Tax Law Highlights ICMS Agreement 109/2024: New Credit Transfer Rules and Their Tax Implications

UPDATES IN EVIDENCE

Recent Updates on ICMS and Tax Law

ADC 49: In April 2023, through ADC 49, the Brazilian Supreme Federal Court declared as unconstitutional the imposition of the Tax on the Circulation of Goods and Services (ICMS) on the transfer of goods between establishments of the same legal entity. The court also determined that states must establish rules for the use of tax credits arising from such transactions by the end of 2023.
Complementary Law No. 204/2023: On December 28, 2023, Complementary Law No. 204/2023 introduced changes to the procedures for maintaining and transferring ICMS credits, allowing interstate transfers between establishments of the same taxpayer to be treated as taxable transactions.
ICMS Agreement 109/2024: This agreement regulates inter-state transfers between establishments under the same ownership, and corrects irregularities in ICMS Agreement 178/2023.

Introduction and Tax Landscape

The Brazilian tax system is undergoing significant transformations as a result of judicial decisions and regulatory updates. The Supreme Federal Court’s (STF) ruling in Constitutionality Declaratory Action No. 49 (ADC 49) provided a clear definition regarding the non-applicability of ICMS to transfers between establishments of the same taxpayer—a long-standing issue that had led to legal uncertainty and disputes between states and taxpayers. This decision reaffirmed existing case law and eliminated the requirement to reverse ICMS credits related to such transfers.

In this context, ICMS Agreement 109/2024 emerges as a key regulatory milestone. It was introduced to correct irregularities created by ICMS Agreement 178/2023, which mandated the transfer of tax credits between establishments without considering taxpayer autonomy. The key innovations are: (i) the option to transfer tax credits between the establishments; (ii) the alternative to treat the transaction as “a taxed transaction”; and (iii) cap of the taxable basis of the transaction.

These developments underscore the importance of a clear and predictable tax system to foster a stable business environment in Brazil. Taxpayers must remain vigilant to these changes to maximize benefits and mitigate risks in their interstate operations.

Repercussions and Changes

The ruling in ADC 49, by affirming erga omnes the non-applicability of ICMS to the transfer of goods between establishments of the same taxpayer, has provided greater legal certainty for taxpayers’ operations, eliminating the requirement to reverse tax credits in such transactions. This represents a significant step forward in tax predictability and the simplification of fiscal procedures.

ICMS Agreement 109/2024 introduces a more structured approach to inter-state transfers, allowing taxpayers to treat these transactions as taxable operations. However, this flexibility comes with strict conditions, such as the requirement for an annual and irrevocable registration of this option, which must be applied uniformly across all of the taxpayer’s establishments nationwide.

What Conclusions Can We Draw?

The flexibility introduced by the new agreement allows measures more suitable for each taxpayer, but it also imposes additional responsibilities, such as the annual and binding election for the transactions being treated as "taxable transfers transactions". While this measure represents progress, it may limit companies’ ability to adapt to regional tax benefits, highlighting the need for continuous monitoring of legislative and regulatory changes.

Finally, it is crucial to provide an update on the current status of the adoption of ICMS Agreement 109/2024 by the states. As of now, most of the states have adopted the agreement into their legislation, namely: