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Software taxes in Brazil: Begging for clarity

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Clarissa Machado Miras of Trench Rossi e Watanabe (in cooperation with Baker McKenzie) provides an overview of Brazil’s uncertain approach to taxing revenues from software. Federal rules and state and municipal authorities all have different opinions.

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

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

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.

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. The harmed party is always the industry player.

Conflicting interpretations

Nevertheless, the interpretation above is not properly supported by the Brazilian intellectual property legislation, since it does not establish any kind of distinction between the various modalities of software or its form of use. According to Law 9,609/1998 (the Software Law), the use of a computer program (software) in Brazil is subject to a licence agreement, regardless of the term (perpetual or limited term) and payment conditions (lump sum or monthly) of such a licence.

The Software Law also assimilates the licensing of software to the licensing of copyright. Hence, it is possible to argue that software transactions should be treated as licence or assignment, as the case may be, of an intellectual property right (a copyright), rather than the commercialisation of goods or services provisions. This is relevant because, from a formal standpoint, the pure licence or assignment of an intellectual property right, in principle, should not be subject to either the ICMS or the ISS.

In any event, it is important to mention that, in accordance with ISS legislation (Complementary Law 116/03, item 1.05), a software licence is expressly listed as a 'deemed' service subject to ISS. Accordingly, several software companies have adopted this position and paid ISS in connection with its activities.

Besides the aforementioned conflict with state and municipal tax authorities regarding the taxation of software transactions, the controversy regarding the income characterisation of software transactions has also resulted in conflicts with federal tax authorities.

Article 363, I of the Brazilian Corporate Income Tax Regulations (Decree 9,580/2018 – RIR/2018) notes that expenses with royalties paid to shareholders, individuals or legal entities, are not deductible for purposes of Brazilian corporate income taxes (IRPJ/CSLL). Federal tax authorities have been using this provision to deny the deductibility of software fees paid by Brazilian companies to their shareholders or quotaholders (non-residents), which has led to tax assessments along those lines. The federal tax authorities' position has even been confirmed by some recent Brazilian tax administrative court decisions.

Notwithstanding the above, there are grounds to support that payments in consideration for software licences do not qualify as royalties, so the deductibility restriction above should not apply. Moreover, it is also possible to sustain that the deductibility restriction only applies when the beneficiary of the royalties is an individual and not a legal entity. Indeed, Article 71d of Law 4,506/1964, which is the legal basis for Article 363, I of RIR/2018, only mentions: "royalties paid to shareholders or to officers of companies, and to their relatives and dependents". Law 4,506/1964 therefore does not state that the shareholders might be individuals or legal entities, so Article 363, I of RIR/2018 may be viewed as exceeding Law 4,506/1964.

On May 31 2019, the Brazilian tax administration issued a very important ruling (Ruling 182) on this matter. From a practical standpoint, 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 quotaholder 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.

Clarissa Machado Miras



Trench Rossi e Watanabe in cooperation with Baker McKenzie

Tel: +55 11 3048 6786

Clarissa Giannetti Machado has extensive experience advising clients on tax planning. A partner since 2007, she worked in Baker McKenzie's Chicago and Amsterdam offices in 2002 and 2006, respectively. Clarissa has co-written articles on tax issues for several publications. She has been nominated as a leading tax lawyer by Chambers Latin America (2010, 2011 and 2012 editions) and as a pre-eminent figure in global transfer pricing deals by Euromoney's Guide to the World's Leading Transfer Pricing Advisers (7th edition – 2011).

Clarissa advises companies with business operations in Brazil on transfer pricing, real estate transactions and general tax planning. She helps clients develop and implement tax-efficient structures for financial transactions, acquisitions and sales of business operations, real estate operations and related transactions. She also counsels clients on the economic valuation of Brazilian companies.

Among her recent work, Clarissa has advised local and multinational clients on tax structures for acquisitions and joint-ventures involving Brazilian companies; foreign clients on tax efficient alternatives for investing in the Brazilian financial and capital markets; and local and multinational clients on transfer pricing matters involving global projects. Clarissa has also co-authored several publications.

She is a member of the Sao Paulo Lawyers Association, Brazilian Bar Association and New York State Bar Association and admitted to the New York and Sao Paulo bars. She obtained her LLM from Columbia University (2002) and LLB from the University of Sao Paulo (1997).

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