legislative reforms, the implementation of the consumption tax overhaul, and Brazil’s growing alignment with international tax standards. Although these developments are still undergoing regulatory and interpretative consolidation, they already indicate potential areas of substantial litigation. They are characterised by technical complexity, significant financial exposure, and the need for co-ordinated interaction among taxpayers, tax authorities, and adjudicatory bodies. As a result, they are likely to generate new disputes and increase pressure on the litigation system, particularly during the transition to the new tax framework and in areas involving evolving international standards.

Pillar II

Brazil’s implementation of Pillar II is expected to create new fronts of litigation. Law No 15,079/2024 introduced a CSLL surcharge structured as a Qualified Domestic Minimum Top-up Tax (QDMTT), aimed at ensuring minimum effective taxation of 15% for multinational groups subject to the GloBE – Global Anti-Base Erosion Rules (Pillar Two) rules. Key controversies are likely to arise, not only in relation to the legal nature and taxable basis of the surcharge, calculated by reference to GloBE income, but also in connection with specific provisions of the law, particularly Article 36.

Article 36 provides that the CSLL surcharge will be deemed unpaid if it becomes subject, directly or indirectly, to judicial or administrative challenge and, therefore, cannot be used as a credit under the GloBE framework. This rule is expected to face constitutional scrutiny, as it may be interpreted as indirectly restricting access to courts and limiting the exercise of defence rights. In this context, Pillar II is likely to generate both constitutional and international tax disputes, positioning it as a relevant new source of litigation in Brazil in the coming years.

Transfer pricing

Brazil’s new transfer pricing rules are also expected to generate significant controversies. Law No 14,596/2023 aligned the Brazilian framework with OECD standards by replacing the previous regime, based on fixed margins and more objective criteria, with a system grounded in the arm’s-length principle, requiring comparability analysis, assessment of economic substance, and robust documentation.

Important challenges are likely to arise in connection with method selection, identification of reliable comparables, particularly given the scarcity of domestic data, reliance on international commercial databases, market adjustments, and application of the interquartile range in situations of uncertainty. These elements introduce a higher degree of subjectivity and technical complexity compared with the prior regime. While convergence with international standards may reduce double taxation risks, the initial implementation phase is expected to generate disputes regarding the interpretation of technical criteria, the sufficiency of documentation, and the scope and depth of tax audits. Tax authorities are likely to adopt a more detailed and economically driven review approach, increasing the potential for controversy.

Additional areas of attention include potential conflicts involving Bilateral Advance Pricing Agreements (BAPAs) and Mutual Agreement Procedures (MAPs). Although these mechanisms are designed to provide greater certainty and mitigate double taxation, they may give rise to procedural and interpretative disputes, particularly in cases involving co-ordination between jurisdictions, timing mismatches, or divergent positions between competent authorities. Overall, the transition to the new transfer pricing framework is expected to reshape the litigation landscape, shifting disputes towards highly technical analyses and reinforcing the importance of consistent, well-supported economic and documentation positions.

The IBS and CBS in the ICMS taxable basis

The transition phase of the consumption tax reform already signals potential disputes arising from the interaction between existing taxes and the new value-added taxes. One of the most sensitive issues concerns the possible inclusion of the CBS – Contribuição Social sobre Bens e Serviços (Contribution on Goods and Services) and the IBS – Imposto sobre Bens e Serviços (Tax on Goods and Services) in the ICMS taxable basis during the period in which both regimes will coexist.

Although Constitutional Amendment No 132/2023 sought to reinforce neutrality, transparency, and simplicity, certain interpretations argue that the IBS and the CBS, as components of the value of the transaction, could be included in the ICMS taxable basis, particularly under a traditional reading of the Kandir Law (Supplementary Law No 87/1996). This interpretation is likely to be challenged, as it appears inconsistent with the rationale of the reform, may revive “tax on tax” discussions, and could generate cumulative effects incompatible with the new consumption tax model.

The absence of uniform interpretation among states, combined with the extended transition period through to 2033, increases the likelihood of significant litigation. This scenario may directly affect pricing, tax systems, compliance obligations, and the competitive position of taxpayers operating in different jurisdictions.

