The Brazilian Supreme Court has finally ruled on Unconstitutionality Direct Action No. 2.588 (“ADIN 2.588”), which was filed over a decade ago in order to analyze whether Brazil can tax profits earned by Brazilian controlled or affiliated companies abroad regardless of distribution.
According to the Brazilian Supreme Court decision, constituting binding law, profits earned by controlled companies established in tax haven jurisdictions are taxable at the parent company level in Brazil. Conversely, profits earned by affiliated companies located in non-tax haven jurisdictions are not subject to taxation.
The decision also held that such profits earned abroad are Corporate Income Tax taxable subsequent to January 1st, 2002 and Social Contribution Tax taxable as of November 24, 2001.
The Brazilian Supreme Court applied the ADIN 2.588 decision directly to Extraordinary Appeal 611.586 and permitted the taxation of profits earned by a controlled company located in a tax haven jurisdiction.
In Extraordinary Appeal 541.090 the Brazilian Supreme Court decided that the taxation of profits earned by a controlled company located in a non-tax haven jurisdiction is allowed and does not violate the Brazilian Federal Constitution. This ruling was taken on a majority of five votes to four and, thus, may be subject to later modification by the full Brazilian Supreme Court of eleven justices.
Although the Brazilian Supreme Court rulings in Extraordinary Appeal 611.586 and Extraordinary Appeal 541.090 are indicative of Brazilian Supreme Court opinion, as they are extraordinary appeals the Brazilian Supreme Court decisions in their cases are binding only on the involved parties.
A final and generally -binding decision of the Brazilian Supreme Court on the taxation of profits earned by (i) controlled companies located in non-tax havens ; (ii) affiliated companies located in tax havens; and (iii) companies located in jurisdictions with which Brazil has entered into tax conventions to prevent double taxation is still pending.
The supremacy of international treaties whenever challenged by domestic law has already been declared in specific decisions of the Brazilian higher courts.