As a result of Brazil's current economic crisis, many Brazilian states have been trying to restrict or even eliminate State VAT incentives previously granted to companies established in their territories.

The State of Rio de Janeiro, whose financial situation is poor, created a State Fund for Fiscal Balance (EFSF), as provided by Law 7,428/2016 and grounded by State´s VAT Agreement (Convenio ICMS) No. 42/2016.

According to Law No.7,428/2016, as ruled by Decree No. 45,810/2016, the enjoyment of any ICMS tax incentive or benefit is now conditioned to a deposit corresponding to 10% of the difference between the ICMS that would be due by the taxpayer, if no incentive or benefit was granted, and the value to be effectively disbursed.1

In view of the above, the Rio de Janeiro Industrial Center (CIRJ) filed a Collective Writ of Mandamus against the above referenced requirement on the basis that it would have breached its associates' rights. The CIRJ obtained a preliminary injunction for its associates to prevent the State of Rio de Janeiro to demand the 10% monthly deposit to the EFSF.

In addition, on 19 December 2016, the National Confederation of Industry (CNI) also filed a Lawsuit (ADI No. 5635) to challenge the constitutionality of Law No. 7,428/2016 at the Brazilian Supreme Court. This lawsuit is currently pending analysis but, if CNI obtains a preliminary injunction, such decision will favor Rio de Janeiro taxpayers in general.

In parallel, in December 2016, the Federation of Goods Trade, Service and Tourism of Rio de Janeiro State (FECOMÉRCIO) filed at the Special Chamber of Rio de Janeiro State Court, a Lawsuit challenging the constitutionality of the Law No. 7,428/2016 and requiring a preliminary injunction to prevent the State of Rio de Janeiro to demand the 10% monthly deposit to the EFSF to all Rio de Janeiro Taxpayers.

The preliminary injunction was initially granted by the Rapporteur judge, but the full bench of the Special Chamber did not confirm the injunction on the grounds that the deposit to the EFSF is constitutional and should not be considered as a new tax.

Although the merits of the case is still pending decision by the Special Chamber of the Rio de Janeiro State Court, in February/2017, the injunction granted on the Collective Writ of Mandamus filed by Rio de Janeiro Industrial Center (CIRJ) was revoked by the lower judge of the Rio de Janeiro State Court, based on such precedent.

We understand that such controversy around the EFSF shall only be settled by the judgment of the lawsuit filed by the CNI (ADI No. 5635) at the Brazilian Supreme Court, which is still pending analysis and will have a binding effect in all lawsuits filed at the Rio de Janeiro State Courts.

More recently, the State of Rio de Janeiro, still aiming at increasing tax revenues, enacted Law No. 7,495/2016, preventing the granting of new fiscal or tax incentives for a two-year period.

This new law grandfathers tax benefits or incentives already granted to Rio de Janeiro taxpayers, allowing the benefits renewal, provided that duly grounded by the National Council on Finance Policy (CONFAZ) and/or by law, as applicable, and already foreseen at the act which granted the benefit. The aforementioned law has been effective since 6 December 2016, entering into full force within 90 days from its enactment.

Finally, on 15 December 2016, the President of the Rio de Janeiro State Assembly enacted Legislative Decree No. 02/2016 , suppressing the any State VAT incentives granted to transactions with assets destined to the exploration or production of Oil and Natural Gas, and enjoying the REPETRO regime, as provided for in Decree No. 41,142/2008 and authorized by the State VAT Agreement 130/2007.

Recently, the Brazilian Association of Petroleum Services Providers filed a Collective Writ of Mandamus against the above referenced Legislative Decree no. 02/2016 and obtained a preliminary injunction for its associates to restore the State VAT incentives granted to transactions with assets under REPETRO.