End of the Software Tax Dispute

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On February 18, the Federal Supreme Court (STF) in the judgment of the Direct Actions of Unconstitutionality (ADIs 5659 and 1945) put an end to the long discussion about the taxation levied in cases of licensing and assignment of software.

The majority of the Court followed Justice Dias Toffoli understanding, who understood that software is not a commodity but a service since that when the software is purchased, the program is constantly updated, with maintenance and help services (”helpdesk”) to users. In this sense, it would characterize service as there is a constant provision of services to the user in addition to the intellectual effort applied.

Thus, the Court decided that in these licensing operations and the assignment of software usage rights, the Tax on Services of Any Nature (ISS) will be levied.

On 02/24/2021 the trial of the ADIs continued to discuss how the effects of the decision should be modulated to avoid infra-constitutional discussion of the subject.

In this sense, it was ruled that the collection of the ISS Tax will be due only since the date of the publication of the verdict minutes, to: i) prevent the recovery of the undue payment of the ICMS levied on software operations in favor of those who paid this tax up to the day before the publication of the judgment verdict, prohibiting the municipalities from collecting the ISS; and ii) prevent the States from collecting the ICMS concerning the taxable events that occurred, with some exceptions, such as when the collection is made through lawsuits still in progress, for example.

Following, the Justice Dias Toffoli explained eight scenarios in which the result of the trial may impact taxpayers that have paid only the ICMS or ISS or both, among other situations.
The Justice suggested a solution for each scenario.

The verdict is extremely relevant as it puts an end to a discussion that has lasted more than 20 years by establishing ISS as the tax to be levied on software transactions and avoids the risk of double taxation. Furthermore, it is good news to e-commerce taxpayers taking into consideration that the ISS tax rate is usually lower than ICMS.


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