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Brazil: Guilty Until Proven Innocent

New Brazilian rules increase the risk that executives may be held personally responsible for their company’s tax liabilities.


SAO PAULO -- For top executives at Brazilian companies, the risk of being considered personally liable for legal issues involving their firms comes with the territory.  The purpose of this article is to shed some light on the issue of personal liability and to provide some guidance for officers, managers and board members so that they might avoid or minimize this risk.

Under Brazilian law, the concept of “administrador” (the person in charge of administrating a company or business) may apply to managers, executive officers or members of the board of directors.  In this article, we will use the word “officer” to refer to all of these categories.


One reason why officers have become so concerned about civil liability is that many court decisions have been issued determining what is called the “disregard of legal entity,” resulting in the personal assets of an individual (in this case, the officer) to be attached in a legal proceeding aimed at indemnifying a plaintiff for losses or damages caused by a legal entity.  In normal circumstances, judgments would be reached involving the company’s assets only. But individual officers can be held personally liable in cases that touch on a broad range of issues, including labor, environmental, consumer and antitrust. However, there are two legal requirements which must be present in order to result in personal liability: the individual must have committed fraud and must have reaped financial benefit from that fact. Furthermore, the court’s decision must be limited to a specific case.

According to the Brazilian Corporation Law and the Brazilian Civil Code, an officer is legally committed to act with diligence and loyalty on behalf of the company, respecting the confidentiality and disclosure rules that are similar to international standards, and to run the company’s business with the same care that any honest and diligent person would have when taking care of his/her own personal business. 


According to both statutes, the officer would only be required to indemnify any kind of damages if those damages were the result of his/her fault (defined as negligence, recklessness or malpractice), deceitfulness, malice, bad faith or violation of the law, or violation of the articles of incorporation or of the by-laws of the company.  An officer may be sued by the company itself, by a shareholder or by any third party which suffered damages resulting from the officer’s act or omission.

Another major concern for officers of Brazilian companies is the possibility of being considered personally responsible for corporate tax liabilities. The reason for the concern is that the Brazilian tax authorities have stepped up efforts to find officers personally liable for corporate tax default. 


Cases in which an officer can be deemed personally liable for the company’s tax debts are limited to those expressly set forth by the Brazilian National Tax Code.  However, a recent ruling by the Supreme Justice Court (Superior Tribunal de Justiça), which is responsible for the interpretation of the Brazilian federal law, has alarmed corporate officers across the country. 

According to this new interpretation, if an officer’s name be included in the document required to commence a tax foreclosure proceeding, the officer is required to prove that he/she has not acted in violation of the law, or in violation of the articles of incorporation or the by-laws of the company, or has not exceeded the powers with which he/she had been vested – instead of requiring the tax authorities to prove that the officer had acted in such a way.


The officers’ fears have recently increased by virtue of an internal administrative rule enacted by the office of the Attorney General of the National Revenue Service (Procuradoria-Geral da Fazenda Nacional) orientating the attorneys of the National Revenue Service to include those who are jointly and severally responsible (in this case, officers) in the tax debt certificate (certidão de dívida ativa).  Despite being contestable, this directive opens the possibility for targeting a tax foreclosure against the officers upon a petition by the tax authorities.

As a result of this new ruling, officers should take certain precautions to make sure they are properly satisfying all legal requirements and to avoid putting themselves at risk. Not only should the role and responsibility of each officer be described in the articles of incorporation or the by-laws of the company. It is also important to adopt corporate governance procedures focused on the tax area. Tax management should now be oriented not only by efficient tax planning, but also by identifying risks and being transparent in decision-making regarding the payment of taxes. This could avoid an innocent officer being considered jointly and severally liable for acts or omissions performed by other officers.

It is recommended that all the officers work closely with the company’s legal department, in order to receive appropriate advice on decision-making in the tax area. Officers should carefully follow all corporate compliance policies and, in case they are unsure of the legal implications, request authorization from headquarters or from the parent company when performing critical tasks. The annual approval of financial reports, consistent with opinions issued by independent auditors, should exempt the officers from liabilities relating thereto (except in case of fraud).

Another recommended safeguard, which is becoming more common in Brazil, is to set forth in the officer’s labor contract the company’s commitment to pay for insurance coverage (Directors & Officers insurance), along with guarantees that the officer has the right to be indemnified by the employer under certain conditions.  Finally, when negotiating D&O insurance with the insurance provider, officers should read the fine print and understand which events are covered. 

Paulo Sergio de Moura Franco, specializes in corporate law, is a partner in the Brazilian law firm of Franco Kelly based in Sao Paulo.  Eduardo Fazoli, with his own firm in Sao Paulo, specializes in mergers and acquisitions, corporate law, foreign investment, foreign trade and international agreements. This article is republished with permission from Kroll Tendencias, Kroll’s monthly newsletter.


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