STF decides on the incidence of ISS on software

At the Plenary judgment session on February 18, the Brazilian Federal Supreme Court (“STF”) took an important step towards forming a new understanding of software taxation.

It was decided that the incidence of Service Tax (ISS) would apply both in the so-called ‘off-the-shelf software’, and in software developed to order to meet the specific demands of a given customer.

The judgment represents a change in positioning, given that since 1998, the understanding has been that ‘off-the-shelf software’ (that is, those produced on a large scale, without a certain recipient), would be subject to ICMS, while only ‘software by order’ would be subject to ISS.

The new positioning also represents a boost for companies in the segment whose operations suffered as a result of great legal uncertainty due to the conflict of competences waged between states and municipalities.

However, the issue is not yet definitively resolved and it is still awaiting a decision on the modulation of effects, that is, if this new understanding will be required only after the date of publication of the minutes of the judgment of the case or if it will also be valid retroactively, which would legitimize, for example, the recovery of amounts unduly paid to state tax authorities. This issue will be addressed in the next session.

Thus, even if the modulation of effects is being directed to ratify past decisions, there is a brief window of opportunity, until the publication of the minutes of the judgment, for the filing of a lawsuit, with a view to allowing the possible recovery of amounts unduly paid as ICMS in the last 5 years from the filing of the lawsuit. Evidently, however, the success in this demand will depend on the result of the modulation of effects.

Demarest’s tax team is on hand to provide further clarification on the matter.