Cláudio Colnago

Cláudio Colnago


Some Thoughts on the ISS: the Brazilian Services Tax

Cláudio Colnago

Cláudio Colnago


Understanding the Brazilian legislation is already complicated by default, but when it comes to ISS, a municipal tax related to the act of providing services in Brazil, things can get even more complicated.


The tax system in Brazil is known for being very complex. This complexity in part reflects the political structure chosen by the people with the Constitution of 1988. Since that year, Brazil can be divided into three levels of government: federal, state and municipal, each one of them being authorized by the Constitution to create certain kinds of taxes.

The Municipalities (that are basically the towns and cities of Brazil) are entitled to create taxes on the following situations:

a) the possession of real state property, through a tax called “Imposto Predial e Territorial Urbano” - also known as “IPTU",

b) the transfering of real estate property - with a tax known as ITBI - “Imposto de Transmissão de Bens Imóveis” and,

c) the act of providing services (a tax known as “Imposto sobre Serviços” or “ISS”).

The ISS is the most relevant one, since it is the main source of income for the majority of the municipalities.

Because of this authority on creating taxes over services, the Brazilian legislation is concerned on diferentiating two economical behaviors, which are a) selling goods and b) providing services. Whenever a company sells goods it is subjected to a state tax, known as ICMS. On the other hand, the act of providing services with an economical return creates the obligation of paying the ISS to the Municipal government.

Basically what differs the act of providing services from the act of selling goods is the human component on the activity. In a much used example, if someone hires a famous painter to produce a portrait of a loved one, this is a service, even though there would be a good at the end of the human action. On the other hand, if you go to a gallery and buy a painting, this act consists on the selling of goods. On the first example, the painter is a service provider, albeit on the second one, the gallery is selling a merchandise. Other examples of situations subject to the ISS are hotel services, oil drilling, engineering services, software development and so on.

Lei Complementar 116

There are about 5,565 municipalities in Brazil. If each one of them could be entitled to regulate the same kind of tax, there would be grounds for a lot of misunderstanding and misinterpretation of the legislation, not to mention the heavy burden that would be for the companies to get to know thousands and thousands of legislation just to comply with the governments impositions. Because of that, the Brazilian Constitution provides that a federal statue, know as “Lei Complementar 1” or “LC”, would establish the ground rules for the ISS. All the Municipalities must obey this “Lei Complementar”, which nowadays is the “L.C. 116/2003”.

The LC 116 provides some basic rules regarding the ISS, such as its inapplicability whenever there is a labor contract (such as the case of the associate lawyer that is hired by a law firm and is not obligated to pay the ISS) and the method for calculating the amount to be paid. This amount would vary according to the Municipality law, but can never be less than 2% of the income provided by the service. On the other hand, the local government is bounded on taxing at most 5% of the income as a limit.

The Complementary Law 116 also establishes the criteria to determine to which municipality the ISS must be paid. The general rule is that the tax is due to the municipality where is located the headquarters of the service provider. There are some exceptions, like on the case of contractors or demolitions, when the tax is due on the place where the service is provided.


There are some situations in which the tax is not enforceable due to restrictions established on Brazil’s Constitution, such as the immunities provided on article 150, VI, that forbids any level of government on demanding taxes over each other (for example, the Federal Government demanding taxes from the Municipal), or over religious temples or political parties. The immunity is also applicable to labor unions and to both educational and social security institutions that don’t aim for profit.

Beyond these cases it is also possible for a service provided to be exempted from the obligation on paying the ISS, depending on the local legislation. The local law can, for example, establish a reduced rate (2% instead of 5%) for some kinds of services, depending on the public interest on inducing the local economy.

There are some loopholes on the Brazilian legislation of the ISS, and a lot of taxpayers start lawsuits in order to challenge the imposition of the tax over its services. Some known cases involve offshore oil drillers that sustain that the sea, in Brazil, belongs to the Federal Government and therefore the Municipality couldn’t demand taxes on services provided outside of its territory. Other know cases are the ones involving the imposition of ISS over leases, which is not considered to be a service, even though a lot of local governments so state on their statutes.

Other than that it is also recommended for companies that are willing to invest in Brazil to plan the better Municipality to locate its business, since this could affect directly the amount of taxes that would have to be paid.

These are some of the main characteristics of the tax known as “ISS”. We hope this article contributed to make it clear how this tax works on the complex structure of taxation managed by the Brazilian government.

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