The rental company must pay the vehicle tax (IPVA) in the state where the vehicle is being driven.

The Brazilian Supreme Court (STF) has ruled that car rental companies must pay IPVA (Vehicle Property Tax) to the state where the car is driven, i.e., the location where the vehicle is made available to the customer. In the ruling, the justices also determined that the renter can be held liable for the tax if the rental company fails to pay it.

The decision is expected to impact finances and also how companies in the sector are organized. Experts say that rental companies usually register their entire fleet in a single state – generally the one where the company headquarters are located.

Data from the Brazilian Association of Car Rental Companies (Abla) shows that 67% of vehicles available for rent in the country have license plates from Minas Gerais. This is the state where Localiza, one of the largest companies in the sector in South America, with more than 200,000 cars, is headquartered.

The state offers a reduced IPVA (Vehicle Property Tax) rate for rental car companies registered with the State Treasury Department. Rio de Janeiro and São Paulo also grant a similar benefit.

The Supreme Federal Court (STF) ministers ruled on the payment of IPVA (Vehicle Property Tax) when judging a direct action of unconstitutionality (ADI) presented by the National Confederation of Commerce against a law of Santa Catarina, No. 15,242, of 2010, which determines the payment of the tax even if the company is domiciled in another state and the vehicles are registered there.

“It is not the use of the vehicle that gives rise to the obligation to pay IPVA (Vehicle Property Tax), but rather the ownership relationship that the owner maintains with the asset. Registration and licensing are the distinguishing sign that justifies the tax,” argued lawyer Daniel Monteiro Peixoto, representative of the National Association of Vehicle Rental Companies (Anav), which acted as an interested party in the process, against the law in a video made available to the ministers.

The legislation in Santa Catarina also establishes that lessees may be held jointly liable for payment. The law addresses partners, directors, managers, or administrators of companies, as well as public officials responsible for vehicle rental contracts with the rental company that failed to pay the tax to the State.

The trial, which concluded Monday in the virtual plenary session, had a close vote: six to five. The vote of the rapporteur, Minister Dias Toffoli, prevailed, upholding the constitutionality of the Santa Catarina law. He did, however, raise reservations regarding the tenant's liability.

Toffoli vetoed the possibility of holding the public official responsible for hiring the vehicle accountable and limited the liability of the private sector. According to the minister, the company may be called upon to pay the debt. He took into account the fact that the company can demand proof from the vehicle rental company that the IPVA (vehicle property tax) was paid.

Regarding who should collect the tax – whether the state where the rental company's headquarters are located or the state where the vehicle is made available to the customer – Dias Toffoli believes that allowing the entire fleet to be registered in a single location creates a favorable scenario for some states to collect the tax in a less burdensome way. "This encourages unfair concentrations of vehicle registrations in these federative units," he states in his vote.

In his opinion, Toffoli further states that the Federal Constitution "allows the legislator to choose as the taxable event for IPVA (Vehicle Property Tax) not only ownership, but also beneficial ownership and possession of a motor vehicle under any title."

This understanding was shared by Justices Alexandre de Moraes, Gilmar Mendes, Cármen Lúcia, Rosa Weber, and Luiz Fux. Justices Marco Aurélio, Edson Fachin, Luís Roberto Barroso, Celso de Mello, and Ricardo Lewandowski dissented.

According to lawyer Luiz Massara, from the firm Massara Pieroni Advogados, which represents car rental companies, the decision "is a disaster" for the sector, especially from an operational standpoint. "It's not compatible with the dynamics of the market," he says.

The lawyer states that it is not always possible to foresee where the vehicle will be used. This could be because the client picks it up in one state and returns it to another, for example, or because when a company contracts the rental, it is the company that decides where the car will be used.

Furthermore, he points out that fleet redistribution is common. At certain times of the year, for example, vehicles that were in one state may be redirected to another due to demand – such as beach locations during peak season.

The market was caught off guard by this decision. The Supreme Federal Court began judging, in 2018, RE 1016605, which also deals with the subject. The ministers would decide, in a case with general repercussions, whether the IPVA (Vehicle Property Tax) should be paid to the state where the company is domiciled or to the state where the vehicle was registered.

At that time, five ministers voted in favor of the vehicle's registration location, and three sided with the rental company's domicile. The trial was not concluded in 2018 only because Dias Toffoli requested a review. Ministers Luís Roberto Barroso and Gilmar Mendes were not present at the 2018 session.

This ruling—and the score, up to that point—gave hope to the sector that the outcome would be favorable to the companies. RE 1016605 was also brought to a vote in the virtual plenary session, concurrently with the ADI, and the score reversed.

Minister Luiz Fux, who in 2018 had sided with the state where the vehicle was registered, changed his vote. The final outcome was the same as in the Direct Action of Unconstitutionality (ADI).

Source: Economic Value