Reflections on the Concept of Establishment in the New Civil Code, and E-Commerce Taxation
The concept of establishment and its correct interpretation thereof are essential to the application of the tax rules regulating society and companies’ activities, especially to unequivocally define, on a case-by-case basis, which entity has authority to tax, which is the person subject to said tax obligation (taxpayer), as well as which is the entity responsible for collecting a certain tax.
Historically, the concept of establishment and its application in practice have been established and regulated by the tax legislation, based on transactions and relations created within the society, and on the State’s collecting requirement. The Tax on Manufactured Goods (Imposto sobre Produtos Industrializados) legislation, for instance, focuses on the industrial establishment and on those equivalent thereto to define which are the persons required to collect said tax. The Services Tax (Imposto sobre Serviços de Qualquer Natureza) legislation also focuses on the establishment on considering the location where the company’s activities are performed, on either a permanent or temporary basis, as the service providing establishment. As regards the Income Tax (Imposto sobre a Renda), in turn, with a view to preventing double taxation, international treaties provide for the permanent establishment in a specific article, in order to determine the State with authority to tax.
In an innovating and unprecedented manner in the positive law, the lawmaker specifically provided for the establishment in articles 1.142 to 1.149 of the new Brazilian Civil Code. Under articles 1.142 and 1.143, establishment is the complex of properties organized, aiming at the company’s operation, by an entrepreneur or a business company, and it can be the unitary object of legal, transferable or constituting rights and business that are consistent with its nature.
It should be noted that, as defined by said Code, the establishment is formed by a set of properties interconnected towards the company’s operation. Since the lawmaker failed to specify the kinds of properties that can make up the establishment, we may consider for this effect both the material and the immaterial properties. The material properties, as it is known, correspond to the corporeal things existing in the physical world, and which may the object of ownership. On the other hand, the immaterial properties are those things that do not occupy a space in the physical world, such as marks, patents, advertising expressions and other intellectual creations.
The significance of the immaterial or virtual properties in business activity and the possibility of ascribing a value thereto leaded to their inclusion in the company’s assets. Marks are a good example, because they often represent the highest valued asset of the company. The question to pose now is whether or not the immaterial property, in addition to making up the company’s assets, may also make up the company’s establishment . Our analysis will focus on this issue.
The traditional concept of permanent establishment is pegged to a physical location, whereat a total or partial economic activity takes place on a constant basis. Such concept is not consistent with the nature of the business transacted on the Internet, and in this regard it is necessary to examine the convenience or not of establishing rules specific to virtual transactions.
Part of the doctrine advocates the possibility of application of the already existing tax rules and norms in the virtual world, thereby eliminating the requirement for the enactment of specific rules. In the cases involving the physical circulation of goods, even if the agreement had been made on the Internet, the current tax concepts are sufficient to determine the establishment’s location, the tax payable, the taxpayer and the authority to tax. However, in the cases where there is no material delivery of the goods transacted (e.g., provisions of services, software download or music) doubts remain as to the authority to tax. Would it be of the place where the acquirer of the goods or services resides, the place where the seller of the goods or the provider of the services reside, or the place where the provider is located?
Although slowly, the society and the States have been progressing towards a definition of how and where the e-commerce should be taxed. The provisions on the “establishment” in the Brazilian Civil Code contributed, as regards this issue, another element to be considered in the examination of this matter – the possibility of considering the website – as an immaterial property – a establishment.
As mentioned above, articles 1.142 and 1.143 of the Brazilian Civil Code innovated on providing for the concept of establishment, allowing the law interpreter to characterize it as the whole complex of properties organized towards the company’s operation, including immaterial properties.
As it happens, the said Code expressly provides in its article 1.143 that the establishment may be the unitary object of legal rights and business. As a result, it can be understood that the establishment is formed by the universality of its properties, however it must be treated as a unity for the effects of law. Hence, it is a mater of distinguishing the companies having a physical establishment and a virtual establishment (a website), from those companies existing only on the Internet. In the first, the establishment is formed by material and immaterial properties, whereas in the latter, it is formed by immaterial properties (website, marks, domain name, etc.) only.
The point at issue is, then, to establish which Brazilian companies have only a virtual existence. At this point, it should be reminded that to register a domain name in Brazil, the Brazilian company is required to have an address, corporate documents, and corporate taxpayer registration (CNPJ). Hence, the existence of a physical place is required.
Based on the foregoing, one can conclude that articles 1.142 and 1.143 of the New Civil Code enabled the characterization of the website as a part forming the establishment. However, considering the condition of establishment as a unitary object of a right, the website still may not, in an isolate manner, make up an establishment.
Therefore, when it comes to the Internet, the determination of the entity with authority to tax, of the person subject to the tax obligation (taxpayer) and of the entity responsible for the collection of a certain tax is still pegged and subject to the traditional concepts of establishment, as treated in the Brazilian Civil Code and in the tax legislation currently in force.
* Attorney at Demarest e Almeida Advogados