On February 7th, the Brazilian Supreme Court (STF) will resume the trial of a long-standing controversy between Vale and the Brazilian government regarding the taxation of profits from the company's subsidiaries and affiliates abroad. The case reached the Supreme Court a decade ago through an appeal by the Attorney General's Office for the National Treasury (PGFN) against a decision by the Superior Court of Justice (STJ) favorable to the mining company, and in 2024, the first votes were cast in the Court's virtual plenary session. Ministers André Mendonça, the rapporteur for the case, and Gilmar Mendes dissented. The next to vote will be Minister Alexandre de Moraes, who had requested a review of the case.
The issue does not have recognized general repercussion, meaning that its observance is not mandatory for other instances of the Judiciary or the administrative sphere. However, the government is closely monitoring the case, not only because of the relevant precedent that will be formed from the judgment, but also because a favorable outcome for Vale, depending on the wording, could open the way for the company to try to recover R$ 32 billion related to the thesis that were paid in installments by the state-owned company.
Despite being part of the issue before the Supreme Federal Court (STF), Vale has been taxing the profits of its subsidiaries in Brazil as if there were no treaties to avoid double taxation. The amounts related to the company's lawsuits on this matter, including the one discussed in the STF, were included in a tax amnesty program. On the other hand, other companies continue not to tax the profits of their subsidiaries and affiliates based on the treaties, and receive recurring tax assessments. This is the case with Petrobras, which has considerable litigation related to the issue.
In the case before the Supreme Federal Court (STF), Vale seeks to eliminate the automatic application of Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) to the profits of its subsidiaries and affiliates in Belgium, Denmark, and Luxembourg. This would allow the mining company to avoid double taxation, which occurs when the same activity of a taxpayer is taxed by two different countries.
If the Supreme Court recognizes the unconstitutionality of the tax, the economic and financial impact on the Union should be R$22 billion, according to the 2025 Budget Bill.
Brazil is a signatory to a series of international agreements to avoid double taxation. When voting on the case, Mendonça emphasized these treaties. He considered that the agreements should be prioritized over domestic legislation when there is a conflict. The minister's position considers what is determined by article 98 of the National Tax Code (CTN), a law prior to the 1966 Constitution.
Gilmar Mendes sided with the government. The senior justice argues that the taxation in question targets the income earned by the Brazilian parent company through its investment, and not the subsidiary's profit directly.
STJ vs. Carf
In 2014, the Superior Court of Justice (STJ) ruled in favor of Vale on this matter. At the time, the court expressed its understanding that double taxation treaties signed with Brazil prevail over domestic legislation. The Court understood that Article 7 of the OECD Model Agreement should prevail. This regulation establishes that these profits can only be taxed in the country of origin.
Contrary to the STJ's decision, the PGFN took the case to the Supreme Court with Extraordinary Appeal (RE) 870.214. According to the government, the court's decision contradicts precedents from the STF that support the possibility of taxing the profits of subsidiaries abroad. The Court had already deemed the double taxation of the compressor company Embraco constitutional in the judgment of RE 541.090, in 2007. The decision followed the premise that the income belongs to the Brazilian company, not the foreign one.
The PGFN's argument in this case is based on a similar point. The Union maintains that the profit belongs to the parent company based in Brazil, regardless of whether the funds have been distributed, and not to the subsidiary in European countries. Therefore, the rules of international treaties would not apply.
The government's position is also supported by decisions of the Administrative Council of Tax Appeals (Carf). In 2019, for example, the court upheld a tax assessment of R$ 1.7 billion against Petrobras.
The Supreme Court had already addressed the issue in early 2014 in Direct Action of Unconstitutionality (ADI) 2.588, a lawsuit filed by the National Confederation of Industry (CNI) against double taxation. There was no majority for a definitive solution. By a majority vote, the presumption of constitutionality of Article 74 of Provisional Measure (MP) 2.158-35 remained. This regulation established a more rigorous and anticipated taxation of profits from controlled and affiliated companies abroad. The article was revoked in May of the same year by then-President Dilma Rousseff (PT).
Now, the Supreme Court's judgment on the Vale case could bring a definitive solution to the issue, experts believe. "It's an opportunity to establish the position of international treaties against double taxation of income signed by Brazil in relation to the domestic legal system, to define the character they acquire," says tax lawyer Raquel Andrade, PhD in Financial Law from the University of São Paulo (USP).