Procedural Law Issues

In addition to substantive controversies, the next cycle of Brazilian tax litigation is expected to be significantly influenced by procedural developments. The increased complexity of the new tax framework, the multiplicity of public entities involved, and the search for more efficient dispute resolution mechanisms are likely to shift part of the debate towards procedural matters. Key issues include jurisdiction, standing, institutional co-ordination, and the adequacy of available procedural avenues. In particular, discussions concerning the use of arbitration in tax matters and the definition of the competent courts for disputes involving the CBS and IBS are expected to gain prominence.

These topics are especially relevant during the transition phase of the tax reform, when avoiding conflicting decisions, procedural fragmentation, and additional pressure on the litigation system will be critical. Ensuring coherence across jurisdictions and procedural mechanisms will be essential to mitigate uncertainty and prevent a further increase in litigation.

Arbitration

Arbitration in tax matters has emerged as a relevant topic in Brazil, particularly in light of legislative initiatives aimed at expanding dispute resolution mechanisms. The discussion has gained traction due to the increasing complexity and volume of tax litigation and the need for more efficient and specialised adjudication. Recent bills have sought to introduce or regulate arbitration in tax disputes, especially in matters involving factual disputes, valuation issues, and highly technical questions. Among them, Bill No 4,257/2019 stands out, proposing the use of arbitration for federal tax controversies after the exhaustion of administrative proceedings, subject to specific eligibility criteria and procedural safeguards. Other initiatives, such as Bill No 3,667/2021, also consider arbitration in tax-enforcement contexts, particularly for disputes over guarantees and asset valuation.

These proposals generally emphasise that arbitration would be optional and limited in scope, while preserving core tax-law principles such as legality, publicity, and the non-waivability of tax credits. At the same time, they seek to introduce greater efficiency, technical expertise, and predictability into the resolution of complex disputes, particularly those involving large taxpayers and high-value assessments. Key points of debate include the extent to which tax matters are arbitrable under Brazilian law, given the public-law nature of tax obligations, as well as concerns regarding transparency, consistency of decisions, and potential asymmetries between taxpayers. There are also discussions regarding the interaction between arbitration and existing judicial and administrative mechanisms, including the role of precedents and the enforceability of arbitral awards in tax matters.

Although arbitration in tax disputes is not yet fully implemented at the federal level, these legislative developments indicate growing openness to alternative dispute resolution mechanisms. Arbitration is therefore expected to play an increasingly important role if regulatory frameworks evolve in a manner that reconciles efficiency gains with the constitutional principles governing taxation.

Jurisdiction over disputes involving the IBS and CBS

A central procedural issue in the next cycle of tax litigation concerns the definition of judicial jurisdiction in disputes involving the CBS and IBS, particularly in light of Brazil’s dual judicial system. As a rule, disputes involving federal taxes fall within the jurisdiction of the Federal Courts, while state and local tax disputes are heard by State Courts. Under the new framework, CBS-related controversies implemented at federal level tend to fall within Federal Court jurisdiction. IBS-related disputes, despite the tax’s shared governance structure, may fall within State Court jurisdiction. This dual allocation creates a structural risk of fragmentation, particularly because the IBS and CBS are designed to follow harmonised substantive rules.

This jurisdictional divide is further complicated by the institutional role of public entities. The Office of the Attorney General of the National Treasury (Procuradoria-Geral da Fazenda Nacional – PGFN) represents the Federal Government in CBS-related disputes before the Federal Courts, while state and municipal attorneys’ offices act in IBS disputes before State Courts. The coexistence of multiple authorities, with distinct litigation strategies and institutional incentives, increases the likelihood of divergent interpretations and inconsistent case law on materially identical issues, including taxable basis, crediting mechanisms, immunities, and special regimes.

There are currently multiple legislative proposals aimed at defining jurisdictional boundaries and clarifying the role and co-ordination of the different public attorneys’ offices. These initiatives seek to reduce fragmentation and enhance legal certainty. The issue, however, remains highly sensitive, as it directly affects the constitutional allocation of powers, the autonomy of federal and subnational entities, and the institutional prerogatives of public advocacy bodies. Ensuring coherence across jurisdictions, alignment among public authorities, and effective co-ordination between judicial and administrative bodies will be essential to prevent conflicting rulings, reduce legal uncertainty, and avoid a further increase in litigation under the new tax system.