As already mentioned by our tax team in recent bulletin (see Relativization of res judicata: General Repercussion Issues 881 and 885 – L.O. Baptista Advogados), the Plenary of the Brazilian Federal Supreme Court (STF) concluded the judgment on Issues 881 and 885, under General Repercussion, which have discussed the treatment to be given to final and unappealable judicial decisions on tax matters, based on constitutional interpretations different from those that still might to be adopted by the Court. It was decided, unanimously, that, in the event of a change in STF’s position on the constitutionality of certain taxes on an ongoing bases (such as, for example, the Social Contribution on Net Profits – CSLL), any judicial decisions in contrary to those rendered during the validity of the Supreme Court’s previous understanding, would loose effect if the Court decides to change its position, even if such decision had already become final and unappealable, and if the deadline for the tax authorities to file a rescissory action had already expired.
Besides the impacts of STF’s decision on the tax field, it also compromises other law areas, such as mergers and acquisitions (M&A).
From a practical standpoint, STF’s decision brings some legal uncertainty to the transactions of purchase and sale of companies due to the potential relativization of the res judicata for tax judgments in progress, or that will be judged in the future by the Supreme Court. This will force future interested parties in acquiring companies to pay extra attention when choosing the target companies, as well as in the due diligence processes.
This is because, when faced with tax benefits granted to the target company by final and unappealable court decisions, the responsible, for example, for the financial audit will also need to evaluate the court decision, to identify possible impacts on the company and its operations in case such decision is reversed according to the STF’s position. As an example, in the case a company has a favorable court decision in its favor exempting it from paying part or the totality of certain tax, in the event of a change in STF’s understanding, such tax could become due, changing even significantly, the contingency to be considered for acquisition purposes and, consequently, the valuation of the transaction.
Moreover, after the conclusion of financial and legal due diligences, the e legal counsel and the buyer must evaluate if, in view of the findings of the due diligence process, the buyer still wishes to proceed with the transaction, and/or the necessity to negotiate more robust contractual mechanisms, as the request of possible guarantees (i.e., the holdback of part of the purchase price), and the inclusion of more specific indemnification clauses able to protect the buyer in the event of a possible change in the STF’s position applicable to any contingency of the target company.
Thus, even STF may rule further decisions on Issues 881 and 885 modulating or restricting possible impacts of the decision rendered, companies intending to proceed with the acquisition of other companies should be attentive from now on, in order to avoid potential future problems with an acquisition, which may bring up an expressive non provisioned liability, due to possible changes in STF’s position.
Co-authoria: Amanda Brisolla Fernandes and Gabriel Grunberg Tesler.
