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The Brazilian STF’s stance on the levy of service tax in 2020

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The STF had a busy year as Brazil remains on the brink of a much-awaited tax reform

Ricardo Marletti Debatin da Silveira and Rogério Gaspari Coelho of Machado Associados discuss recent case law issued by the Brazilian Federal Supreme Court.

Since the beginning of the pandemic, the Brazilian Federal Supreme Court (STF) has been delivering many decisions on important tax matters, especially under the so-called ‘general repercussion’ regime, so that lower courts must abide by the STF’s decision.

If on the one hand it has rendered decisions in cases that were waiting a solution for a long time, on the other hand many of those decisions were reached at the court’s ‘virtual’ judgment sessions, jeopardising the participation of the taxpayer’s attorneys who were prevented from delivering oral arguments, which usually took place at the court. This article addresses the main STF decisions about the controversial service tax (ISS) during 2020.

The ISS is a municipal tax levied on the import and domestic rendering of services currently listed in federal Supplementary Law 116/2003, which establishes guidelines that must be respected by the municipal laws that govern the ISS locally. It is worth mentioning that Brazil has 5,570 municipalities. The federal law brings a service list with the services to be taxed, though does not define their concept or the concept of ‘service’ itself. The ISS rates vary from 2% to 5%.

Not surprisingly, during the past half century, case law had to define whether some activities were services or not; if they fit into the broad concept of the services listed; and, more recently, if some activities, such as licensing of software, were deemed as rendering of services or sales of goods, in which case it would attract the levy of the state-VAT (ICMS) instead of the ISS.

Given that scenario, it is important for companies to keep up with the STF case law, especially when structuring businesses in relation to which there are doubts on whether they provide services that fit in the service list or develop activities that may blur the lines between goods and services, as in the case of some digital goods and services.


One of the most important decisions of the year was rendered when the STF judged Extraordinary Appeal 603136 (General Repercussion theme 300), ruling against taxpayers and determining that the levy of ISS on franchising agreements is constitutional. As the decision represented an overruling on settled case law, a motion for clarification is still pending judgment, to define if the decision is also valid for the past or only for the future.

Franchisors are now considered as service providers and taxed accordingly. Such taxation is already creating practical problems, as the place where the service is deemed to be rendered must be defined. Franchisors are paying the ISS to the city where they are headquartered. Nevertheless, some municipalities are illegally demanding that franchisees withhold the tax, as those cities consider the service rendered where the franchisees are located. That is a kind of tax war, which will probably create further litigation concerning the ISS on franchising.

Gambling and bets

The STF decided on Extraordinary Appeal 634764 (general repercussion theme 700) that the levy of the ISS on gambling and bets is constitutional, as per item 19 of the service list (distribution and sales of lottery tickets, bingo, cards, horse racing betting tickets, draws and prizes, including capitalisation bonds and similar). The court understood that the taxable basis is the amount charged for the service (regardless of the charge of entrance tickets), and it cannot be the total amount of the bet.

Interpretation of the items of the service list

A decision on Extraordinary Appeal 784439 (general repercussion theme 296) fixed the thesis that the service list, referred in the Brazilian constitution and detailed by Supplementary Law 116/2003 is exhaustive, but the levy of the ISS on activities that are inherent to the services listed is admitted. The possibility of extensive interpretation of the items of the list allows that to take place, especially when they mention a service and similar services (literally ‘congeners’). That hermeneutic model, albeit not new, crystallised a broad approach to collection, favouring tax authorities. 

Preparation of medicine by compounding pharmacies

The court decided on Extraordinary Appeal 605552 (general repercussion theme 379) that the production of medicine under request of costumers by compounding pharmacies is service provision, therefore subject to the ISS. On the other hand, the sale of off-the-shelf products is subject to the state-VAT (ICMS), which may bring a higher tax burden than the ISS.

Complex and mixed operations

On Direct Action of Unconstitutionality 3142, the STF ruled how item 3.04 of the service list must be interpreted. Such item establishes that the “rent, sublet, lease, right of way or permission of use, shared or not, of railways, highways, poles, cables, pipelines and ducts of any kind” are taxable services. This is a significant matter for highway concession companies and telecom companies, for example.  

The court ruled that the interpretation must be made on a case-by-case basis as, depending on how the agreements are settled, the tax may be levied or not. Considered in isolation, those agreements (rent, lease, etc.) are not services and must not be taxed. Nevertheless, if there is an overlap of relations – a complex and mixed operation – such as the rental of a railway and the obligation to perform its maintenance by the lessor, the ISS is due. The collection criterion was also ratified by the court: each municipality must receive its share.

Software licensing agreements

Probably one of the most expected judgments of the past two decades will finally reach an outcome, when the judgment session of the Direct Actions of Unconstitutionality 1945 (which pends judgment since 1999) and 5659 are concluded. The majority of justices of the STF (there is only one pending opinion) have already construed that software licensing agreements must not be taxed by the ICMS. That indicates that the taxing conflict between the ICMS and ISS in regard to software will be solved in favour of the municipalities, although the judgment is not yet finished.    

Some crucial themes still require definitions, for example, the place where services are considered as rendered in the case of some financial services and healthcare plans, as Supplementary Law 157/2016 promoted changes to Supplementary Law 116/2003, by adopting the destination principle for those services. Supplementary Law 157/2016 was challenged by Direct Action of Unconstitutionality 5835, in which a relief was granted by the STF to suspend the new rule brought by Article 1 of Supplementary Law 157/2016.

Finally, it is important to bear in mind that Brazil is on the brink of a much-awaited tax reform, which may unify consumption taxes and create a single VAT, charged on the destination. The National Congress is analysing different proposals for the tax reform, and news – hopefully good – are expected in the next months in Brazil.

Ricardo Marletti Debatin da Silveira

T: +55 11 3819 4855


Rogério Gaspari Coelho

T: +55 11 3819 4855


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