Brazilian Federal Revenue Office publishes new rulings on cross-border transactions with software
The Brazilian Federal Revenue Office (“BFRO”) has recently published new rulings on the tax treatment applicable to payments remitted abroad in consideration for the licensing of software developed or held by foreign parties.
According to Solução de Divergência No. 18/17 from the General Coordination of Taxation (“COSIT” – Coordenação Geral de Tributação), payments remitted abroad as compensation for software distribution or commercialization licenses are deemed royalties, therefore subject to Withholding Income Tax (“WTH”) at a 15% rate, as per section 710 of Income Tax Regulations (Decree No. 3,000/99). Also, such ruling sets forth that no CIDE (Contribution for Intervention in the Economic Domain) should be levied on remittances of payments for distribution/commercialization licenses, as no transfer of technology (i.e.: transfer of the source code) is verified in such cases.
One should comment that the rulings published so far by the BFRO used to focus on either licenses to use software or software acquisition for resale, and affirmed that payments remitted abroad should be subject to WTH (and to 10% CIDE, when applicable) or that no WTH should be levied, respectively. Indeed, Solução de Divergência No. 18/17 is the first ruling to clearly analyze the license for the distribution/commercialization of software in view of the applicable intellectual property law and tax regulations.
The BFRO also published Solução de Consulta COSIT No. 191/17, which was the first to address remittances abroad as compensation for the so-called Software as a Service (“SaaS”). According to such ruling, SaaS are deemed technical services that depend on specialized computing knowledge and derive from automatic structures with clear technological content, thus they should be taxed by WTH (15%) and CIDE (10%).
It should be stressed that the abovementioned rulings aim at standardizing tax authorities´ understanding on the analyzed matters and must be followed by the BFRO agents when carrying out tax inspections and by taxpayers that remit payments as compensation for SaaS or for the license for distribution/commercialization of software.
Please note that said rulings did not analyze the applicable tax treatment when said remittances are made to Countries that executed Double Taxation Avoidance Treaties with Brazil, which dispositions should be considered whenever applicable, nor if PIS/COFINS-Imports should be collected on such payments. Finally, it should be emphasized that the WTH rate commented above is increased to 25% if the remittance is carried out to a beneficiary residing in a jurisdiction blacklisted as a tax haven*.
In view of the foregoing, it is highly recommendable to proceed with an analysis of the agreements executed in software-related transactions and their respective tax treatment.
Felsberg Advogado’s tax consulting and intellectual property teams are at your disposal to advise in these regards. For further assistance, please contact Ivan Campos (IvanCampos@felsberg.com.br), Thiago Medaglia (ThiagoMedaglia@felsberg.com.br), Gabriel Paranaguá (GabrielParanagua@felsberg.com.br) or Andrea Faria (AndreaFaria@felsberg.com.br), partners and senior associate of the tax consulting teams and coordinator of the intellectual property department, respectively.
This article is of a solely informative nature, and does not contain any opinion, recommendation or legal advice from Felsberg Advogados concerning the subject matter covered.
*Currently, the following Countries and jurisdictions are considered to be tax havens according to Normative Instruction No. 1,037/10: American Samoa; Andorra; Anguilla; Antigua and Barbuda; Aruba; Ascension Island; Bahamas; Bahrain; Barbados; Belize; Bermuda; British Virgin islands; Brunei; Campione D’Italia; Cayman Islands; Channel Islands (Alderney, Guernsey, Jersey and Sark); Cook Islands; Costa Rica; Curacao, Cyprus; Djibouti; Dominica; Federation of St. Kitts and Nevis; French Polynesia; Gibraltar; Grenada; Hong Kong; Ireland; Kiribati; Labuan; Lebanon; Liberia; Liechtenstein; Macao; Madeira; Maldives; Isle of Man; Marshall Islands; Mauritius; Monaco; Montserrat; Nauru; Niue; Norfolk Island; Panama; The Pitcairn Island; Qeshm Island; San Marino; Seychelles; Singapore; Saint Helena; Saint Martin Islands; Solomon Islands; St. Pierre and Miquelon; St. Vincent and the Grenadines; St. Lucia; Sultanate of Oman; Swaziland; Tonga; Tristan da Cunha; Turks and Caicos; United Arab Emirates; US Virgin Islands; Vanuatu; Western Samoa.