In the judgment of the Direct Action for Constitutionality[1] 49 (ADC 49), the Supreme Constitutional Court (STF) ruled that the levy of ICMS on transfers between establishments of the same entity is unconstitutional.

According to the judgment, ICMS credits related to input supplies must be maintained, and the states must introduce mechanisms for the transfer of ICMS credits in interstate supplies until 1 January 2024, given the modulation of the ADC 49 decision effects.

In light of this judgment, the Senate has presented the Bill of Complementary Law (BoL) n. 332/18, which aims to amend the Complementary Law n. 87/96 (ICMS Law) to establish:

  • the non-levy of ICMS on transfers of goods of the same owner;
  • the maintenance of ICMS credits related to input supplies; and
  • the right to transfer ICMS credits between origin and destination.

Approved by the Senate on 9 May 2023, the BoL has been sent to the House of Representatives for discussion and a vote.

According to the proposed amendments, the ICMS Law will expressly enshrine the non-levy of ICMS on transfers between establishments of the same entity, and the right to maintain ICMS credits. In addition, the amendments establish that, in interstate transfers, the credits must be guaranteed by the destination state, in accordance with the interstate rates provided for by the Senate (4%, 7% or 12%), the origin of the goods, and the origin- and destination state.

Any positive balance between the credits recorded in relation to input supplies and the credits transferred to the destination shall be ensured by the state of origin.

The BoL also establishes that taxpayers may choose to consider transfers a taxable event, observing the rates determined in the legislation for internal output supplies and the rates provided for by the Senate for interstate output supplies.

The provision to tax transfers as a taxable event is relevant to enable the enjoyment of tax incentives already granted. This is an aspect of concern for taxpayers after the judgment of the ADC 49, given the potential incompatibility with the calculation system (especially when the tax base of the benefit refers to the outstanding ICMS payable amount in the calculation period) or even the unfeasibility of such system.

Making the judgment of the ADC 49 suitable with the system of tax incentives is especially delicate, as it could give rise to complex legal discussions about eventual violation of a right secured to taxpayers, who took on and fulfilled onerous obligations for the enjoyment of tax incentives. This because, in the case at hand, any inapplicability of the incentives would not result from a unilateral revocation on the state’s end, but rather from a Court decision determining the non-levy of the tax.

In addition, the option for taxpayers to tax the transfer may also be relevant to accommodate the supplies subject to the ICMS substitution regime (ICMS-ST), given that the absence of debit (own-ICMS) in the interstate output supply could result in a lack of balance when calculating the ICMS-ST that is due to the destination state.

It is also worth mentioning that the provision of the ICMS Law that establishes specific criteria for the definition of the tax base of transfers (article 13, paragraph 4) has been revoked.

The correct definition of the tax base of transfers is important, as it can directly affect the measurement of ICMS credits to be transferred to the destination state. The issue can lead to disputes and trigger credit disallowances and tax assessments.

In the absence of a specific provision for the tax base of transfers, the residual rules provided for in article 15 of the ICMS Law may, in principle, be applicable.

We recommend that companies evaluate the need for updating the criteria for defining the ICMS tax base according to the possible new legal parameters.

The new provisions of the ICMS Law, if approved by the House of Representatives, will take effect from 1 January 2024, in compliance with the modulation of effects determined by the STF.


[1] A request filed before the Supreme Constitutional Court aiming for the declaration that certain legislation is constitutional.