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February 17, 2023

Brazil's Federal Supreme Court restarts analysis on imposition of ICMS on transfers between branches of same legal entity

  • Based on a recent Brazilian Federal Supreme Court ruling, transfers between branches of the same legal entity do not trigger the ICMS, which is a State Value Added Tax (VAT). The ICMS taxable event depends on the transfer of ownership of the good (sale).
  • The Brazilian Federal Supreme Court has been, over the years, recognizing transfers do not trigger the ICMS. However, the previous rulings issued essentially did not have binding effect.
  • Those discussions were initiated by taxpayers that, for particular reasons, such as a tax benefit, could not use the ICMS credits generated in the transfers (because the incentive provides for the reversal of such credits).

Executive summary

The main change in a transfer scenario (between branches of the same legal entity) is that now the decision issued by the Federal Supreme Court (ADC49) has binding effect and must be followed by all the States and taxpayers.

Taxpayers are currently expecting a decision on when the binding decision will become effective. If at least 8 (of a total of 11) Ministers of the Federal Supreme Court reach an agreement, the effects of their decision can be limited to prospective application.

If this minimum quorum is not achieved, then the Federal Supreme Court decision can have retroactive effects (this means, for instance, that taxpayers could try to recover the amount of the ICMS paid on transfers during the last five years, provided that the statute of limitations term is observed and that the branch that has received the credit has not used it; otherwise the taxpayer would recover twice the amount unduly paid).

Detailed discussion

Credit maintenance and transference

Until now, ICMS credits were transferred from one branch to another by an invoice. The branch carrying out the transfer would pay the ICMS to the State where it is located and would issue an invoice indicating the amount of the ICMS due in such a transaction. The branch receiving the goods would be entitled to register the ICMS amount indicated in the invoice as a credit.

The Federal Constitution establishes that taxpayers should reverse ICMS credits whenever they perform transactions that do not trigger the ICMS, unless specific state law authorizes such credit maintenance. This constitutional provision raised a concern on whether the ICMS credits could be maintained and also transferred with the goods being transferred from one branch to another once the binding ruling becomes effective (because no ICMS would be indicated in the invoice that would support the transfer).

As of the beginning of the judgment of this case (ADC 49), one of the Ministers (Mr. Fachin) recognized that taxpayers could maintain the ICMS credits but was silent about the transfer of such credit to the branch receiving the goods. Later, Mr. Fachin reviewed his position and understood the credits could be transferred and the States should agree on the mechanism of such transfer. Another Minister, Mr. Toffoli, agreed the credits could be maintained and transferred, but he stated such transfer should be preceded by a Complementary Law (which is a Federal law that empowers the States to enact local laws).

Currently, the prevailing understanding is that taxpayers will be able to maintain and transfer the ICMS credits, but the mechanism that will be used to do so is still uncertain. Ministers can change the vote at any time before the judgment comes to a final conclusion.

The conclusion of the ADC 49 judgment was expected to occur by 17 February, but on 16 February it was suspended by Minister Alexandre de Moraes, so that he could analyze the case more carefully.

Considering the importance of the matter, taxpayers should follow next developments carefully.

Comparative analysis - before and after ADC 49 ruling

Before the ruling

  • There is a 12% ICMS on the transfer of goods from Branch 1 to Branch 2
  • Branch 1 pays the ICMS on the transfer to the State where it is located. It issues an invoice indicating the amount of ICMS triggered on the transaction (12%, 7% or 4%)
  • Branch 2 receives the goods and register the amount of ICMS indicated in the invoice as a credit. It offsets such credits against its own ICMS debts

Following the ruling

  • There is no ICMS on the transfer of goods from Branch 1 to Branch 2
  • Branch 1 does not pay ICMS on the transfer to the State where it is located
  • It will be regulated how the credits will be calculated and transferred if the current approach prevails

The solution proposed by the Complementary Bill n. 332/2018

The Complementary Bill nº 332/2018 was proposed by the Brazilian Federal Senate to change article 12 of the Complementary Law nº 87/1996, stating that transfers of goods between branches of the same legal entity do not trigger the ICMS, as held by ADC 49.

The proposal was amended to rule the effects of ADC 49 on the maintenance and transfer of the credits, providing that the sender of the goods (branch 1 in the example), keeps the credits even after transferring the goods without paying ICMS. Alternatively, sender was able to opt for transferring the credits (to branch 2).

However, the bill was filed by the Federal Senate at the end of 2022 without approval, and currently, as of the date of this alert, there do not appear to be any similar proposals under consideration by the National Congress.

It is important to note that ADC 49 ruling can generate other tax impacts, which will be detailed soon after the Federal Supreme Court finalizes the judgment of this case.


For additional information with respect to this Alert, please contact the following:

EY Assessoria Empresarial Ltda, São Paulo

Ernst & Young LLP (United States), Latin American Business Center, New York

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific