BRAZILIAN CFC RULES

Administrative Court refrains from deciding on taxation of profits derived from CFCs

On 25 January 2012, the Federal Administrative Court (Conselho Administrativo de Recursos Fiscais – CARF) rendered yet another decision on the possibility of application of the provisions of article 74 of Provisional Measure 2,158-35/01 (PM 2,158), which introduced the so-called "automatic" taxation in Brazil of profits earned by foreign controlled and affiliated companies of Brazilian legal entities, vis-à-vis the provisions of article 7 of tax treaties signed by Brazil.

The Court's decision was rendered within the case records of an Administrative proceeding involving the Brazilian company Companhia Vale do Rio Doce S/A.

The decision rendered by the CARF was based on a previous decision of the Federal Court of the 2nd Region (second level of the judicial courts), which had already analysed this matter within the case records of Appeal 003.51.01.002937-0, also involving Companhia Vale do Rio Doce S/A (for details, see Brazil-1, News 9 December 2011) (below).

Unlike the Judicial Court case, the members of the CARF have not analysed the merits of the discussion under the argument that the same matter was being discussed within a Judicial Court. Their position was based on the fact that according to internal tax regulations, when the same matter is being discussed by the same taxpayer in both the Administrative and Judicial Courts, the Administrative proceedings must be terminated and only the Judicial Court is competent for the judgment of the merit.