The understanding issued more than two decades ago, that ICMS should be levied on off-the-shelf software and ISS on customizable, made-to-order software, was outdated and did not keep pace with the technological innovations occurring in the sector.
In fact, if, on the one hand, the States were understanding that the operation was subject to ICMS (normally charged at rates between 5% and 18%) given the interpretation that it was an intangible good, on the other hand, the Municipalities and taxpayers in general were claiming the incidence of ISS (at rates between 2% and 5%) due to the lack of transfer of ownership and its classification as possible services contained in Complementary Law No. 116/2003.
This decision changes the case law on the subject and impacts technology companies nationwide, which had been awaiting its conclusion to ensure legal certainty in their activities. Given the lack of a clear definition of the applicable tax, companies filed lawsuits seeking the Judiciary to determine the tax to be applied to their operations, while others simply chose to collect a specific tax (or none at all), exposing themselves to the risk of potential fines from tax authorities.
On February 24, 2021, the Supreme Federal Court (STF) considered the modulation of the effects of the aforementioned decision to regulate potential retroactive charges by states and municipalities, as well as the recovery of amounts unduly paid by taxpayers. On this occasion, eight different solutions were established. In summary, municipalities will only be able to charge retroactively in cases where no tax was collected, and taxpayers may only request a refund of the ICMS amount from states in cases where they have made double payments.
Given this new scenario, technology companies will no longer need state registration when incorporating their companies in Brazil, a requirement that had been automatically requested by the Tax Departments. This requirement also impacted the need for physical and segregated space (not always possible or available at the time of incorporation, especially when it came to the formation of a Brazilian subsidiary of a foreign technology company). Thus, the outcome of the ruling, in addition to resulting in a lower tax burden for the technology sector, will impose a less complex procedure on the company's operations, both in terms of tax calculation itself (since the ISS tax offers less complex ancillary obligations than the ICMS tax) and even in terms of the bureaucracy imposed on companies wishing to start operations in Brazil in this sector.
