Insights > Client Alerts

Client Alerts

Supplementary law that provides for the non-incidence of ICMS in transactions between establishments of the same ownership sanctioned with veto

January 2nd, 2024

On December 29, 2023, within the context of Action for Declaration of Constitutionality 49 (ADC 49), the President of Brazil approved Supplementary Law No. 204/2023, amending Supplementary Law No. 87/1996 (Kandir Law), to establish the non-incidence of value-added tax (ICMS) on the transfers of goods between establishments of the same ownership.

These amendments provide for the system to transfer credits linked to previous transactions in favor of taxpayers, thus ensuring credit even in interstate transfers, under the following terms:

  • By the destination state, through credit transfer, limited to the current interstate rates, which will be levied on the amount relating to the executed transfer; and
  • By the origin state, in the event of a positive difference between credits from previous operations and credits transferred to the destination establishment.

Supplementary Law No. 204/2023 will enter into force on January 01, 2024.

In parallel, the President of Brazil vetoed a controversial provision that enabled taxpayers to opt for equating transfers between their establishments to an ICMS-taxed transaction. In other words, taxpayers would have been given the choice on whether transfer operations between their establishments would be taxed.

The President of Brazil argued that this provision “contradicted public interest, increasing legal uncertainty, inhibiting tax oversight and raising the likelihood of tax avoidance or even evasion.”

It is important to highlight that although the sanctioned provisions do not expressly address the mandatory transfer of credits, they are expected to be reconciled with ICMS Agreement 178/2023, which imposes the listing of the ICMS for purposes of transferring credits resulting from operations executed prior to interstate remittances.

Finally, new motions for clarification that have been filed within the scope of ADC 49 are still pending trial and aim to:

  • Obtain clarification on the option to use ICMS credits in the origin or destination states, at the of origin or destination, at the taxpayer’s discretion; and
  • Extend the deadline for the decision to become effective (at least until the financial year of 2025, in order to enable the timely issuance of a normative act that provides for this matter).

Demarest’s Tax team is available to provide any further clarifications that may be necessary.