Supplementary Law 160 of 2017 has eliminated the distinction between investment subsidies and cost subsidies in connection with ICMS incentives. According to such law, all ICMS incentives granted by the States of Brazil should be excluded from the basis of the Income Taxes. Supplementary Law 160 is silent with respect to the requirement of booking these incentives in a special tax incentive reserve, which cannot be distributed to the shareholders, which is normally applicable to investment subsidies. Such requirement, in principle, continues to apply.
Supplementary Law 160 provides that this treatment is applicable to ongoing administrative proceedings and lawsuits, suggesting it is interpretive and would affect transactions occurred in the last five years. However, to avoid penalties in relation to the past, we recommend taxpayers not to offset overpayments directly, but to seek refund either in administrative proceedings or in court.
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