Technology companies that acquire the right to commercialize software licenses and pay their overseas parent company, or another company within the same economic group, have been suffering significant tax impacts because the Federal Revenue Service prohibits the deduction of this expense from the IRPJ and CSLL calculation bases.
The tax authorities understand that these remittances are in the nature of royalties and, therefore, are non-deductible from income tax (IR/CS) bases. The legislation governing the matter, however, clarifies that the exploitation of copyrights will be classified as royalties, except when received by the author or creator of the work.
Based on this premise, the payment made to the licensor who received the revenue from the software’s author/creator is not considered a royalty, but rather a payment for copyright. The distinction between these two entities is crucial because they each have their own legal deductibility regimes.
Given this scenario, a Brazilian company would simply need to demonstrate that the remuneration paid to its foreign subsidiary is a necessary and customary expense for its business to be deducted from its income tax/social contribution calculations. This is sufficient because the Federal Revenue Service, based on a literal interpretation of the legislation, maintains that only individuals should be considered authors/developers of computer programs.
Indeed, the Copyright Law protects computer programs, with the exception of specific legislation on the subject. However, the Software Law (specific legislation) also treats the legal entity as the author/creator of the computer program.
Every law student learns a basic principle of the legal world early in their course: in cases of conflicting laws, the special law always prevails over the general law. This is precisely the case because the special law allows a legal entity to be the creator of the software.
As if that were not enough, the Copyright Law itself expressly recognizes that the protection granted to the author/creator may be applied to legal entities in cases provided for by law.
Therefore, the argument used by the Federal Revenue Service to support the non-deductibility of this expense is easily dismissed, which is why we recommend that taxpayers affected by this situation review the accounting treatment given to such payments, or even evaluate the possibility of challenging the Tax Authorities in court.