According to tax lawyer Igor Mauler Santiago, from the law firm Mauler Advogados, the ruling deserves attention because it deals with a context in which a Brazilian company is in the position of an investor abroad, as opposed to the country's usual role as a recipient of foreign capital. According to the lawyer, what is at stake is "how Brazil, as an exporter of capital, will encourage Brazilian companies to grow and internationalize." The Supreme Court must answer what legal security and tax treatment companies have in this type of situation, he says. "It is a ruling of strategic importance for expanding Brazil's economic presence on the international stage," he states.
For the Union, the relevance of the process is also clear. Taxation, with the incidence of CSLL (Social Contribution on Net Profit) and IRPJ (Corporate Income Tax), on the profits of subsidiaries and affiliates of the company abroad was the subject of the call for adhesion to the transaction in the tax litigation in 2023. Also last year, according to the National Treasury, there were 200 ongoing cases involving the conformity between Brazilian rule and treaties to avoid double taxation.
André Mendonça's vote was better received by tax experts interviewed by JOTA, who considered the minister's text aligned with good taxation practices. There is a fear that the country could undermine its commitment to international agreements if the majority of the other nine ministers of the Court follow Gilmar Mendes' interpretation.
“It would be a self-inflicted wound,” says tax lawyer Alexandre Salles Steil, partner at Lavocat Advogados. “It could even have diplomatic repercussions, but I think the biggest damage would be what the country could cause itself.”.
Lawyers believe that adopting double taxation could put Brazilian companies at a disadvantage, in addition to leading to tax evasion by discouraging foreign investment in the country and compromising Brazil's reputation in the international community due to non-compliance with treaties.
“The expectation is that, in the end, common sense will prevail, and we must comply with international legislation. We need to align with best practices and avoid some of the excesses that Vale's situation revealed regarding taxation,” Steil stated.
Understand André Mendonça's vote.
The first vote in the Supreme Court, by rapporteur André Mendonça, followed a favorable understanding for Vale, similar to that of the Superior Court of Justice (STJ). The minister defended maintaining the validity of international treaties and prioritizing them over national legislation in cases of conflict, according to article 98 of the National Tax Code (CTN). Read the full text of André Mendonça's vote.
Mendonça also argued that the equity method for taxing foreign profits was not created for tax purposes. According to the minister, this objective would distort the original intention of the method, which is to reflect the economic value of investments in the financial statements.
The method, also known by the acronym MEP, is an accounting technique used in subsidiaries and affiliates to evaluate and record the value of an investment by one company in another. The account adjusts the amount on the balance sheet according to the investing company's share in the investee's net worth.
Mendonça states in his vote that the Equity Method does not alter the basis for calculating the valuation of foreign companies in relation to the parent company's assets in Brazil. It is neutral with respect to the taxable actual profit for Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL), since it disregards factors such as exchange rate fluctuations abroad and changes in the assets of subsidiaries. Thus, Brazilian legislation focuses exclusively on the taxation of profit, respecting the bilateral international agreements signed with the three countries analyzed in the case.
“The arguments presented to the effect that the profit of the foreign subsidiary is reflected as the parent company's own profit, due to the positive portion of the investment, according to the equity method, are unfounded. Brazilian law (article 74) has never taxed the positive equity method adjustment, but the mere addition of profits to the parent company, indiscriminately,” the minister states in his vote.
Mendonça also says that Brazil attracts investment by entering into agreements like those with Vale. "Any reduction in tax revenue from domestic parent companies is offset by the influx of foreign multinationals that establish themselves here," the minister states.
According to Mendonça, double taxation "frustrates the trust of taxpayers who structured their operations in light of the legislation and its interpretation in force at the time of their operations.".
Understand Gilmar Mendes' vote.
Minister Gilmar Mendes dissented and reiterated a similar understanding to that of his vote in the judgment of ADI 2.588 – the CNI case against double taxation. "The central aspect lies in the consideration that the positive increase in net worth, resulting from the calculation of profits abroad, is experienced immediately by the controlling or affiliated company in Brazil, even before the distribution of profits," says Gilmar.
According to the minister, the discussion does not involve the interpretation or application of international treaties, because they would not apply to the specific case, since the tax levied is on the income of the Brazilian company, not the foreign subsidiary.
