Recently, an unprecedented decision was published by the 1st Panel of the Superior Court of Justice (“STJ”), according to which the companies that pay Corporate Income Taxes (“CIT”) under the real tax profit method may deduct, from the taxable basis, all amounts paid to the companies’ officers and directors.

The decision derives from the judgment of Special Appeal No.  1.746.268 (“REsp”) which modified the decision of the Federal Regional Court of the 3rd Region (“TRF 3”), which followed the previous position of the courts that allowed the deduction only of fixed monthly paid compensations.

The Minister, Regina Helena, based her vote on the justification that it is impossible to charge CIT only based on infra-legal legislation. Thus, the restriction in Normative Instruction No. 93 of 1997 (the Instruction that served as the basis for the restriction of the deduction by the TRF 3) results in an indirect increase in taxation based only on the infralegal rule. Therefore, there is a violation to the constitutional principle of legality provided in article No. 150, item I, of the Federal Constitution, and article No. 97, item IV, paragraph No. 1 of the National Tax Code of Brazil.

Although the decision has no binding effect, it sets an important precedent so that other companies in similar situations can claim the same right to deduct from the income tax base all compensation to managers and directors, regardless of whether they are made on a fixed monthly basis.

By Bruno Salama