On 30 August 30, 2023, the Brazilian Federal Government published the Provisional Measure Order No. 1,185, aiming to regulate the application of tax credits arising from investment subsidies. Given the political complexities surrounding this issue, the government proceeded to introduce Bill No. 5,129/23 to Congress on 24, October 2023, under the same terms initially outlined in that Provisional Measure.
Bill No. 5,129/23 represents a significant shift in the taxation of investment subsidies, revoking the stipulations for the Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL), as well as provisions for the Social Integration Program (PIS) and the Contribution for Social Security Financing (COFINS) as specified in article 30 of Law No. 12,973/14, alongside items IX and X, paragraph 3, article 1 of Laws No. 10,833/03 and 10,637/02.
The main points addressed by the Bill No 5,129/23 are listed below:
| ASPECT | CURRENT SCENARIO | PROPOSED SCENARIO |
| SUBSIDY | Investment subsidies are excluded from the calculation basis for Income Tax (IRPJ), Social Contribution on Net Profit (CSLL), Program of Social Integration (PIS), and Contribution for the Financing of Social Security (COFINS). | Establishment of a 25% credit on subsidy income for the Income Tax on Corporate Entities (IRPJ), available for refund or offset with federal taxes. Revocation of tax exemptions on investment subsidies for the Income Tax on Corporate Entities (IRPJ), Social Contribution on Net Profit (CSLL), Social Integration Program (PIS), and Contribution for the Financing of Social Security (COFINS). |
| CRITERIA | Establishment of tax incentive reserves within equity, as stipulated by article 30 of Law No. 12,973 of 2014 and Complementary Law No. 160 of 2017. | Subsidy revenues must be allocated to initiating or expanding a business operation. Eligibility criteria: (i) Receipt of an investment subsidy by the entity. (ii) Subsidy award before business operation implementation/expansion. (iii) Explicit terms, conditions and expectations in the subsidy award. Post-April 2024, creating a tax incentive reserve in equity becomes redundant. (Existing reserves as of December 31, 2023, are to remain as net equity and may only be utilized as specified in article 30 of Law No. 12,973 of 2014). |
| CREDIT DETERMINATION | Upon meeting conditions outlined in Law No. 12,973/2014 and Complementary Law No. 160/2017, the investment subsidy sum can be deducted from the calculation bases of Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL). | A tax credit of 25% is recorded in the Tax Accounting Records in the year revenue is recognized. Subsidy revenues for implementation or expansion are eligible for the tax credit. The tax credit applies to revenues recognized post-implementation/expansion. Subsidy amounts exceeding expenses are excluded from the tax credit calculation. The benefit is capped until December 2028. |
| TAXATION | Revenues from investment subsidies will continue to be exempt from contributions to the Social Integration Program (PIS) and the Tax for Social Security Financing (COFINS), in accordance with items IX and X, §3, article 1 of Laws No. 10,833/03 and No. 10,637/02. | Repeal of the clauses that address the non-incidence of Social Integration Program (PIS) and Tax for Social Security Financing (COFINS) on revenues resulting from investment subsidies. Repeal of art. 30 of Law No. 12,973/14. The Income Tax credit will not be taxed by Income Tax (IRPJ), Social Contribution on Net Profit (CSLL), Social Integration Program (PIS) and Tax for Social Security (COFINS) (Art. 11). |
| FAVORABLE DECISIONS | Favorable ruling from the Federal Supreme Court (Decision EREsp 1.517.492/PR), supporting the federative pact thesis. Under Federal Supreme Court Topic 1182, Value-Added Tax on Sales and Services (ICMS) benefits may be excluded from the Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) calculations, subject to the criteria of article 30 of Law No. 12,973/14 and Complementary Law No. 160/2017. | Awaiting vote. The legislation is set for review within a maximum period of 45 days by each house of the Brazilian Congress. |
It’s worth mentioning that Bill No. 5,129/23 introduces article 15, a provision absent from the initial Provisional Measure Order. This article ensures the utilization of benefits related to Income Tax (IRPJ), Social Contribution on Net Profit (CSLL), Social Integration Program (PIS), and Tax for Social Security Financing (COFINS) that are stipulated by specific laws, such as those in effect in the jurisdiction of the Superintendence for the Development of the Northeast (Sudene) and the Superintendence for the Development of the Amazon (Sudam).
It’s noteworthy that the government has prepared the bill under an urgent regime, requiring a decision within 45 days. Should it pass, the measures will become effective as of 1, April 2024.
