General Conditions for Sellers x General Conditions for Buyers – Form Battle

With the permanent need for swifter solutions for issues that commonly arise in the business world, companies developed standard clauses to regulate matters that are the subject of their commercial relations of buying and selling products and/or services. Thus, instead of discussing in each new business deal what will be the warranty period offered for a certain product, what are the rules in the event of non-payment of the price, what is the liability between the parties, what is the applicable law, etc., companies concluded that it would be much simpler if their commercial and legal conditions were previously defined, thereby saving time and money.

With this focus, it became common for companies to send their general conditions attached to proposals, quotes and invoices, so that such conditions were considered valid for that deal, without the need for discussion of the contract.

The fact is that if, on the one hand, the seller/supplier defined their sales conditions in a standardised manner, buyers also decided to simplify their lives and created their own standardised conditions for purchasing products and/or services.

Accordingly, it frequently happens that, in the same legal transaction, the seller attaches its “General Terms and Conditions of Sale” to its proposals and/or invoices, while the buyer attaches its “General Terms and Conditions of Purchase” to its orders.

It is at this moment that the doubt arises as to which should prevail: the General Terms and Conditions of the Seller or the General Terms and Conditions of the Buyer?

Battle of The Forms

The so-called Battle of the Forms is the dispute between the Terms and Conditions (T&C) or standard clauses of different parties to the same commercial contract. This battle occurs in business-to-business (B2B) commercial relationships, especially in cases where both business partners present their respective T&C as being the rules applicable to that business relationship, and the T&C of each party have divergent and/or contradictory points with the T&C of the other party. And even if the T&C of one party establishes its prevalence over any other documents pertaining to that contractual relationship, the situation is complicated when the other party’s T&C also establishes its prevalence over other documents.

Currently, there exist several solutions to this Battle of Forms, which are determined mainly by the country where they will be applied. In the United States, for example, there is the UCC (Uniform Commercial Code), which provides its own rules for the solution of this battle. In addition, there are two solutions that are internationally considered the best for resolving the impasse. These are the “last-shot rule” and the “knock-out rule”.

The “last-shot rule” holds that the T&C that will prevail are those that were last sent to the other party, taking into consideration the chronological line of negotiations, and that were accepted by such other party (even if only tacitly).

Also according to this rule, as long as there are partial T&C acceptances, for example, with suggestions for modifications, we are still at the stage of counterproposals. Thus, the contract will only be formalised when there is acceptance, without any changes, of the last T&C sent by either of the parties.

The “knock-out rule” establishes that, in the case of divergent or contradictory rules between the T&C submitted, they end up “knocking each other out”, i.e. excluding each other. In such event, as a loophole arises, the excluded terms would be replaced by the provisions of the United Nations Convention on Contracts for the International Sale of Goods (CISG) or the applicable legislation.

Battle of The Forms in Brazil

If there is a dispute in Brazil involving a company domiciled in Brazil and another domiciled abroad, there is no express provision regarding the battle of forms in Brazilian law, but the Civil Code contains a rule regarding the formation of contracts, stating that, once accepted, the proposal acquires the force of a contract, but if the acceptance of a proposal occurs after the deadline, or with additions, restrictions or modifications, this will be understood as a counterproposal (or new proposal).

So if, for example, a seller sends its T&C in a proposal and the buyer sends its own T&C on placing the order, there is a risk that the buyer’s T&C will take precedence, if the seller has not made any subsequent disclaimers.

With a view to avoiding the risk of divergent interpretations and legal uncertainty, the ideal solution is for the parties to seek, at the time of the preliminary negotiation of the business relationship, solutions for the application of their T&C, if they find that they conflict with each other. In this respect, the parties may, for example, make mutual concessions or negotiate specific conditions or contracts for that particular transaction, thereby facilitating the resolution of any future conflict.

