According to the Federal Revenue Service, amounts paid to employees as compensation for moral and material damages, pursuant to a court-approved agreement, are not deductible in determining taxable income.

This was the understanding recently confirmed by the tax authorities in Consultation Solution No. 77 – Cosit.

The argument used was that article 311 of the Income Tax Regulation (“RIR” – Decree 9580/2018), determines that only the expenses necessary for the company’s activity and the maintenance of the respective production source are deductible, not which is the case of said indemnities paid in labor agreements. This is because the indemnities due to the practice of unlawful acts, or even to close processes in which the practice of unlawful acts is assessed, cannot be considered necessary for the company’s activity, as they are not essential to the promotion of its operations or transactions, nor usual or normal.

Thus, in order to avoid debates and questions whose final result is, in most cases, uncertain, it is recommended that, as far as possible, agreements specify the value attributed to each type of budget, even for those of a pure nature arising from the employment relationship, arise, as a consequence, incidences of tax charges.