Brazil: The ISS Service Tax And Leasing - The Opinion Of The Superior Court Of Justice

Despite the ever existing legal system addressing commercial leasing transactions and the ISS taxable event, during the past decade certain municipalities followed a line of interpretation which allowed them to collect the ISS tax based on the delivery of the asset being leased.

The purpose of those transactions, almost without any exception, was the financial leasing of automotive vehicles sold by distributors connected to different automakers and importers. Under the allegation that the delivery of vehicles within their territory sufficed to represent a service rendering, the municipalities started to require registration of lessors as taxpayers, as well as the payment of ISS tax. This tax collection-oriented conduct disregarded the fact that lessors paid ISS tax as taxpayers in the municipalities where the establishments carrying out commercial leasing activities are located.

The ISS tax was always paid by lessors under the presumption that on provision of services in their establishments, the law defining the authorities entitled to collect the ISS tax was being complied with. The tax should not be paid to municipalities where the mere delivery of the leased asset took place, but rather to those where the services were effectively provided.

As the tax deficiency notices by municipalities where the automobile distributors are located increased and became fiscal enforcement actions, the issue started to become a recurrent subject of examination by the Judiciary branch. In an effort to prove that the ISS tax was paid to the public treasuries of the municipalities entitled to the tax, lessors proved not only the irreproachable tax conduct followed so far, but also evidenced the absolute subversion in the interpretation of the rules governing ISS tax levy.

The brief in several lessors' defense requested the annulment of the tax deficiency notices, arguing that the ISS was not levied on financial leasing transactions, whose prevailing activity was the leasing of movables, which does not represent an obligation to do, but rather an obligation to give.

In 2011, the Federal Supreme Court - STF acknowledged the overall effects of the issue, and a decision on the merits of the issue allowed disentanglement of that conflict in all other cases. The STF examined the extraordinary appeals and decided that ISS tax would be levied on financial leasing, given that financing is the predominant activity in this type of business.

On confirmation of the ISS levy by STF, the STJ started to examine the authority of the municipalities to exercise taxation powers. Hence, in a judgment commenced in May, 2012, the STJ determined that the municipality with authority to collect the ISS on leasing transactions is that where the leasing provider's establishment is located, that is, the place concentrating the essential activities for the services provided by lessors.

This decision was rendered during judgment of a special appeal selected by sampling, and must be followed in other decisions involving the same subject. The decision does not have the power to determine the automatic cancellation of the entire tax deficiency notice, however, assures predictability as to the merits of the case.

Based on this decision by the STJ, it became clear that the operational stages involved in a commercial leasing agreement show the performance of permanent activities in the fulfillment of the agreements, where the beneficiaries are the lessees, any assignees or third parties acquiring the leased assets. Such activities are performed at the place where the leasing company is established, and has the material and human resources to this end.

This structure shows the involvement of several areas and the complexity of the services. It would be impossible to maintain the contracted services without areas such as MARKETING (which develops the pertaining plans and types of transactions to serve lessee's specific needs), FINANCE (in charge of analyzing and assuring the economic feasibility of the transactions, further to managing the cash flows and alternatives for fund raising), ACCOUNTING (in charge of the correct entry of the transactions in the books, including those resulting from the provision for guaranteed residual value - VRG) and ADMINISTRATION (keeps control of the documentation pertaining to the transactions). The financial commercial leasing comprises complex acts scattered along the term of the agreement, which cannot be mixed up with the mere delivery of the leased asset.

According to the STJ's current and definitive position, there is no doubt as to the continued provision of services by lessors, whether at their headquarters or branch offices, as these are the places where all resources assure the performance of the financial leasing agreements.

Further to bringing legal assurance to the entire leasing market, this decision on the merits by the STJ entails the opportunity for the lessors to reverse significant loss provision amounts from their books to cover any potential charges. Nevertheless, it is worth mentioning that such reversal requires the prior verification of the details of each concrete case. In any event, it is certain that the outcome of the decision provides better financial planning conditions as of fiscal year 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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