October 18, 2023

ADI 5635 - Rio de Janeiro State Laws Funding FEEF and FOT Deemed Constitutional New

On October 17, 2023, the Federal Supreme Court (“STF”) adjourned the virtual trial of Direct Action of Unconstitutionality (ADI) No. 5635, determining that Laws No. 7,428/2016 and No. 8,645/2019 are constitutional. These laws create a 10% deposit to be made toward the State Fiscal Balance Fund (“FEEF”), and the Temporary Budgetary Fund (“FOT”), as a condition for maintaining ICMS tax benefits.

The Court, by a majority vote, established the following thesis: “Laws No. 7,428/2016 and No. 8,645/2019, both of the State of Rio de Janeiro, which created the State Fiscal Balance Fund – FEEF and, later, the Temporary Budget Fund – FOT, are constitutional and consist in atypical funds whose revenues are not linked to a specific and detailed government program.”

The decision has not been published yet, but—according to the reporting judge, Justice Luís Roberto Barroso—the laws were deemed constitutional as no compulsory loan was created, nor any new tax under the Federal Government's residual competence. Instead, it merely created a temporary reduction of the ICMS tax benefit in favor of a fiscal balance fund for the State of Rio de Janeiro. It is worth noting that the Justice highlighted that it is necessary (i) to rule out the possibility of FEEF and FOT revenue being linked to a specific government program; and (ii) to respect the non-cumulative nature of ICMS, in order to guarantee to the taxpayer the possibility to offset the credits related to the amounts deposited.

For further information, please contact our Tax team.

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