Brazil’s Supreme Federal Court declares software transactions subject to Service Tax
On February 18, 2021, the trial of ADIs 1945 and 5659 concluded in the Brazil’s Supreme Federal Court (STF), settling a long-standing point of litigation for the technology industry. The judiciary ruled 7-4 in favor of an ISS (Service tax) levy on software licensing transactions, while rejecting an ICMS (VAT tax) levy.
On February 24, 2021, the Supreme Federal Court decided how this ruling should be applied in the following situations:
- 1: Taxpayers who only collected the ICMS – These taxpayers will not have the right to a refund. Municipalities will not be able to charge ISS that has not been collected in the last five years.
- 2: Taxpayers who only paid the ISS – States will not be able to charge ICMS.
- 3: Taxpayers who have not paid ICMS or ISS – These taxpayers can only be charged ISS, observing the five-year statute of limitations.
- 4: Taxpayers who paid both ICMS and ISS, but did not file a refund request – Taxpayers will be able to seek a refund for ICMS paid in the last five years, regardless of any existing lawsuits in progress.
- 5: Taxpayers with lawsuits questioning the ICMS levy – The court’s will decide against an ICMS levy. If ICMS was already paid, refunds are allowed.
- 6: Lawsuits filed by State tax authorities charging ICMS – The court will decide against an ICMS levy.
- 7: Lawsuits filed by Municipal tax authorities charging ISS – The court’s decision will determine the validity of the ISS levy, except for cases in which the taxpayer has already paid the ICMS.
- 8: Lawsuits filed by taxpayers questioning ISS levy – The court’s decision will determine the validity of the ISS levy.