Managers, Owners Not Personally Liable for Companies' Social Security Taxes, Brazil's Supreme Court Rules

Brazil's Supreme Court (STF) on November 3 ruled that officers and owners of businesses are not personally liable for social security taxes owed by their companies unless they are owed because of acts committed in excess of their granted powers or in violation of the law or the company's articles or bylaws.

The decision is important because it deals with an issue that is often disputed, particularly regarding who (the government or the taxpayer's officers/managers) has the burden of proof to show that a given person has acted in excess of his granted powers. Although common sense would dictate that the burden of proof should be on the tax administration based on the constitutional principle of presumption of innocence, that is not what is seen almost daily in Brazilian courts. The STF's ruling will hopefully put an end to the controversy once and for all.

The decision was rendered in Extraordinary Appeal No. 562276, which was filed by the Federal Revenue Attorney General's Office (PGFN) against a federal appellate court's decision that sided with the taxpayer (Owner's Bonés Promocionais Ltda - Me) and ruled article 13 of Law 8,620/1993 unconstitutional.

Under article 13, which was revoked in late 2008, the sole proprietors and owners of limited liability companies were jointly liable, with their personal assets, for social security tax liabilities. The provision assigned controlling shareholders, officers, managers, and members of the board of a corporation joint and secondary liability for nonpayment of social security taxes arising from willful misconduct, fault, or negligence.

In theory, the revocation of article 13 should have lifted any constraints imposed on individuals based on Law 8,620/1993. However, the PGFN has been reluctant to accept this and has taken the official position that third-party liability measures imposed before the revocation of the provision of Law 8,620/1993 were fully valid. The PGFN held that the revocation of article 13 applied only prospectively (in this case, after December 3, 2008) -- that is, for situations taking place after the revocation of that provision of Law 8,620/1993.

Upon reviewing the case, STF Justice Ellen Gracie reviewed the existing statute on third-party tax liability and concluded that the Federal Constitution and the National Tax Code require that personal tax liability be somehow related to the taxable event or the taxpayer. Justice Gracie held that in the case of corporate officers, managers, or legal representatives, the mere lack of payment of a tax is insufficient to hold an individual liable for the company's tax debts. It must be clearly evidenced that the individual has committed an illegal action or omission that led to the nonpayment of a tax.

Justice Gracie held that by designating an individual's status as sole proprietor or officer of a company sufficient in itself to hold that person jointly liable for a company's social security tax debts, article 13 of Law 8,620/1993 violated the Federal Constitution and the National Tax Code. Under article 146, Item III(b) of the Constitution, only a complementary law duly approved by Congress could regulate this issue because it refers to general tax rules; as an ordinary law, Law 8,620/1993 could not regulate the matter.

The STF judgment not only sets its position on the matter but also has an impact on the lower courts because in 2007 the STF declared the case at hand as subject to "general repercussion." Under Constitutional Amendment 45/2004 and the Code of Civil Procedure, that means that the constitutional issue at stake is so economically, politically, socially, or legally relevant that its effects may surpass the subjective interests of the appellant directly involved in the case and reach a broader group in Brazilian society. Thus, all Brazilian lower courts will eventually have to follow the STF's position on the matter.

That is clearly good news for thousands of individuals who have been held liable by the PGFN for their companies' unpaid social security taxes over the years. In some extreme situations, this has meant the pledge of their personal assets and the freezing of bank accounts. Although Law 8,620/1993 refers specifically to social security taxes, the STF decision may also apply to similar situations not addressed by that piece of legislation.

- David Roberto R. Soares da Silva, partner, Battella, Lasmar & Silva Advogados, São Paulo

(Article originally published in the November 9, 2010 edition of World Tax Daily - Copyrights Tax Analysts)