Brazilian companies free from taxation of foreign subsidiaries' Equity appreciation

UPDATE FROM DECEMBER, 2013: The rules of taxation over foreign subsidiaries have changed completely. Please ignore this post an go to

Brazil adopts universal taxation for individuals and corporations - What to do?

Today (April 6, 2011),  the Brazilian Superior Court on non-Constitutional subject, called STJ (Superior Tribunal de Justiça), has published an important decision for the Brazilian companies with subsidiaries abroad.

The Court ruled as illegal the regulatory diploma issued by the Brazilian Stock and Exchange commission that obliged Brazilian Companies to pay income tax over the Equity appreciation of such subsidiaries.

The situation was, in fact, very unusual: Since 2001, the Brazilian matrix must pay income tax over the profits of the foreign subsidiaries.

 This, although painful, is comprehensible. However, the  Agency understood that it was not enough, and decided that the equity appreciation of such subsidiaries should also be subject to income taxation.

This has led to a very unfair scenario, where variation in the exchange rate of the Brazilian Real and even loans acquired by the subsidiary could "inflate" the equity value, thus generating tax obligation in Brazil, in spite of no real profits or no real Value being actually generated.

A thumbs up for the STJ.