Brazilian tax authorities decide on the levy of PIS/COFINS-Import on payments for licenses to use software

On June 13, 2023, the Brazilian General Coordination of Taxation (“COSIT”) Answer to Inquiry No. 107/23 (“SC COSIT 107/23”) was published, in which the Federal Revenue Office of Brazil (“RFB”) decided on the application of Withholding Income Tax (“IRRF”), Social Contributions on Imports (“PIS/COFINS-Import”), and Contribution for Intervention in the Economic Domain (“CIDE”) on transactions dealing with licenses to use software.

Regarding IRRF, the RFB stated that remittances abroad for licenses to use software comprise royalties subject to IRRF at a 15% rate (or 25% if the beneficiary is domiciled in a low-tax jurisdiction).

This position is in line with COSIT Answer to Inquiry No. 75/23 (“SC COSIT 75/23”), published in April 2023, which established that IRRF is levied on amounts paid by end users for the acquisition or renewal of software licenses, regardless of customization or the means of delivery (download or cloud).

According to the RFB, since the judgment of the Direct Actions for Declaration of Unconstitutionality (“ADIs”) No. 1,945 and No. 5,659, which determined the levy of Municipal Services Tax (“ISS”) on licenses to use software instead of the State Tax on Circulation of Goods and Services (“ICMS”), it would not be possible to treat these transactions as acquisitions of goods. In the opinion of the RFB, these agreements represent a license for the use of copyrights and their remuneration royalties.

However, SC COSIT 107/23 has further emphasized that software licensing agreements can include other services, such as support and maintenance guaranteed by the supplier. In such cases, it is important to distinguish the acquisition of a new license to use the software or its extension from the provision of technical maintenance services.

In the case of a new license, payments are considered royalties for IRRF purposes, even if they provide for a term extension. As for services guaranteed by the supplier, the RFB clarified that maintenance services could be contracted for a fee outside the contractual warranty. In these cases, the payments comprise fees for technical services and are subject to IRRF at a 15% tax rate.

For CIDE, SC COSIT 107/23 established that the license to use software (through a new license or extension of the original license) is not subject to tax, except when it entails technology transfer. According to the RFB, CIDE is levied at a 10% rate on payments for technical maintenance services.

The new development refers to the PIS/COFINS-Import. SC COSIT 107/23 determined that, due to the ADIs, licenses to use software entail a provision of services. In their view, this position was reinforced by item 1.05 of the list of ISS taxable services of Supplementary Law (“LC”) 116/03. As a result, the RFB changed its previous position and concluded that PIS/COFINS-Import must be levied on the remuneration paid for licenses to use software and related services.

This decision is in line with COSIT Answer to Inquiry No. 36/23 of February 2023, in which the RFB concluded that the revenue from licensing the use of standardized or customized software must be classified as services for corporate taxation purposes under the presumed profit regime. At the time, the RFB had not considered the possibility that revenue from licenses to use of software could be classified as royalties and, therefore, fall under the specific legal provision dealing with the assignment of rights as opposed to services.

The RFB has significantly changed its position on software transactions since the judgment of ADIs No. 1,945 and No. 5,659 (through Answers to Inquiries). Several discussions will likely arise because of this hybrid treatment for software license agreements: (i) royalties for IRRF purposes; (ii) services for PIS/COFINS-Import purposes.

It is essential that taxpayers carefully evaluate their transactions to assess the appropriate tax treatment.

Demarest’s Tax team is available to provide any further clarifications that may be necessary.