The focus, says Gilmar, is the analysis of the compatibility of article 74 of Provisional Measure 2.158-35 with the concept of income. In this case, which is addressed in the Embraco case against double taxation (RE 541.090), the Supreme Federal Court had already declared that the provision was constitutional in cases where a Brazilian company controls a foreign company.
“"Applying what was decided by the Plenary of this Court in RE 541.090, I understand that the case warrants recognizing the possibility of the incidence of IRPJ (Corporate Income Tax) and CSLL (Social Contribution on Net Profit) on the profit of the controlling company obtained through controlled companies located abroad," declares Gilmar.
Unlike Mendonça's assessment, the minister believes that the equity method serves as a legitimate basis for taxation. He argues that the equity method captures an increase in the assets of the Brazilian company, which constitutes "income" for constitutional purposes. Read the full text of Gilmar Mendes' vote..
The difference between the votes is mainly due to Mendonça prioritizing adherence to international tax treaties and an interpretation of income as realized profit, while Gilmar Mendes prioritizes domestic legislation and considers the MEP (Method of Equity) as a justifiable means of capturing income even before the actual distribution of profit.
According to experts, Gilmar Mendes's position was, in a way, expected because of the vote he had cast in the CNI case.
However, in 2011, Gilmar Mendes had a different perspective on international conventions when confronted with national legislation. In RE 460.320, in a case involving the automotive company Volvo against the Union, the minister argued that treaties to avoid double taxation prevail over domestic norms, and should only be subject to the Constitution.
“The problem between the Vale and Volvo cases is that one vote doesn't align with the other. In the Vale case, he simply analyzes it as if he were only evaluating the compatibility of article 74 of Provisional Measure 2158-35 with the Constitution. And, in fact, there's the issue of treaties. This is a single issue; you can't separate one part of the facts,” says financial law expert Raquel Andrade.
Tax expert Igor Mauler says the minister is mistaken in trying to disregard the treaties in the Vale case. “To allow full taxation even when a treaty exists, he is dismissing the treaty's applicability by saying that what is being taxed in the Brazilian company is not the other company's profit, but its own profit resulting from equity accounting. But that's the mistake, because Brazilian law has never authorized the taxation of equity accounting results,” Mauler argues.
According to Alexandre Salles Steil, Gilmar's vote is still "tied" to the judgment of the CNI case, which focuses on article 74 of the Provisional Measure regarding taxation. In this judgment, the treaties and article 98 of the National Tax Code take on greater importance, he assesses. "When I have these international agreements, as is the case here, it is necessary to move beyond this pure discussion of what article 74 of the Provisional Measure is and towards a more specific discussion about the treaties," he states.
Constitutional debate?
There is also discussion about whether the case should, in fact, be judged by the Supreme Court. Minister André Mendonça acknowledges arguments highlighting the importance of the issue in a supranational context, which could lead the debate to the constitutional sphere, but considers, in his vote, that the issue "is restricted to an eminently infraconstitutional debate." Gilmar Mendes, on the other hand, relies on previous discussions about double taxation brought before the Court to assert that there is a constitutional question to be debated in the case.
Lawyer Igor Mauler believes that establishing whether or not double taxation is constitutional is the key issue at stake. For him, taxing income violates the concept of income. “This is a constitutional concept. Income always belongs to someone. Income is a concept linked to a person. I tax the income on the owner of the income, the holder of the income; I don't tax the income on a third party. The income is yours, but you're going to tax me. Why?” he asks. “I think there is no constitutional authorization to break this autonomy of legal entities,” the tax lawyer states.
But Mauler defends the final word of the STJ (Superior Court of Justice). “On a case-by-case basis, I will have to see if that controlled entity is or is not in a country with which Brazil has a treaty. This effect and this relationship between the law and the treaty is within the competence of the STJ. And I think the STJ did exactly what it should have done,” he states.
According to tax lawyer Raquel de Andrade, the STJ's decision is not enough. The issue needs to go before the STF, since it is article 98 of the CTN (National Tax Code) that deals with the relationship between treaties and domestic legislation. The law that includes the provision dates from 1966. The Constitution was only promulgated about 20 years later. "This is poorly resolved and, to this day, the STF has not categorically stated what interpretation should be given to article 98 in light of the Constitution," she says.