The Brazilian Supreme Court decides for the exclusive ISS levy over software transactions, with “modulation of effects”

In brief

On February 24, 2021, the Brazilian Supreme Court (“STF”) finalized the trial of Direct Unconstitutionality Actions 1,495 and 5,659 that addressed whether software related transactions should be taxed by ISS (Municipal Service Tax) or ICMS (VAT State Tax).

By majority of votes, STF decided for the exclusive levy of ISS over such transactions, regardless of the form of commercialization and type of software (if off-the-shelf or customized).

In depth

The STF decision will produce effects going forward (ex-nunc effects).

With respect to the past transactions, the so-called “modulation of effects” took into account various aspects:

(i) Taxpayers who collected only ICMS – The taxpayer will not have the right to recover the ICMS collected and the Municipality will not be able to charge ISS, as it would qualify as double taxation;

(ii) Taxpayers who collected only ISS – Confirmation of the validity of the ISS payment and prohibition of the ICMS being charged by the States;

(iii) Taxpayers who did not collect ISS nor ICMS – Possibility of charging only ISS, subject to the statute of limitation;

(iv) Pending lawsuits filed by taxpayers against the States or by the States against taxpayers aiming at the collection of ICMS – Judgment must be carried out in accordance with the STF’s understanding (ISS levy only), with the possibility of recovering the ICMS in cases where this right is object of the lawsuits;

(v) Pending lawsuits filed by taxpayers against the Municipalities or by the Municipalities against the taxpayers – Judgment must be made according to the STF’s understanding (ISS levy only), except if the taxpayer has already paid the ICMS.

The parties might still oppose a Motion for Clarification against the decision.

We remain available to discuss the effects of STF decision.