Supreme Court changes its ruling and authorize the social security taxation upon “1/3 constitutional vacation” paid to employees


Contrary to the ruling rendered by the Superior Court of Justice (STJ) on the Special Appeal 1,230,957 in favor of the taxpayers with respect to the non-levy of social security taxation upon amounts paid as “1/3 constitutional vacation” (taken by the employee), on last week’s judgment (08.28.2020), by majority vote, the Brazilian Supreme Court (STF) ruled on the Extraordinary Appeal 1072485 – leading case – an important and different tax thesis on the same matter.

This is because, on this recent case, the Supreme Court recognized the constitutionality of the levy of social security contributions upon payments made as 1/3 constitutional vacation taken by employees, changing its past rulings related to non-existence of constitutional matter in this case.

According to the vote of the rapporteur judge Marco Aurélio, the regular payments of “1/3 constitutional vacation” does constitute compensation as result from labor work.

Although the STF’s decision is still subject to appeal by the parties, this precedent was judged by the system of the so-called “general repercussion”, which means that the current precedent unfavorable to taxpayers will serve as guidance to other Courts (judicial and administrative) and lower levels ruling on the matter.

Another important issue is the possibility of the so-called modulation of the effects of the decision insofar as the new positioning of the STF is contrary to the STJ ruling and, for this reason, the modulation of its effects shall be necessary in order to respect the principle of legal certainty. The taxpayers shall also be aware of the future developments of this case, as the final outcome may impact social security offsets made in the past based on the STJ’s past ruling.

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