Brazilian IRS issues Request for Ruling concerning the taxation of software by WHT, CIDE and PIS/COFINS-Import

In brief

In June 13, 2023, the Brazilian IRS issued, with binding effects, COSIT Ruling No. 107, which refers to the taxation on cross-border remittances made as compensation for the acquisition of off-the-shelf software license from abroad.

More details

In relation to Withholding Income Tax (“WHT”), the Brazilian IRS confirmed the tax is due since the amount due as compensation for the software license qualifies as royalties for copyright remuneration, pursuant to article 767 of Decree 9,580/18. The applicable rate is 15%, except when the payment’s beneficiary is resident or domiciled in a low tax jurisdiction, in which case the rate of 25% applies. The Brazilian IRS already adopted this position upon COSIT Request for Ruling 75/2023, published on April 11, 2023, which confirmed the WHT levy even in relation to the so-called “off-the-shelf software”.

As for CIDE, the Brazilian IRS understood that it does not apply upon the amount due as compensation for software licenses, except when there is a transfer of the corresponding technology, as per art. 2, §2 of Law 10.168/00.

However, the innovation of  COSIT Ruling No. 107/23 was in relation to the PIS/COFINS-Import, since it determined the levy of the Contributions, considering that the amount due as compensation for the acquisition of software license would be qualified as compensation for a service provision. This position represents a change in the IRS understanding, which previously understood that such transactions were not subject to PIS/COFINS-Imports.

The change of interpretation by the Brazilian IRS results from the decision rendered by the Federal Supreme Court in the Direct Action of Unconstitutionality No. 1.945/MT and 5.659/MG, in which it was decided that software-related transactions should be treated as service for tax purposes, regardless of whether the software is downloaded of hosted in the cloud and of its level of customization.

Considering that the change in the IRS interpretation is unfavorable to taxpayers, such interpretation only applies to triggering events occurred after the publication of COSIT Request for Ruling No. 107 in the Official Gazette.

We recommend that companies evaluate their business and the effects of the above mentioned Request for Ruling, considering the specific case.