São Paulo State Court of Appeals authorized an agribusiness company under judicial reorganization to use ICMS tax credit for the acquisition of raw materials and other inputs, despite debts owed to the State (Interlocutory Appeal No. 2010460-22.2017.8.26.0000).

The application of ICMS credit, here understood as the recognition of its value, and its subsequent use for the acquisition, for example, of raw material, packaging material, fixed assets, or even for transfer to non-interdependent third parties, is subject to prior authorization from the Tax Authorities. Such authorization, as a rule, is prohibited in cases in which the taxpayer has (tax) debts with the State, even though such debts are subject to installment payment programs.

However, agribusiness taxpayers—specifically meat, meat processing and leather companies that have a Special Tax Arrangement with the São Paulo Tax Authority—under the terms of Decree No. 57,686/2011, are excluded from this rule. In this case, the legislation removes such prohibition, allocating, alternatively, 50% of the accumulated credit for payment of tax debts, while the remaining 50% can be applied by the taxpayer to the purchase of inputs, for example.

The case analyzed by the TJ-SP, involving Vitapelli Ltda.—a leather company that has been under judicial reorganization since 2010—is relevant because, in addition to the law itself, the tax authorities' refusal to release the credit was based on the fact that the company would be a serial debtor, who uses the judicial reorganization to not pay its tax debts, accumulating a BRL 300 million indebtedness arising from tax assessments and fines.

The appeals court panel, however, understood that the São Paulo Tax Authority did not prove any kind of fraud on the part of the debtor that authorizes the blocking of credits, noting also that the State does not have the right to prevent the company from using its credits, mainly because such claims will help not only the company but also all its creditors. This decision reinforces the principle of maintenance of company’s activities, in the sense that Law No. 11.101/2005, which regulates the judicial reorganization proceeding, requires the turnaround of the company, so it can pay its debts, continue to produce and create jobs.

Regarding the limitation of the free use of only 50% of the ICMS credit, the Court considered that this restriction does not affect "situations prior to its enactment", maintaining, based on the principle of non-retroactivity of the tax norm, the rule then in force on the date of the credit, unless the most recent rule is more beneficial to the taxpayer.

The precedent is also important especially since October 2017, when the São Paulo Tax Authority began limiting the use of ICMS credits, providing that taxpayers involved in agribusiness must use such credits only to settle tax debts. Following such payment, it could assign the remaining amount to other destinations, such as acquisition of inputs and fixed assets.

Although tax indebtedness is not subject to judicial reorganization, it is frequently a topic of discussion related to the proceeding. This is because an understanding has been established by the Brazilian courts that the judge in charge of the judicial reorganization proceeding, who has a more detailed view of the debtor’s situation, is the one responsible for deciding on constriction actions on a debtor’s assets, including orders issued in tax collection lawsuits.

In addition, according to a recent study, companies under judicial reorganization owe approximately BRL 455 billion to the tax authorities, while the total indebtedness to be restructured in the judicial reorganization amounts to BRL 325 billion. Therefore, stakeholders should not address only the amounts under the judicial proceeding, since most of the debt is, in theory, outside of the process.

Our Tax and Restructuring, Bankruptcy and Insolvency teams are available to assist you in evaluating any limitations imposed by the São Paulo Tax Authority on the appropriation and use of ICMS credits, as well as on insolvency proceedings.