Volume 6, Number 1, Page 5

Recent Developments in Brazilian Tax Law

by Levy and Salamao Advogados

Assignment to securitization companies of credits with collateral in the form of fiduciary alienation

The National Monetary Council on May 7, 1998, issued Resolution No. 2.493 regulating the securitization of bank credits. Included among its provisions was approval for financial institutions to assign credits to securitization companies: special purpose corporations that do not belong to the National Financial System (SFN).

At issue is the securitization of bank credits with collateral in the form of fiduciary alienation might prejudice the enforceability of the collateral by such securitization companies because they are not financial institutions.

This controversy has arisen because there are those who believe that the limitations which Article 66 of Law No. 4.728, dated July 14, 1965 (as amended by Decree Law No. 911, dated October 1, 1969) placed on debtors’ right to defense will result in fiduciary alienation. This would only benefit financial institutions, public sector entities and state-controlled agencies, due to the strict control to which the former are subject and due to the latter’s public character.

Transfer of the collateral to the assignee of credit is implicit in the law itself. For example, Article 1.066 of the Civil Code states that “unless otherwise provided, all accessories of a credit shall be deemed included in its assignment”. Accordingly, Article 2, III, of Resolution 2.943/98 provides that the assignment of credits to securitization companies “implies transfer to the assignee of the agreements, deeds, instruments and guarantees necessary for the enforceability of the credit”.

In addition, since collateral was created within the SFN and under the strict controls imposed on financial institutions, subsequent assignments thereof should imply no additional burden to the debtor.

Additionally, the cancellation of collateral would harm, rather than benefit, the debtor. Pursuant to Article 954, III, of the Civil Code, the cancellation of a guarantee is cause for acceleration of a debt if the debtor fails to furnish additional guarantees after having been notified to do so.

The securitization of bank credits with collateral in the form of fiduciary alienation does not prejudice the enforceability of the collateral itself, which remains valid and effective.

The unconstitutionality of the increase of the icms TAX from 17 percent to 18 percent in the state of São Paulo

A recent pronouncement of the Brazilian Supreme Court confirmed this understanding, in recognizing, by majority vote, the unconstitutionality of articles 3 to 9 of Law No. 6.556/89, and therefore, of the increase under discussion.

Article 34, I, of Law No. 6.374, dated March 1, 1989, governs the Tax on Goods and Services in the State of São Paulo (“ICMS”) and sets the generic ICMS rate at 17 percent. This tax rate is applicable “to internal operations or rendering of services or to operations started outside Brazil.”

State Law No. 6.556, dated November 30, 1989, raised the rate to 18 percent, and was to remain in effect until the end of the 1990 fiscal year. However, eight subsequent laws have kept the 18 percent rate in effect for the following years through 1998.

Proceeds deriving from the additional tax collection were to be directed to a specific organ ¾ the Savings Bank of the State of São Paulo (“Caixa Econômica do Estado de São Paulo”) ¾ for the purpose of supporting the construction of low-income housing. Articles 3, 4 and 5 of Law No. 6.556/89 provide that proceeds obtained with the additional 1 percent have the specific purpose of increasing the capital of the state savings bank for the financing of housing programs.

However, the Federal Constitution, in article 167, IV, expressly forbids linking tax revenues to any specific organ, fund, or expense.

Thus, if the specific destination is unconstitutional, it follows that the tax increase established in connection with such destination will also be unconstitutional. The unconstitutionality of the destination taints the increase itself.

Hence, the Supreme Court’s decision also confers the right to a refund form the ICMS for those taxpayers, such as the final purchasers of goods in operations taxed by the increased ICMS percentage.