Understanding what the requirements used by the Federal Supreme Court (STF) are to grant reciprocal tax immunity to state-owned companies is certainly one of the most challenging tasks in the realm of academic research. Any attempt at systematization is insufficient due to the recent court decisions.

The Federal Constitution establishes in article 150, subsection VI, paragraph a, that the Federal Government, States, Federal District, and municipalities may not impose taxes on each other's assets, income, or services. This is the basis of what has come to be known generically as reciprocal tax immunity.

The second paragraph of article 150 extends the right of tax immunity to the municipalities and foundations created and maintained by the public power. There is no mention of state-owned enterprises in the Federal Constitution. The application of this right to them derives from case law of the STF.

In the beginning it was simple: the STF granted the right to tax immunity to government-owned companies that provide public services and economic activities considered a state monopoly, requirements that were met by the Post Office and Infraero, the first state-owned companies to be granted tax immunity.

Other public companies that provided public services and in practice acted as true instrumentalities, with loss-making operations and demanding budgetary resources, also obtained tax immunity.

After being prompted several times, the STF issued the understanding that governed-controlled companies would not be entitled to reciprocal tax immunity, even if their purpose was to provide a public service, because their activities are inherently focused on remunerating their shareholders.

In a previous case, when the possibility of granting tax immunity to Sabesp was analyzed (RE 600.867/SP, Topic 508), the STF held that reciprocal tax immunity would not apply to government-controlled companies whose shares are traded on stock exchanges. The trading of the state sanitation company's shares was said to be strong and irrefutable evidence that the company's goal was the remuneration of its investors.

Based on these precedents, requests for granting tax immunity to government-controlled companies are usually denied in the Judiciary.

However, the STF has been rendering decisions that, at first glance, seem to be relaxing the hitherto existing prohibition on extending reciprocal immunity to government-controlled companies. In April of 2022, another decision was handed down in this regard (Original Civil Action - ACO 3.410).

The Federal Supreme Court granted the lawsuit filed by Companhia de Saneamento de Sergipe (Deso) to recognize reciprocal immunity from federal taxes levied on the assets, income, and services provided by state-owned companies.

In the suit, despite being a government-controlled company, Deso contended that it is a company that provides essential public services and works on an exclusive basis for almost all the municipalities in the state (71 of the 75 municipalities in Sergipe). He also stressed that, although it is a government-controlled company, the majority shareholder is the state of Sergipe, which holds 99% of the shares.

Reporting Justice Luis Roberto Barroso found that the company met the requirements for extension of reciprocal tax immunity:

• provision of a public service;
• absence of intention to make a profit; and
• action on an exclusive basis.

The Justice pointed out that Deso, unlike other government-controlled companies, conducts activities that constitute a state public service, as per the terms of article 23, IX, of the Federal Constitution, that is, the supply of drinking water and collection and treatment of sanitary sewage.

The Justice also considered the fact that Deso has exclusive operations in 71 of Sergipe's 75 municipalities and that its capital stock belongs almost entirely to the state (99%).

This is not the first time that the STF has relaxed its own requirements for granting tax immunity. In 2018, reciprocal tax immunity was granted to Serpro, a public company operating in the data processing and technology service segment (ACO 2,658).

The understanding that prevailed in the constitutional court was that Serpro, by exclusively providing information processing and data processing services that aim to modernize and give agility to strategic sectors of the Public Administration, would be able to enjoy tax immunity.

Analyzing the STF's case law, one gets the impression that the requirements have been applied in a very flexible way. Criteria that were objective up to now have been made subjective in order to contemplate some specific and exceptional situations.

Take the case of Serpro, for example, where the criteria of "public service" and "exclusivity arrangement" have been flexed to the limit. Serpro did not meet either of the two criteria previously applied by the STF. The activity it performs is an economic activity that is free to any agent of private enterprise. There is no legal exclusivity. The Federal Government has no constitutional or legal mandate to provide these services.

What there is, in reality, is a merely circumstantial exclusivity. Serpro is systematically contracted by the bodies and entities of the Federal Public Administration based on the case of exemption from bidding provided for in Law 8,666/93.

These characteristics were enough for the STF to recognize that the company is entitled to tax immunity when it performs activities aimed at serving public customers.

The same loosening is observed in the "no profit objective" criterion.

Previously, government-controlled companies were denied the right to tax immunity because of their legal status. The mere fact that they were government-controlled companies was an indication that the company aimed at making profit and enriching its shareholders. The presumption was absolute if the government-controlled company traded its shares on the stock exchange.

However, after some dispute, the STF started to issue decisions establishing that government-controlled companies that had the State as majority and practically exclusive shareholder would be entitled to tax immunity.

This is, of course, a rather questionable assumption. It is possible that government-controlled companies, even if with almost exclusive state participation, carry out activities with the intention of profit and enriching the state's wealth, especially in the basic sanitation sector, where the company acts as a true contractor of the municipalities that hold exclusivity for the provision of sanitation services.

The STF's criteria, in the way they have been applied, could create two kinds of problems:

• The need for constant monitoring of the factual situation underlying the decision that conferred reciprocal tax immunity. The tax immunity should be revoked if, for example, Deso changes its shareholder composition or ceases to provide exclusive services in the municipalities. This need, in fact, was pointed out by Justice Roberto Barroso in his opinion in the constitutional action.
• The risk of creating situations of violation of equal protection and perpetuating economic distortions. Currently, government-owned companies or government-controlled companies with almost exclusive state participation that provide public services enjoy reciprocal tax immunity, regardless of the characteristics of their operations. Government-controlled companies with significant private participation, on the other hand, do not have the same benefit.

It is fully possible, therefore, for state-owned companies with consistently high profit margins to continue to enjoy tax immunity. The situation is even more worrying when these companies provide public services that do not belong to the public entity that created the company, as happens in the basic sanitation sector.