Tax Law Highlights | Provisional Measure No. 1,227/2024 and Law No. 14,789/2023 (taxation of investment subsidies)

1. Updates in evidence

Provisional Measure No. 1,227/2024:

• Provide information about tax benefits which was already regulated by Normative Instruction RFB No. 2,198/2024 (DIRBI); and
• Restrictions on the use of PIS and COFINS credits, later rejected by the Brazilian National Congress.

Law No. 14,789/2023:

• History of the taxation regime for investment subsidies;
• Relevant judicial rulings; and
• The new rules and the calculation of tax credits under the regime of Law No. 14,789/2023.

2. Introduction

Provisional Measure No. 1,227/2024: Provisional Measure No. 1,227/2024 established the obligation to report the tax benefits enjoyed to the Brazilian Federal Revenue Service (RFB) and the respective tax credits, starting in January 2024. Additionally, this Provisional Measure also aimed to impose restrictions on the compensation of PIS and COFINS credits by (i) limiting the compensation of credits calculated under the non-cumulative system to the settlement of only PIS and COFINS tax liabilities; and (ii) prohibiting the compensation and reimbursement of accumulated PIS and COFINS credit balances granted to certain specific taxpayers.

Law No. 14,789/2023: Law No. 14,789/2023 revoked the taxation regime in force until then, so that the so-called “investment subsidies” became subject to Corporate Income Tax (IRPJ), Social Contribution on Net Profit (CSLL), and Contributions to the Social Integration Program (PIS) and to Social Security Financing (COFINS). In return, the new law allowed the calculation of tax credits, which can be subject to compensation or reimbursement, calculated on these subsidies by legal entities previously qualified with the Brazilian Federal Revenue Service.

3. Tax landscape

Provisional Measure No. 1,227/2024: In its explanatory memorandum, Provisional Measure No. 1,227/2024 is justified by the pursuit of greater transparency in the revenue waivers by the Federal Government due to the granting of tax benefits, as well as stricter control over the fulfillment of conditions for enjoying these benefits by companies.

Law No. 14,789/2023: The taxation of investment subsidies has generated accounting and legal discussions for decades, being a topic frequently commented on by scholars and the subject of various statements by the RFB and Brazilian Courts. In this context, the changes introduced by Law No. 14,789/2023, resulting from the conversion of Provisional Measure No. 1,185/2023, represent a new milestone in this topic, raising new doubts and discussions.

4. Repercussions and Changes

Provisional Measure No. 1,227/2024: As the President of the Brazilian National Congress summarily rejected the provisions dealing with the restriction on the compensation of PIS and COFINS credits, Provisional Measure No. 1,227/2024 remained in force in the parts that (i) established the new obligation to declare the tax benefits enjoyed by companies and (ii) delegated authority to the Federal District and Municipalities for the adjudication of administrative proceedings related to the Rural Land Tax (ITR).
More recently, Normative Instruction No. 2,198/2024 was issued, regulating the Declaration of Incentives, Waivers, Benefits, and Immunities of a Tax Nature (DIRBI) for, initially, 16 tax benefits, including PERSE, RECAP, REIDI, and REPORTO. However, the RFB has already announced that it intends to expand the range of tax benefits that must be reported in the DIRBI.

In addition to this novelty, it is important to highlight that the penalties established by Provisional Measure No. 1,227/2024 and regulated by Normative Instruction RFB No. 2,198/2024, for cases of non-submission or late submission of the DIRBI, deserve the attention of taxpayers, as they are graduated according to the gross revenue of the legal entity and may represent a violation of constitutional principles, such as the prohibition of confiscation.

Law No. 14,789/2023: Law No. 14,789/2023 revoked the previous taxation regime for subsidies, which allowed the exclusion of the mentioned subsidies from the tax bases of IRPJ, CSLL, PIS, and COFINS, provided certain legal requirements were met.
On the other hand, it (i) established the possibility of calculating tax credits for investment subsidies by entities qualified with the RFB, subject to compensation and reimbursement; and (ii) created a specific tax settlement and self-regulation regime for previous tax debts related to subsidies.
The new legal framework also provides for some relevant restrictions on the calculation of the mentioned tax credit, such as considering the rate of 25%, which does not proportionally correspond to taxation by CSLL, PIS, and COFINS; and the restriction that only revenues related to “expenses for depreciation, amortization, or depletion or for the rental or leasing of capital goods, related to the implementation or expansion of the economic enterprise” (item I of article 8 of Law No. 14,789/2023) can be computed, among others.

5. What conclusions can we draw?

In light of all the above, we highlight that the changes introduced by Provisional Measure No. 1,227/2024 and Law No. 14,789/2023 are significant and should be subject to thorough analysis by taxpayers. Therefore, the tax practice of Tauil & Chequer Advogados in association with Mayer Brown is available to present the nuances of these topics that will certainly impact our clients' businesses.