**ICMS for software: is it valid or not?**

The tax landscape in Brazil is notoriously complex, and this complexity extends to the technology sector, where the software play a fundamental role. One of the issues that frequently arises in this context is the application of the ICMS (Tax on the Circulation of Goods and Services) on software. In this article, we will explore the current situation of ICMS for software and we will clarify whether technology companies are still subject to this tax.

The answer is NO! ICMS for Software is no longer valid.

On March 3, 2021, ATA No. 04, of February 24, 2021, DJE No. 39, published on March 2, 2021, was published. The STF determined that the tax that should be levied on commercial transactions with software is ISSQN!

This determination is therefore in line with § 2 of Art. 1 of Complementary Law 116/2003, if we do not see:

Art. 1o The tax on services of any kind, which is the responsibility of the municipalities and the Federal District, has as its taxable event the provision of services included in the attached listeven if these do not constitute the provider's main activity.

2o Subject to the exceptions set out in the attached list, the services mentioned therein are not subject to the Tax on Operations Relating to the Circulation of Goods and the Provision of Interstate and Intermunicipal Transportation and Communication Services - ICMSeven if its provision involves the supply of goods.

List of services annexed to Complementary Law no. 116, of July 31, 2003.

1.05 - Licensing or assignment of the right to use computer programs. (emphasis added)

O STF (Supreme Federal Court) has established the thesis that "Service Tax (ISS) should be levied on the licensing and assignment of the right to use a computer program". This put an end to the discussion that had been going on for more than 20 years! A situation that discussed in RE 176.626-3 SP of 1998, ICMS Agreement 181 of 2015, Agreement 106 of 2017, Normative Opinion 01 of 2017 of the Municipality of São Paulo and ADI 1.945 of 1.999 and ADI 5.659 of 2017, was in favor of the two Direct Actions of Unconstitutionality (ADI)decreeing the unconstitutionality of the ICMS tax levied on software Licensing and assignment of the right to use computer programs.

This whole judicial process - which has lasted more than 20 years - has consequently led to many doubts about how the STF's decisions have developed, and what comes and goes from taxes for software.

In this post, we'll take a closer look. Check it out!

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**What is ICMS for software:**

The Tax on the Circulation of Goods and Services (ICMS) is the tax levied when a taxable product or service circulates between cities, states or from legal entities to individuals (such as when an appliance store sells a microwave to a customer).

Thus, the claim by companies in the area was that software cannot be charged ICMS when there is no movement of physical goods. The idea was that, instead, the products could only be charged ISS (Tax on Services), which is the responsibility of the municipalities - ISS has an average rate of 5%, while ICMS can reach 18%.

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What is ISS?

Taxs on services of any kind (ISS). As such, it is a tax levied by municipalities and the Federal District. This means that all amounts collected as ISS go to the municipal public coffers.

Therefore, its incidence occurs in cases where a service is provided, with general rules subordinated to the Law Complementary 116/2003.

It's worth remembering that this type of tax, being a municipal tax, can vary from region to region.

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How do you assess each case of software tax?

As you may have noticed, assessing the taxes levied on software is no easy task, given the lack of legal qualifications in this segment. So, in order to make life easier for entrepreneurs looking to understand what taxes are due when selling this type of service/product, we have organized software into 6 tax categories. Follow the list below:

1. Off-the-shelf software

Qualifications: Service

Taxes:

ISS: 2.90%.

Non-cumulative PIS (real profit): 1.65%
Non-cumulative COFINS (real profit): 7.60%

Cumulative PIS (Presumed profit): 0.65%
Cumulative COFINS (presumed profit): 3%

IRPJ*: 15%
Additional IR*: 10%
CSLL*: 9%

2. Customizable software

Qualifications: Service

Taxes:

ISS: 2.90%.

Cumulative PIS: 0.65%
Cumulative CONFINS: 3%

IRPJ*: 15%
Additional IR*: 10%
CSLL*: 9%

3. Custom software

Qualifications: Service

Taxes:

ISS: 2.90%

Cumulative PIS : 0.65%
Cumulative COFINS : 3%

IRPJ*: 15%
Additional IR*: 10%
CSLL*: 9%

4. Imported off-the-shelf software

Qualifications: Service

Taxes:

ISS: 2.90%

Non-cumulative PIS (Real Profit): 1.65%
Non-cumulative COFINS (Real Profit): 7.60%

Cumulative PIS (Presumed Profit): 0.65%
Cumulative COFINS (Presumed Profit): 3%

IRPJ*: 15%
Additional IR*: 10%
CSLL*: 9%

5. Customizable imported software

Qualifications: Service

Taxes:

ISS: 2.90%

Non-cumulative PIS (real profit): 1.65%
Non-cumulative COFINS (real profit): 7.60%

Cumulative PIS (Presumed Profit) 0.65%
Cumulative COFINS (Presumed Profit) 3%
IRPJ*: 15%
Additional IR*: 10%
CSLL*: 9%

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Conclusion

The STF's decision has brought some relief to technology companies, but the issue of taxing software is not yet completely resolved. The application of ISS can vary, and companies need to be aware of the specific regulations in their municipality. In addition, it is important to be aware of possible changes in legislation that could affect the taxation of software in the future.

In short, the ICMS for software is no longer in force, but technology companies must continue to monitor legislation and be prepared to comply with tax obligations, especially in relation to ISS. Advice from tax experts is essential to ensure compliance and effective tax management in the technology sector.