Brazilian Supreme Court (STF) Analyzes Taxation of Foreign Subsidiaries: How Vale’s Case Impacts Brazilian Companies with Investments Abroad

The judgment of Vale S.A. by the Brazilian Supreme Federal Court (STF) is one of the most relevant cases currently under discussion regarding the limits of international taxation in Brazil.

The central point of the debate is whether Brazil can tax the profits of foreign subsidiaries before those profits are actually distributed to the Brazilian parent company. This is not a discussion about whether taxation is legitimate, but about when taxation is allowed to occur. The Brazilian Tax Authority has been trying, in different ways, to impose taxation on foreign subsidiaries before the profits are effectively made available to the parent company in Brazil.

In Vale’s case, the company holds subsidiaries located in countries such as Belgium (Rio Doce Internacional S.A. – RDI), Denmark (Rio Comércio Internacional), Luxembourg (Brasilux and Rio Doce Europa S.a.r.l), and Bermuda (Brasamerica Limited). It is important to clarify that when we talk about “tax havens,” this term is not defined by personal interpretation but rather by the official list published by the Brazilian Tax Authority under Normative Instruction No. 1.037/2010. Among Vale’s subsidiaries, only Bermuda is listed as a tax haven. Belgium is not on the list. Denmark appears on the list only under specific circumstances related to holding companies that do not perform substantial economic activities.

Vale argues that Article 74 of Provisional Measure No. 2.158-35/2001 is incompatible with the international tax treaties that Brazil has signed with Belgium, Denmark, and Luxembourg. These treaties allocate the taxing rights to the country where the subsidiary is domiciled — meaning they prioritize taxation at the source, not in the country of residence of the shareholder. Therefore, under these treaties, profits generated by foreign subsidiaries should only be taxed in Brazil if and when those profits are distributed to the Brazilian parent company.

Additionally, Vale’s lawyer pointed out that although the Brazilian Tax Code (CTN) allows the domestic law to define the moment of income availability for tax purposes, it does not authorize the creation of a "legal fiction" that treats mere accounting profits, recorded in the balance sheet of a foreign company, as if they were effectively available to the parent company in Brazil. The Brazilian Tax Code explicitly requires economic or legal availability of income as a condition for triggering taxation.

This legal debate is not new in Brazil’s judicial system. The Superior Court of Justice (STJ) had already ruled in favor of Vale, confirming that international tax treaties take precedence over domestic tax law whenever there is a conflict. This is a key point that I consistently emphasize to my clients: whenever there is an international tax treaty in force between Brazil and another country, the treaty prevails over conflicting domestic tax rules. This applies even to fundamental tax concepts, such as tax residency.

For instance, under Brazilian domestic law, any foreign individual who stays in Brazil for more than 183 days within a 12-month period would be considered a tax resident. However, when applying the tie-breaker rules in international tax treaties, that same individual may not be considered a tax resident in Brazil, depending on factors such as permanent home, center of vital interests, or habitual abode.

The Brazilian Tax Code itself acknowledges the supremacy of international treaties, as Vale’s lawyer correctly argued before the courts. The STJ’s decision aligned with this principle, which, from my professional perspective, reinforces the very same legal guidance that I have consistently provided to clients in my tax practice. However, the Brazilian federal government did not accept the STJ’s decision. Facing a potential tax liability of approximately BRL 34 billion, the government escalated the case to the Supreme Federal Court (STF), which will have the final word. Naturally, the significance of the case goes far beyond Vale’s specific situation, given the magnitude of the tax dispute involved.

It is important to note that the STF does not specialize in international tax matters. The court’s primary role is to interpret the Brazilian Constitution, not international tax treaties or cross-border tax law. This is a factor that brings additional uncertainty to the final outcome. Nevertheless, the STF’s decision will be crucial to understanding how Brazil will position itself regarding the taxation of foreign subsidiaries and whether the country respects the commitments it has assumed through international tax treaties.

This case also gains even more relevance in the current scenario shaped by the new Law No. 14.754/2023, which establishes the automatic taxation of profits from offshore entities held by Brazilian tax residents — even if those profits have not been distributed. In practice, this law applies the same rationale that the government has used for years against Vale: attempting to tax undistributed profits abroad as if they were already available to the Brazilian taxpayer.

The legal issue in Vale’s case is exactly the same: whether the Brazilian government can tax foreign profits before those profits are actually distributed. This approach clearly conflicts with the principle of income availability, which is a constitutional requirement under Brazilian law, and it also violates the international tax treaties that Brazil has signed.

Therefore, the outcome of Vale’s case before the STF will become a critical precedent for companies with foreign subsidiaries and for individual taxpayers with offshore holdings. The decision will define whether Brazil can impose taxation that disregards both the principle of income availability and the limits set by international tax treaties.

In summary, this case will determine whether Brazil respects the tax sovereignty of other nations, as agreed upon in its international treaties, or whether it will continue to pursue an aggressive tax position that creates double taxation risks for Brazilian companies and individuals with foreign investments.

Reference: Case RE 870214, Supreme Federal Court of Brazil (STF).