Brazilian Federal Supreme Court unravels the levy of taxes on software licensing

On February 24, 2021, the Brazilian Federal Supreme Court (STF) delivered a final decision related to the taxation of software in Brazil, defining that transactions with software are deemed as services and therefore shall be taxed by the municipal service tax (ISS), with rates that vary from 2% to 5%.

This judgment puts an end to a long discussion started in 1999, when the STF decided that off-the-shelf software should be taxed by the state-VAT (ICMS) and customised software by the municipal service tax (ISS). However, things have significantly changed since then and now it has been ruled that the ISS is the tax to be applied. Nevertheless, as the prolonged discussion made several different factual situations arise for taxpayers, the court also decided to adjust the effects of the judgment and unusually established eight hypotheses of application of its decision as regards the past and the right to recover unduly paid taxes.

According to the authors, this decision is positive for the software industry in Brazil, as it brings tax and legal certainty for taxpayers, tax savings in certain situations, and more simplicity for businesses in the IT sector.

Tax in a digital world is one of the main challenges everywhere on the planet. It is no different for Brazil.

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