Even though the T&C developed by companies aim precisely to avoid long and wearisome negotiations, the fact is that the existence of mutually contradictory T&C in the same transaction may lead to undesired conflicts. Accordingly, a dialogue conducted in good faith between the parties during the negotiations is essential to make it clear what each party expects from the other, clarifying possible controversial points and thus minimising the risks of any disputes.

Charles Wowk
Partner in the Civil Area – São Paulo

Countries Agreement to Avoid Double Taxation

Double taxation refers to income tax being paid twice on the same source of income. Double taxation occurs when income is taxed at both the corporate level and personal level, as in the case of stock dividends. Double taxation also refers to the same income being taxed by two different countries.

The text of the Agreement, which had already been approved in Switzerland in 2019 by the Council of States and the National Council, was approved in Brazil both in the House of Representatives, on March 5, 2020, and in the Federal Senate, on February 24, 2021, and now depends only on publication by means of a Presidential Decree to start producing legal effects in Brazil.

Eliminating uncertainties and distortions and encouraging the flow of investment between the two countries, among which we highlight:

  • a) Inclusion of the following Brazilian taxes IRPJ; IRPF, and CSLL – which is expressly provided for in the Agreement – and the recognition on the Swiss side of the inclusion of cantonal taxes in its scope;
  • b) Besides aiming to avoid double taxation and possible double non-taxation, and containing a general anti-abuse clause, the Agreement includes both transparent entities and collective investment vehicles;
  • c) Although until now dividends have not been taxed at source in Brazil, the Agreement includes a provision that reduces to 10% the withholding tax on dividends paid to the beneficial owner of a company that holds at least 10% of its capital;
  • d) With regard to interest, it determines the reduction of the IRRF rate to 10% on interest on loans granted for a minimum term of 5 years, granted by banks for the purchase of equipment and/or investment projects;
  • e) Royalties are also now subject to the reduced rate of 10%, except for those arising from the use, or right of use, of industrial and commercial trademarks; and
  • f) Technical services were given a specific definition, which no longer includes services of an administrative or scientific nature. The IRRF rate here has also been limited to 10% – lower than the general Brazilian rule, which provides for a rate of 15%.

The tax team of Stüssi-Neves Advogados are following closely the publication by Presidential Decree and are available to answer any questions regarding the Agreement.

Stüssi-Neves Advogados was founded in 1977. The law firm consists of some 30 lawyers, distributed between our offices in São Paulo and Rio de Janeiro on a basis of around 50-50.

Our clients are mainly companies of European and Japanese origin, who operate or intend to operate in Brazil directly or through subsidiaries or partnerships.

Cost Sharing with Company Domiciled Abroad

Cost sharing is a process wherein two or more organisations work together to secure savings in one or more areas of business operations.

1. Characterisation of shared services as reimbursement

The payment of costs and expenses shared between companies of the same economic group, with headquarters in different countries, may be treated as a mere reimbursement without the incidence of a high tax burden on payment or receipt. However, in order for such costs and expenses to be characterised in Brazil as a reimbursement, certain requirements must be complied with.

First of all, to be treated as a reimbursement the costs and expenses must relate to supporting activities rather than core activities of the service provider. Thus, services that are included in the corporate purpose of the service provider may not be shared, and consequently the costs and expenses thereof cannot be treated as a reimbursement.

For this reason, it is only possible to recognise as a reimbursement of shared costs and expenses those actually incurred by the service provider. It is therefore not permitted to add any amount or profit margin to the costs or expenses shared and reimbursed.

Moreover, in order for the costs and expenses to be recognised as a reimbursement, it must be shown unequivocally that the services shared are of mutual benefit to the companies that participate in the agreement. Accordingly, all the companies must benefit from the services shared, including those performing the services.

With a view to proving compliance with the minimum conditions required, it is necessary to have, apart from other documents, a formal contract between the companies of the group, showing the total costs of each service incurred and shared, and also the reasonable and objective criteria used for the division.

