Brazil’s Supreme Court takes up taxation of software downloads


The income characterisation and taxation of software transactions has been raising controversies and conflicts in Brazil for a long time.

The taxation regime applicable to software transactions in Brazil is quite complex. There are different federal, state and municipal taxes that are potentially applicable to software. That, together with the frequent changes in law and the conflicting interpretations of existing regulations, make it very difficult for the software industry to keep up to date and navigate the complex Brazilian taxation system.

Because the various taxes in Brazil do not take a uniform or consistent approach, the classification and taxation of payments for software under Brazilian tax legislation can vary depending on whether the transaction is characterised as the licence of a copyright, the sale of merchandise or the provision of services. The classification can differ according to the tax under consideration, whether the government permits a different interpretation through the ruling process and whether the courts have ruled on the issue.

Administrative and judicial courts have interpreted that, depending on the software characteristics, different taxes may be levied on the licensing of a certain type of software. This interpretation is based on an old precedent from the Federal Supreme Court (STF) that was set by a decision rendered on November 10 1998.

Taxation Categories of Software Downloads 

The precedent supports the segregation of software into two different categories.

  1. The first category is off-the-shelf software. These comprise packages of well-defined and stable software, developed for widespread use and distribution. Generally, this software is easily implemented and has very limited flexibility regarding customisation. This type of software is, in the view of the STF, assimilated to a ‘good’ because it holds industrialisation characteristics.
  2. The second category is customised software, which has been developed to meet the particular needs of a client. It does not target a great number of customers and is typically difficult and complex to implement. A transaction with this type of software, according to the STF, may be considered as a ‘service provision’.

In view of the above, there are precedents supporting the idea that off-the-shelf software should fall within the tax regime applicable to the commercialisation of goods, which is subject to state value-added tax (ICMS). On the other hand, several other decisions have concluded that licences related to customised software must be subject to the tax treatment applicable to the provision of services, which is subject to the municipal services tax (ISS). Considering the difficulty in defining which category a specific software belongs to, this situation often leads to conflicting interpretations from state and municipal tax authorities.

A majority of the 11 judges on Brazil’s Supreme Court have concluded in two cases that a software download should be considered rather than a sale of goods for tax purposes. Six of the ministers formed a majority with regards to the ISS levy, both for the so-called off-the-shelf software, sold in the retail market, and for custom-made software. The Supreme Court’s guidance is expected to provide clarity regarding indirect taxes that may be levied on such activities. 

Neither of the state or the municipality accepts the reality of the facts that a software is neither a pure service nor a good, but a license of use, which would turn out to be exempt of any of those to taxes.

According to the Brazilian Law, there are three factors that generates the collection of tributes (tax and collections) in the software segment.

  1. Profit or revenue resulting from the software’s commercialization and provision of computer services.
  2. Customs clearance of products or imported goods from abroad and the receiving of computer services provided abroad.
  3. Overseas remittance to the payment of copyrights for companies that commercialize foreign software.

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, is subject to the Imposto Sobre Circulação de Mercadorias e Serviços (ICMS) which is State taxation. The ICMS is a tax on the transfer of goods levied by Brazil’s 27 States and the Federal District, and operates in a similar way as VAT.

In some of the Judges view, when the intellectual creation is produced in a series, and there is a mercantile activity, the ICMS should prevail. Software should not be considered a good if a developer is engaged to produce it on demand (personalized software).

The ruling states that the payments of software licensing fees carried out to related companies may be deductible for income tax purposes, provided that the beneficiary is not a direct shareholder or quota holder of the Brazilian payer. Therefore, there may be a trend developing for more favourable interpretations, but for now the matter remains controversial. It will likely only be settled at the judicial level or through the enactment of clear laws in the future.

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