Tax Uncertainty Is a Certainty in the Brazilian Tax System

In the context of tax law, Brazil has proven to be excessively dependent on decisions handed down by the judiciary in the collection of taxes, given the massive judicialisation of aspects ranging from the possibility of demanding a certain tax on a given activity to the manner of calculating certain complex taxes that – at least until the implementation of the tax reform – will remain part of the daily lives of taxpayers (both companies and individuals).

In fact, although Brazilian law is structured in the form of civil law, the judiciary – especially the Supreme Federal Court (STF) – has played a prominent role in the formulation of public policies, in as much as its precedents (many of which are binding) have conditioned the actions of municipalities, states and the federal government itself.

Nonetheless, knowing which tax matters will be judged through the system of appeals filed on the same point of law by the Superior Court of Justice (STJ, which is responsible for matters of an infra-constitutional nature) and by the STF (which is responsible for interpreting the Federal Constitution) has become a necessary requirement for good business management, not only to adjust procedures and avoid suffering undue charges but also to identify new opportunities, especially as relates to the recovery of unduly paid taxes.

Taxpayers can even be said to have increasingly acted based on bets: they bet on a legal interpretation not necessarily because of the consistency of its arguments but rather because of the expected return that its success may bring.

The importance of knowing which cases stir controversy is therefore clear, as is understanding the timeframes of the superior courts, in view of their routinely adjusting the effects of decisions, which can limit the scope of the established thesis only to those who already had legal action in progress at the time of the judgment.

In short, paying close attention to the discussions and decisions by the higher courts is a major step towards defining strategies involving the management of tax assets and liabilities.

With this in mind, the following lists important tax matters that have already been decided or that may be addressed throughout 2025 by the higher courts.

The “thesis of the century” and its developments

In 2017, the STF finally concluded judgment of the so-called “thesis of the century”, the subject of Theme 69 of general repercussion, establishing a legal theory according to which ICMS (the state tax) should not be included in the PIS and COFINS calculation bases.

If the issue involving the inclusion of a tax within the calculation basis of another had already been deserving the attention of taxpayers and the courts (see, for example, the inclusion of ICMS in its own calculation basis, deemed constitutional in Theme 214), the validation of the taxpayers’ arguments in Theme 69 accelerated the movement to make the tax system more rational and reduce the tax burden to which they are subject.

In this sense, right after Theme 69, the STF looked into the inclusion of ICMS in the calculation basis of the Social Security Contribution on Gross Revenue (CPRB), the subject of Theme 1048. In a diametrically opposite sense, the STF concluded that such inclusion is constitutional, as it understood that gross revenue includes the taxes levied on it.

Another topic that should be highlighted involves the inclusion of ISS in the PIS and COFINS calculation bases (Theme 118). The trial began in the virtual court in 2021, but was interrupted following a tie of votes (four to four) by a request from the then-President of the STF, Justice Luiz Fux, for the case to be heard in a face-to-face environment, when two votes were missing (which could generate a tie, since the composition of the STF was not complete).

It is worth noting that, at that time, Justice Dias Toffoli diverged from this understanding, stating that the inclusion of ISS in the calculation bases of PIS and COFINS is constitutional, justifying his position by showing a difference in relation to ICMS: while the state tax is not cumulative, there is a written repercussion for the next entity in the economic chain (resulting from the highlighting in the invoice). This situation would not occur with the ISS, since, as it is cumulative, there would be no obligation to transfer the burden to the recipient of the service. The trial was resumed only on 28 August 2024 (this time in a face-to-face session).

Although only the votes of Justices Dias Toffoli, André Mendonça and Gilmar Mendes have been counted so far, Justices Alexandre de Moraes, Edson Fachin and Luís Roberto Barroso are likely to follow their interpretations (therefore, following the divergence initiated by Justice Ministro Dias Toffoli).

Considering, furthermore, that the votes of Justices Celso de Mello, Ricardo Lewandowski and Rosa Weber were cast in the virtual trial, the dispute is currently tied at five to five, with Justice Luiz Fux having the tie-breaking vote.

The STF will soon address the constitutionality of including:

• PIS and COFINS in their own calculation bases (Theme 1067); and
• presumed ICMS credits in the PIS and COFINS calculation bases (Theme 843).

In fact, the judgment of Theme 843 began in 2021, when six justices (majority) voted in the sense that the inclusion of presumed ICMS credits in the PIS and COFINS tax bases was unconstitutional, as it was understood that, since the presumed credit is a tax waiver by the states and the federal district, no new revenue is generated to be taxed by the contributions in question; four also voted in the sense that the inclusion in question was legally valid. Justice Dias Toffoli requested a review, which momentarily interrupted the trial.

