STF Deems 50% Tax Penalty Unconstitutional

On March 17, 2023, the Brazilian Federal Supreme Court ("STF") ruled in favor of taxpayer in the Extraordinary Appeal No. 796,939, (Theme 736 of general repercussion) and Direct Action of Unconstitutionality No. 4,905, which challenged the constitutionality of the isolated penalty of 50% due to the denial of tax offset requests, provided in Article 74, paragraphs 15 and 17, of Law 9.430/1996.

The Full Court, by unanimous vote, established the following thesis of general repercussion: “It is unconstitutional for the isolated penalty provided by law to be applied over a mere denial of tax offset, since it does not constitute an unlawful act that enables the automatic monetary penalty.”

According to the reporting judge of the Extraordinary Appeal, Justice Edson Fachin, the tax penalty cannot have a confiscatory nature, and any type of penalty could only be applied in a case of an unlawful act.

Moreover, the Justices concluded that the isolated penalty violates the principles of proportionality and due legal process, as well as the full exercise of the taxpayers’ right to petition, provided for in Article 5, item XXXIV of the Brazilian Federal Constitution.