Brazilian guidance addresses taxation of cross-border software licensing payments

By Francisco Lisboa Moreira, Bocater, Camargo, Costa e Silva, Rodrigues Advogados

The Brazilian Federal Revenue on April 15 published guidance addressing the taxation of cross-border software licensing for commercialization or distribution.

The new guidance, Consultation Solution n. 99004, follows earlier guidance on the same topic, Consultation Solution n. 342 of 2017, which confirmed that such payments do not represent compensation for services but are payments for the right to commercialize an intangible in Brazil.

In brief, according to the new guidance, such payments will be subject to income tax withholding at a 15% rate because they represent a payment, credit, delivery, remittance, or availability to a non-resident in exchange for the cession of a right.

With regard to the withholding tax, it is important to note that this rate may be reduced under specific double tax agreements, such as Brazil’s tax treaties with Spain, Mexico, and Israel, which reduce the tax from 15% to 10%. Also, some double tax agreements grant a matching credit, such as the Netherlands and Italy tax treaties.

The guidance states that the CIDE, normally 10% on remittances made by corporate taxpayers, does not apply to these payments given there is no transfer of technology (which, in the Brazilian legislation, is represented by the opening of the source-code).

Further, PIS and COFINS taxation on the importation of services does not apply as those taxes also refer to the cession of an intangible right, the guidance states.

Although not included in the Federal guidance, depending on the municipality of the source company, the ISS may be levied – even if the payment is not in exchange for a service. This posture is contrary to the major jurisprudence and companies should go to the courts to contest this interpretation. 

Finally, the new Brazilian guidance reinforces the tax authorities´ understanding that art. 7 of Brazil’s bilateral tax treaties does not apply to these payments, which may result in problems for software beneficiary companies that seek to offset the Brazilian withholding tax in their tax calculations.