Recently, the 2nd Panel of the 1st Chamber of the 1st Section of the Administrative Council of Tax Appeals (CARF) decided, by a casting vote, that Microsoft Brazil cannot deduct expenses related to software licensing royalties from its Corporate Income Tax (IRPJ) calculation basis. The majority opinion was that such amounts constitute royalties and, therefore, are not deductible.
The decision, however, does not settle the controversy, as the issue remains a matter of debate and could have favorable consequences in the Judiciary. CARF itself expressed divergent interpretations of the matter, with votes in favor of the taxpayer that considered the possibility of classifying the expense as copyright exploitation.
The thesis concerns the legal nature of payments made by Brazilian companies to their affiliates abroad for software licensing. While the Federal Revenue Service and most CARF committees understand that these payments are royalties (and therefore non-deductible), there are precedents that classify such amounts as operating expenses, because such payments are in the nature of copyright remuneration.
To put it more simply, the payment made to the licensor who benefits from the revenue generated by the software’s author/creator is not a royalty, but rather a copyright payment. The distinction between these two entities is crucial because they each have their own legal deductibility regimes.
Given this scenario, the debate remains open. Taxpayers can choose to immediately deduct these expenses, risking a fine from the Federal Revenue Service and defending themselves in the administrative sphere, or file a lawsuit seeking recognition of their right, where the debate is also open.
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For a more in-depth analysis of this thesis and its impact on technology companies, we recommend reading our article on
deductibility of software licensing expenses
, available at the link: Technology Companies Can Deduct Expenses Incurred on Software Usage Licenses
