WTS Global Update for the Digital Economy in Brazil

Update on a pending Case at the Brazilian Supreme Court on the taxation of Software

The Supreme Court of Brazil is expected to soon clarify the taxation of activities related to the digital economy and the services connected to the world wide web, and in particular whether the provision of software should trigger ISS (services) or ICMS (goods) levies. As there are considerable differences between ISS and ICMS, the below could be of interest for your company in the event that you sell or consider to sell into Brazil.


From a very high level perspective, the difference between ISS and ICMS can be outlined as follows:

  • ISS taxes services of any kind, that are not covered by ICMS. In its turn, ICMS taxes the circulation of Goods and Services.
  • ICMS is applied to operations of movement of goods and interstate, intermunicipal and communication services. ICMS must be paid when there is transfer of product ownership.
  • Just like ISS is not supposed to be charged for services covered by ICMS, the same happens on the contrary: goods that are charged with ICMS aren’t supposed to be charged by ISS.
  • Brazil provided for a complementary Law that regulates ISS. This law includes a substantial list of services that are in scope of ISS.
  • ISS is taxed at a ranging from 2% – 5%
  • ICMS is charged at a 17% – 19% rate (in both cases depending on the State).

Especially because of the difference in rates, the pending case at the Brazilian Supreme Court is of eminent importance.


In this regard we note that Brazil’s Supreme Court has not analyzed software licensing and its taxation since the mid-’90s. The prevailing jurisprudence has concluded that a software sale when sold as a bundle, is a sale of a tangible good, treated as merchandise and, as such, is subject to the Imposto Sobre Circulação de Mercadorias e Serviços (ICMS). The ICMS is a tax on the transfer of goods levied by Brazil’s 27 States and the Federal District, and operates in a way that resembles the EU VAT. At first sight this may come across as odd, however we must remember that in the past, software was sold on a physical support (CD or DVD), and the sale of a good, the CD or DVD, attracted the levy of ICMS. In the meantime, Technology of course has changed dramatically, though, not only from the standpoint of software, which was previously only sold with physical carrier, but also the technologies offered, like continuous updates and changes in licensing forms (lifetime or provisory).

On April 17th, 2020 however, the Brazilian Supreme Court began considering (virtual chamber) direct action of unconstitutionality (Ação Direta de Inconstitucionalidade or ADI) No. 1945, brought in 1999 by the political party PMDB. ADI No. 1945 challenges the Brazilian state of Mato Grosso’s law n. 7.098/98, which imposes the ICMS levy on software operations, even if performed by a data download. The case had been included in the Supreme Court’s trial list three times but was removed for various reasons. Many believe the case was delayed so the Court could render a comprehensive decision that included other forms of software sales, including hosting and streaming. After trial, Justices Carmén Lucia (Rapporteur) and Edson Fachin voted to basically continue the ICMS levy. Supreme Court president Justice Dias Toffoli then asked for a review of the decision. Justice Toffoli was the Rapporteur for another case, ADI No. 5659, filed by the National Service Confederation, which challenged a similar law imposing the ICMS levy on software by the Brazilian state of Minas Gerais.

On November 4th 2020, the Supreme Court continued the judgment, now jointly, of ADI No.1945 and ADI No. 5659. Justice Toffoli then voted in support of the levy of Brazil’s service tax (ISS) on licensing or right to use of software programs. For him, software licensing or the right to use software, either standard or customized, should be placed in item 1.05 of the service list attached to the Complementary law 116/03, regardless of whether the transfer of use takes place via download or through cloud access. In Justice Toffoli’s view, software is a service that results from human effort (an obligation to perform something), which derives from intellectual efforts. Also, there are other services usually provided for the user, such as help desk, instruction manuals, technological and other functions foreseen in the licensing contract. He concluded this decision should be applied prospectively only.

The following Justices agreed to the above conclusions: Alexandre de Moraes, Luís Roberto Barroso, Rosa Weber, and Ricardo Lewandowski. Justice Marco Aurélio also agreed but was against applying the decision on a prospective basis only. Later, Justices Edson Fachin and Gilmar Mendes, and Carmen Lúcia ruled that the ICMS levy on goods/merchandise should apply to standard software (or off-the-shelf). In their view, when the intellectual creation is produced in a series, and there is a mercantile activity, the ICMS and not the ISS should prevail. Software should not be considered a good if a developer is engaged to produce it on demand (personalized software), though. The latter resembles the European VAT approach. After the votes of nine justices, six favoring the service tax on licensing or granting of the right to use software programs, and three favoring the ICMS levy on sales of goods, Justice Luiz Fux, the new president of the Supreme Court, announced his decision in alignment with Justice Toffoli. Then, on November 11th, 2020, newly-appointed Justice Nunes Marques asked for a review, which stayed the judgment once again.

Other cases

While the taxation of software remains unresolved for now, it is worth pointing out that the states returned to charging ICMS on sales. This time, tax is imposed on the licensing itself, whether or not a physical good was included, with or without a transfer of ownership, creating a conflict between states and municipalities. Besides these two lawsuits, there are currently three other lawsuits pending analysis in the Supreme Court addressing the taxation of software transactions: ADI No. 5576, filed by CNS and challenging Decree 61.791/16 of São Paulo state; ADI No. 5958, filed by the Brazilian Association of Information Technology and Communication – BRASSCOM, which challenges the ICMS state Agreement 106/17; and, finally, the extraordinary appeal 688.223, interposed by TIM, which challenges the ISS on licensing and right to use of customized software.

Current status

The finalization of the aforementioned Supreme Court judgment may soon provide taxpayers with a conceptual coherence of activities that relate to the digital economy and the services connected to the world wide web, not only with reference to the effects on the ISS and ICMS levies but also from other taxes that may be levied on such activities. In the meantime, we recommend that companies review your online sales into Brazil (if any) and determine the possible impact of the expected Supreme Court ruling.