Even after Justice Dias Toffoli cast his vote – culminating in the presentation of votes by all justices – Justice Gilmar Mendes, who agreed with the defeated thesis, requested the removal of the case from the virtual environment for judgment in a face-to-face session. Therefore, with the exception of votes cast by justices who have already retired (which prevents their successors from voting), the remaining justices may present new votes. If the interpretation established in the virtual trial is maintained, the case may be judged in favour of the taxpayers.

The STJ has recently issued decisions in cases involving topics derived from Theme 69 of the STF – ie, Theme 1125, through which it was decided that the ICMS due by tax substitution (ICMS-ST) should not be included in the PIS and COFINS calculation bases, and is worth noting in this regard.

Although this discussion is similar to that resolved in Theme 69, it is important not to lose sight of the fact that the tax substitution regime of the ICMS has some particularities, which led the Second Panel of the STJ to conclude that the inclusion of ICMS-ST in the ICMS calculation basis is valid, even after the judgment of Theme 69.

When judging Theme 1125, the First Section therefore considered it appropriate to apply the ratio decidendi of Theme 69, understanding that the fact that the calculation of ICMS-ST is concentrated on the so-called substitute taxpayer does not modify the state tax into a direct tax; additionally, the tax burden imposed on the taxpayer by substitution cannot be understood as an increase in revenue/turnover, tax bases for PIS and COFINS.

Tax amortisation of goodwill

A topic of huge importance for companies involves the tax amortisation of goodwill, particularly that generated between related parties. The case law of the courts is still uncertain on this topic, and there is still controversy between the Panels of the STJ that deal with tax matters.

In an important decision on the merits, the First Panel of the STJ, in the judgment of Special Appeal No 2.026.473, decided that internal goodwill (that is, the goodwill generated between dependent parties) may be amortised. Moreover, the precedent in question explicitly states that there is no prohibition in the law for the deduction of goodwill arising from a relationship between related parties or when the legal transaction is materialised through a corporate vehicle (used to “transfer” the goodwill generated in the acquired company to its acquirer).

The main aspect of the decision lies in addressing the so-called “business purpose”. The Fist Panel’s stance is that the federal government cannot claim the absence of a business purpose to prevent the deduction of internal goodwill, presuming abuse of rights; it is necessary to demonstrate the artificiality of the transactions.

It is worth noting that, previously, the First Panel of the STJ itself upheld a decision by the Regional Federal Court of the Fourth Region, issued in a relevant case in which expert evidence had proven that the goodwill was based on the expectation of future income, as it understood that it could not be included in the examination of factual-evidentiary aspects.

Nevertheless, contrary to the orientation taken by the First Panel, the Second Panel (see Special Appeal No 2.152.642) concluded that, as a rule, internal goodwill is generated through internal transactions, without a business purpose, generally carried out through corporate vehicles which did not even have a reason to exist.

Given the clear divergence between the Panels that make up the First Section of the STJ, one can reasonably assume that the matter may be put for trial on the same point of law, such that case law may be standardised for this matter.

Taxation of profits earned abroad, and the role of treaties to avoid double taxation

This is a well-known subject in the administrative courts. The issue involving the collection of IR and CSLL on profits earned by foreign companies controlled by Brazilian legal entities – despite the existence of treaties signed between Brazil and the country of origin of the profits to avoid double taxation – has already seen decisions favourable to taxpayers within the scope of the STJ; the issue is also about to be decided by the STF, for the first time.

In the STJ, the prevailing understanding is that Article 7 of the treaties that follow the OECD model prevent Brazil from taxing profits earned abroad at the time of their calculation, by adding them to the real profit and the CSLL calculation basis of the Brazilian parent company. According to this interpretation, defended by taxpayers, profits earned abroad can only be taxed abroad, under penalty of double taxation.

This interpretation has always been a subject of dispute, and currently the Administrative Council for Tax Appeals’ (CARF) dominant case law suggests that the purpose of the treaties is to prevent international legal double taxation of profits. In other words, the same taxpayer was being taxed twice, in Brazil and abroad – this does not happen in this case, since the foreign subsidiary (rather than the Brazilian taxpayer) was being taxed abroad.

Currently, Extraordinary Appeal No 870.214, filed by the federal government, is being judged by the STF; three votes have already been cast, two of which favour the tax authorities.

In his vote, Justice André Mendonça – although expressing an understanding that the matter is infra-constitutional in nature – argued that, in the event that his position is overcome, the federal government’s intention to tax profits earned abroad by companies headquartered in countries with which Brazil has signed treaties to avoid double taxation results “in addition to the unilateral breach of the pact, [in the frustration of] the trust of taxpayers who structured their operations in light of the law and the interpretation thereof in force at the time of their operations”.

