The "Sister" Of The "Thesis Of The Century" On The STF's Docket

In February 2026, the Brazilian Supreme Federal Court (STF) will hear Theme 118, which discusses whether the ISS should be included in the PIS/COFINS tax base. Understand the thesis, the possible voting scenarios, and the risks of modulation

Theme 118 discusses the incidence of ISS, and there is an expectation favorable to taxpayers at the Supreme Court, but the vote is likely to be close — and may change entirely depending on the voting dynamics.

The Thesis

We begin 2026 with relevant news for tax practitioners. The Supreme Federal Court has placed Theme 118 of General Repercussion on the docket for judgment on February 25.

This theme arose very close in time to the so-called "Thesis of the Century" (Theme 69), in which the STF examined whether ICMS (a state tax on the sale of goods) should be excluded from the calculation base of PIS and COFINS (federal taxes on revenue/turnover).

In Theme 118, the discussion is very similar, but it concerns ISS, a municipal tax levied on the provision of services.

The debate is similar because the arguments are virtually the same. Taxpayers argue that ISS is not the taxpayer's own revenue, since it is a tax itemized on the invoice.

Thus, from the moment the invoice is issued, it is already known that this portion belongs to the municipalities and does not constitute the taxpayer's assets. Allowing PIS/COFINS taxation would mean admitting that these contributions could be levied on taxes rather than on revenue or turnover, as provided in the Constitution (Article 195).

The Brazilian Federal Revenue Service, in turn, argues that despite being itemized on the invoice, ISS composes the price of the service and therefore is an integral part of turnover and revenue. Only after receiving the amounts would the taxpayer be obliged to allocate part of the revenue to pay the tax cost, just like all other costs and expenses of its activity (such as payroll, inputs, etc.).

The discussion is not straightforward and, for that very reason, the "Thesis of the Century" dragged on for more than two decades in the courts. The very case that originated Theme 118 was assigned to the STF in September 2008.

Procedural Analysis

From a judicial litigation standpoint, thousands of cases are awaiting this judgment so that the courts can apply the outcome defined by the STF — as occurred in Theme 69.

The impact of the thesis is smaller than that of ICMS (since ISS is levied at a much lower rate and, therefore, the amount to be excluded from the PIS/COFINS base is smaller), but it is still relevant.

It is still possible to file a lawsuit on this matter, if the company has not yet done so, to seek recovery of amounts paid over the past five years, but it is uncertain whether the STF will apply any modulation of effects.

Modulation consists of limiting the temporal application of the decision and should be applied in situations involving a change in case law or considerations of social and economic interest.

Several scenarios are possible, but two are the most expected, with some variations.

The first scenario is that the STF rules in favor of taxpayers but determines that only those who filed a lawsuit by a certain date would be entitled to recover past amounts. In Theme 69, that date was March 15, 2017, when the merits were decided by the STF.

The STF may adopt a new date, but it cannot be ruled out that it may adopt the same date as Theme 69, given the similarity between the matters.

If it adopts another date, it could be the date the judgment of Theme 118 began (August 2020), the date the physical plenary judgment began (August 2024), or even the date of publication of the judgment or the minutes of the judgment (in the future).

The second scenario would be an unfavorable decision for taxpayers, but allowing those who have already filed lawsuits — relying mainly on the case law of Theme 69 — to recover amounts paid. The same uncertainty regarding dates would apply here, although it would make more sense for the chosen date to be the date of the judgment of Theme 118, given the context of a change in understanding.

Given the uncertainty, the sooner a lawsuit is filed, the better the chance of being included in any modulation, albeit still with a high degree of uncertainty.

Both new cases and those already filed will likely await the conclusion of the judgment of Theme 118, which, if it follows the path of Theme 69, may still be subject to appeals by the Treasury or by taxpayers, potentially extending the discussion beyond 2026.

Expectations for the Judgment

Although taxpayers prevailed in Theme 69, it is important to remember that the vote count was narrow.

This is not an easy debate, both due to the legal arguments and the large amounts at stake and their impact on public accounts.

In Theme 69, taxpayers prevailed with 6 votes in favor and 4 against (there was no vote from Justice Teori Zavascki due to his passing).

In Theme 118, the judgment began in the virtual plenary in 2020 but was interrupted by a request for review by Justice Luiz Fux, which meant the case was removed from the virtual plenary and brought to the physical plenary, where debates among the justices may occur.

In this situation, votes cast in the virtual plenary may or may not be discarded. Votes of justices who have since left the Court are maintained.

In the virtual plenary, the judgment was interrupted with 4 votes in favor (Celso de Mello, Rosa Weber, Ricardo Lewandowski, and Cármen Lúcia) and 4 votes against (Dias Toffoli, Alexandre de Moraes, Edson Fachin, and Roberto Barroso).

In August 2024, when the judgment began in the physical plenary, the favorable votes of retired justices Celso de Mello, Ricardo Lewandowski, and Rosa Weber were counted, along with a favorable vote from Justice André Mendonça.

On the other hand, Justice Dias Toffoli (who had also voted against taxpayers in Theme 69) presented a dissenting vote and was followed by Justice Gilmar Mendes.

At that point, the score stood at 4 to 2 in favor of taxpayers.

Taking Theme 69 as a benchmark, one might assume that all justices who voted against taxpayers in that case would maintain that position in Theme 118. This would result in 5 votes against taxpayers (even though Alexandre de Moraes did not vote in Theme 69, he had already cast an unfavorable vote in the virtual judgment of Theme 118).

Of the remaining votes, three justices have already retired and, in principle, their favorable votes would be maintained, and André Mendonça has already cast a favorable vote. That would leave Cármen Lúcia and Luiz Fux to vote, both of whom voted in favor of taxpayers in Theme 69.

Therefore, there is a favorable expectation for the judgment, but with a very close vote that could change entirely, as justices are not bound by their prior positions.

Despite this, it is still advisable to assess the discussion of the matter in the Judiciary, given the risks of modulation and the legal plausibility of the thesis.

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.