The minimum  of said contract were set out in Cosit Answer to Consultation no. 8/12 of which it is worth citing the following:

  • a) the division of the costs and risks inherent to the development, production or obtaining of goods, services or rights must be detailed;
  • b) the contribution of each company must be consistent with the individual benefits expected or actually received;
  • c) the identification of the specific benefit to each company of the group must be clear;
  • d) there must be an agreement for reimbursement, meaning the refund of costs relating to the effort or sacrifice incurred in the carrying out of an activity, without any additional profit;
  • e) the collective nature of the advantage offered to all the companies of the group must be express;
  • f) there must be a provision for remuneration of the activities, irrespective of their actual use, it being sufficient to “put the activities at the disposal” of the other companies of the group;
  • g) the conditions must be such that any company, in the same circumstances, would be interested in contracting.

In short, the contract must state the total cost or expense that benefits the signatory companies; the criteria for its division, each company necessarily defraying only the benefits actually expected or gained, with the possibility of their identification; and further it must state the manner in which reimbursement of the cost or expense will be made, with the supposition that it will be attractive even for independent companies.

Although the amounts classified as reimbursement of costs and expenses do not reflect any financial gain, which is sufficient to justify the non-incidence of taxation, the Brazilian Federal Revenue has still not adopted a firm position to this effect.

2.1. Payments abroad

Generally speaking, payments, credits or remittances abroad relating to the provision of services are subject to Withholding Income Tax of 15%, the Contribution on Economic Activities of 10%, the Contribution for the Financing of Social Security payable by the Importer of Foreign Goods or Services from Abroad of 7.6% and the Contribution for the Social Integration Programme and Civil Servants’ Investment Programme due on the Importation of Foreign Products or Services of 1.65%. The Tax on Financial Operations of 0.38% is due in any case. The Tax on Services, with the maximum rate of 5%, may also be demanded by the municipality.

The IRRF paid in Brazil may be taken as a credit abroad if there exists a double taxation convention with the country in question, or, at least, reciprocity of treatment.

It is worth mentioning that, in the event of a remittance of funds abroad in payment of services, the financial institutions involved are also responsible for the operation, for which reason they tend to confirm the need to pay the taxes due on the operation in order to avoid any risks.

2.2. Cash receipts from abroad

Payments received by the Brazilian company for services shared may be regarded as corresponding to services exported. In this case, the funds received from companies abroad, in the form of foreign currency, would not be subject to PIS and COFINS on the amount invoiced. In any case, if they are recognised as remuneration for services rendered, they would be subject to IRPJ and CSLL. The ISS on the services may also be demanded by the municipality in question.

3. Possible risks and means for their reduction/elimination

As already stated, the Brazilian Federal Revenue has not confirmed its attitude regarding the non-taxation of payments relating to costs and expenses shared and reimbursed. As a result, in operations involving remittances abroad, the financial institutions normally require to see proof of payment of taxes.

If it is intended to avoid paying tax, and with a view to reducing, and even eliminating, possible risks, it is important that the operations be properly formalised. It must be possible to show, by producing solid evidence, that the funds received from, or paid to, the related party refer to the recovery of expenses incurred for the benefit of another, so as not to generate income/earnings for the recipient.

The contracts signed must contain details sufficient to prove compliance with the requirements necessary for characterisation of the reimbursement, with the resulting non-taxation, and all the supporting documentation must be retained.

An alternative, in order to guarantee the position of the Brazilian Federal Revenue, in principle and preferably in favour of the non-incidence of tax, is the submission of a formal consultation with a view to confirming the interpretation applicable to the case.

Specifically for operations involving remittances abroad of sums relating to the costs and expenses shared, it is possible that, even on production of the contract signed between the companies of the group, together with all supporting documentation, and further even presenting the formal consultation to the public authorities, the financial institution may not agree to make the remittance without payment of the tax.

In this event, a declaration may also be produced to the financial institution, in which the company making the remittance assumes the obligation to inform the institution immediately of the result of the formal consultation, as soon as a reply is received from the Federal Revenue, and also to comply with the result thereof, if necessary, with payment of tax on the operation.

We consider that, provided the above requirements are met, the risks may be reduced or even eliminated.