In turn, Justice Gilmar Mendes delivered a worrying vote – despite expressing his understanding that the discussion exclusively involves the compatibility of Article 74 of MP 2.158-35 (which provided that profits earned abroad are considered available to the Brazilian parent company on the date of the balance sheet on which they were calculated) with the concept of income, he stated that treaties to avoid double taxation do not prevent profits earned by a subsidiary abroad from being taxed by Brazil, including using the comments on the tax model of the OECD Convention (this was followed by Justice Alexandre de Moraes).

Justice Nunes Marques requested to review the case, the trial of which may be resumed at any time.

Administrative Litigation

It is not only the judiciary that plays a fundamental role in Brazilian tax law. In many matters, administrative litigation is generally responsible for providing the first interpretations of laws, controlling the legality of acts carried out by the federal, state and municipal tax authorities to collect taxes from taxpayers.

In particular, the CARF, the court of appeals in the federal administrative sphere, has become increasingly relevant at the national level.

The CARF is an en banc court responsible for judging appeals relating to taxes required by the federal government. Its panels are divided by subject, and its judges are both tax auditors from the Brazilian Federal Revenue Service and professionals from the most diverse areas (law, accounting, engineering, administration) representing taxpayers, enabling in-depth analysis of cases, which often involve calculations and technical aspects of companies’ operations.

Precisely because of the high level of judges and complex debates, CARF judgments have been considered in decisions handed down within the judiciary, including superior courts.

There is no doubt, therefore, about the importance of closely monitoring CARF decisions, especially when defining business strategies.

In this context, the following highlights some of the tax issues that have been and may be addressed throughout 2025 by the CARF.

Stock options – social security contributions and withholding income tax

Stock option plans allow the sale of company shares to its employees, upon payment of a pre-set price.

The tax discussion involving stock option plans concerns their legal character, whether remunerative or commercial.

The understanding expressed by the CARF was that stock option plans are remunerative in nature and, therefore, taxes should be paid under the headings of individual income tax (IRPF), withholding income tax (IRRF) and social security contributions, when the shares were purchased by employees.

In 2024, the STJ ruled that stock option plans have a commercial nature, such that IRPF is not levied on the acquisition of these shares by employees – only the tax on the capital gain obtained from the resale of these shares is payable. Compliance with the decision – which is the subject of Claim on the Same Point of Law No 1226 – is mandatory.

Within the scope of the STJ, the decision on the merits became final in March 2025. However, the federal government filed an extraordinary appeal (ARE No 1540517), requesting the STF to consider the issue from a constitutional perspective.

Before the STJ decision became final, the CARF had not been applying the mandatory precedent as there was no definitive decision, especially in cases where the requirement for social security contributions was discussed – a matter that was not expressly considered in Theme No 1226 and which, in fact, is the subject of another appeal scheduled to be judged by the STJ later in 2025 (Special Appeal No 2.161.509)

To date, there have been no judgments of cases at the CARF after the STJ decision became final, so it will be important to closely monitor the decisions of the administrative en banc court.

Intervening statute of limitation – customs fine

A relevant topic for companies involves the application of the intervening statute of limitation in cases of customs fines. The current CARF case law, consolidated by means of CARF Summary No 11, is that the intervening statute of limitation does not apply to administrative proceedings, regardless of the subject matter discussed.

However, the unfavourable scenario for companies at the administrative level may soon change due to the judgment handed down on 3 December 2025 by the STJ, in relation to a precedent with mandatory compliance (Theme 1293). The STJ decided that the intervening statute of limitation does apply to customs fines, so that the debts must be extinguished if the (administrative or judicial) proceeding remains paralysed for more than three years.

As the authors see it, the CARF might consider it necessary to wait for the precedent to become final and binding in order to observe it; therefore, it may still take a while for the CARF to apply the STJ decision.

Electricity theft and deduction of expenses for IRPJ and CSLL purposes

This year, the CARF discussed an important issue involving an electric power concessionaire, and decided that expenses resulting from energy theft can be deducted from the IRPJ and CSLL calculation bases.

The Brazilian Federal Revenue Service understands that costs arising from theft are not operational expenses and, for this reason, could not be deducted for the calculation of real profit for the purposes of calculating IRPJ and CSLL.

However, in a recent judgment by the CARF, the prevailing position was that non-technical losses – such as theft – are part of the electricity distribution activity conducted by the company, and can therefore be deducted from the IRPJ and CSLL calculation bases.

Although compliance with this precedent is not mandatory, the CARF decision is relevant and can be used in other cases.