Tax | Understand the Changes Related to Taxation on Software in Brazil

The Supreme Court ruling about taxation on software is final: it will be taxed under ISS (Municipal tax on services) and not ICMS (a VAT-like Brazilian tax). But the effects of declaration of unconstitutionality are still unknow.

That is because of the possibility of modulation of effects in decisions rendered by the Brazilian Supreme Court (sometimes the decision of a tax being unconstitutional is only applied on already existent lawsuits and/or just future cases), which will be decided next week (February 24). Here is a summary overview: 

1. There will be no more distinction between different sorts of software from a tax point of view – standard, customized or Software as a Service (SaaS). They will all be considered “services” to be taxed under ISS. Before, under the jurisprudence, customized and SaaS were taxed under VAT, but standard software (off-the-shelf) was taxed under VAT.

2. There is a decision yet to be take regarding the effects of the decision. One of the Justices suggested that taxpayers that have already wrongly paid VAT cannot recovery it.

3. ISS has rates ranging from 2% to 5% on software licensing, while VAT has a medium rate of 18%. So, the tax burden under ISS is lighter, but there is a need to check the specific rules of each Municipality.

4. It is likely that there will be impact on federal taxes. So far, for companies that pay taxes based on the estimated regime (Corporate income tax and Social Contribution Tax), standard software is equivalent to a good (gross presumption of 8%) while customized software and SaaS are considered services (gross presumption of 32%). With the new ruling, the rate will presumably be 32% for all of them.

5. Probably there will be repercussion on Social Security Contributions on payroll to include software services on its basis, which also applies to the substitutive contribution, known as “CPRB”.  

It is important for every company to follow next week’s decision and analyze the specific tax impacts on business, overall because they are wider than the specific discussion – whether software is taxed under ISS or VAT.


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