Issued by Francisco Lisbo Morera & Rachel Mira Lagos, Pokட்டர்mon Advocates, Brazil
The Supreme Court of Brazil is expected to soon clarify the taxation of activities related to the digital economy and services connected to the World Wide Web.
A majority of 11 judges in the Supreme Court of Brazil have decided that in two cases a software download should be treated as a service rather than selling goods for tax purposes. However, on November 11, the newly appointed judge, Nunes Marx, asked for a review of the case, which set aside the verdict.
While the controversy concerns the merits of the Brazilian sales tax ISS and ICMS taxes, the Supreme Court’s guidance is expected to clarify the implicit tax that can be levied on such transactions.
Indirect line treatment of software
Brazil’s Supreme Court has not reviewed software licensing and its taxation since the mid-90s.
The prevailing judiciary has decided that the sale of a software, when sold in a bundle, is a sale for a good benefit, which is considered a commodity, and is subject to the Imposto Chopra Circulano di Mercatorius e Cervinos (ICMS). ICMS is a tax for the exchange of goods levied by the 27 states and the federal district of Brazil, and acts as a VAT.
We need to keep in mind that in the past, software was sold on a physical support (CD or DVD) and a good CD or DVD sale attracted the ICMS line.
Technology has changed dramatically over time, however, not only from the standpoint of software previously only sold with physical support such as a floppy disk or CD-ROM, but also with constantly updated updates and changes in license forms (lifetime or temporary).
ADI No. 1945
On April 17, the Brazilian Supreme Court began to consider direct action against the Constitution (Virtual Room) (Ação Direta de Inconstitucionalidade or ADI) No. 1945, brought in 1999 by the political party PMDB.
ADI No. 1945 challenges the law of the Brazilian state of Mato Grosso. 7.098 / 98, which imposes ICMS tax on software operations, even if performed by data downloads.
Although the case was added to the Supreme Court’s trial list three times, it was dropped for various reasons. Many believe the case is overdue, so the court can provide a comprehensive ruling that covers the sale of other software, including hosting and streaming.
Following the hearing, Justices Carmen Lucia (Reporter) and Edson Fachin were arraigned in ICMS.
Supreme Court President Justice Dias Tofoli later asked that the decision be reconsidered. Dofoli was the judge in another case, ATI No. 5659, filed by the National Service Federation, which challenged a similar law imposing the ICMS tax on software by the Brazilian state of Minas Gerais.
On November 4, the Supreme Court continued the judgment of ATI No.1945 and ATI No.5659. Judge Tofoli later voted in favor of imposing a Brazilian service tax (ISS) license or the right to use software programs. .
According to him, the software license or the right to use the software, fixed or customized, should be placed in item 1.05 of the Service List attached to the Completion Act 116/03, access regardless of whether the application transfer takes place by download or through the cloud.
Software as a service
In Justice Tofoli’s view, software is the result of human endeavor (the obligation to do something), a knowledge derived from intellectual endeavor. In addition, there are other services that are generally offered to the user, such as help desk, instruction manuals, and other functions foretold in the technical and license agreement. He concluded that this decision should only be used in the future.
The following judges agreed: Alexandre de Moraes, Luis Roberto Barroso, Rosa Weber and Ricardo Lewandowski. Judge Marco Aurelio also agreed, but was adamant that the decision be used only on a prospective basis.
Subsequently, Judges Edson Fachin and Gilmar Mendes, and Carmen Lucia ruled that the ICMS tax on goods / materials should apply to standard software (or off-the-shelf).
In their view, intellectual development is produced in a series and when there is a business activity, not ICMS and ISS. If a developer is engaged in producing as needed (customized software), the software should not be considered a good one.
After a vote of nine judges, six in favor of the service tax for licensing the use of software programs, and three in favor of levying ICMS tax on the sale of goods, the new Supreme Court Judge Louis Fox announced his decision following Judge Tofoli.
Then, on November 11, the newly appointed judge, Nunes Marx, asked for a review, which reversed the verdict.
Other cases
Although the taxation of the software has not been resolved, the states have not yet agreed to the ICMS. This system, taxed for the payment of a license, creates a conflict between states and municipalities, with or without a change of ownership, with or without physical benefit.
In addition to these two cases, three other cases are pending before the Supreme Court regarding the taxation of software transactions: ATI No. 5576, filed by CNS and challenging the State of S சாo Paulo Order 61.791 / 16; IDMS 5958, Brazilian Information Technology and Communications Association – filed by Broscom, which challenges the ICMS state agreement to 106/17; Finally, the extraordinary appeal 688.223, intercepted by TIM, challenges ISS on the right to license and use customized software.
The final outcome of this Supreme Court ruling may soon provide Brazilian taxpayers with an ideological synchronization of activities related to the digital economy and services connected to the World Wide Web, not only the implications of the ISS and ICMS taxes but also other taxes that may be levied on such activities.
Francisco Lispo Morera is a tax lawyer with 17 years of experience with Brazilian taxation who has participated in a variety of projects, including international tax planning, transaction pricing, public tax consulting, relevant diligence programs, and cross-border transactions.
His testimonials include LLM International Taxation in NYU and a Masters Degree (ongoing) at the University of So Paulo.
Phone: +55 11 2198 2800
Fax: +55 11 21982849
A tax expert with more than 9 years of experience with Brazilian taxation who has participated in a variety of projects including tax planning, tax consulting, appropriate diligence programs and a variety of tax questions including tax litigation.
Bachelor of Laws (LLP) at the University Presbyteriana McKenzie (06/2014). Fundação Getulio Vargas – Master’s degree in tax law in FGV SP (2015).
Beatrice Ashford is a contributor at Nintendo-power.com, covering a wide range of topics including news, politics, business, technology, sport, entertainment, and lifestyle. She focuses on delivering clear, balanced reporting and useful information that helps readers stay informed about current events and emerging developments. Her work highlights stories that matter to everyday audiences, with an emphasis on accuracy, relevance, and accessible journalism that keeps readers connected to the issues shaping the world around them.