Prior Deposit Requirement Unconstitutional. By a 9 to 1 vote, the Brazilian Supreme Court has finally deemed unconstitutional a legal requirement whereby any taxpayer would have to post a cash deposit equivalent to 30% of any tax assessment in order for its claim against the assessment to be accepted at an appeal level.

The so–called “prior deposit” represented an unacceptable obstacle to the detriment of taxpayers’ rights to due process in the tax administration level.

The Court’s decision rendered unconstitutional paragraphs 1 and 2 of article 126 of Law 8.213/91, as amended by Law 9.639/98.

Consequences of the Decision:

A first consequence: the Government may no longer claim that the legal requirement for such prior deposits remains valid.

A second consequence is in the effects of this Court’s decision on all those cases where the taxpayer timed filed his, hers or its appeal against an administrative decision sustaining the tax assessment, but did not make the prior deposit for the appeal to be accepted.

In view of the fact that the taxpayer may have filed a timely appeal to the tax administration,  any claim by the Government that it would have a lawful tax credit against the taxpayer could and can be disputed as the case arises.

Suits filed by the Government to collect such “tax credits” against the taxpayer may be confronted on the grounds that the intended credit is not a valid tax credit because of violation of due process at the administration level.

In all actions taken on behalf of its clients, Prado Garcia Advogados has always sustained that the prior deposit requirement could not be accepted under the Brazilian Constitution which expressly adopts the  due process of law principle as a constitutional guarantee.

By a vote of 6 to 4 of its eleven judges, the Supreme Court in Brasilia ruled to confirm a previous 2004 decision of a now retired member of the Court against the Federal Government. The Government had asked the Court to overule a Superior Court of Justice judgement which recognized a tax exemption that the Government sustains to have been revoked.

The tax exemption was granted by Complementary Law 70/91 involving the federal tax named COFINS for professional service companies.

This confirmation represents a defeat to the Government in its attempts to overule the Superior Court of Justice decisions on the matter, and it will represent an additional burden for the Government in its efforts to submit the issue to the Supreme Court from a constitutional angle.

The Government sustains that the tax exemption granted by Complementary Law 70/91 was revoked by the Ordinary Law 9.430/96, on the grounds that the former one was materially an ordinary law.   

Prado Garcia Advogados – Lawyers and Consultants point our, however, that an option made by the Brazilian Congress to adopt a Complementary Law where an ordinary would suffice is a political decision protected by the checks and balances principles under the Brazilian Constitution, among other grounds.