People purchasing software via credit card also pay withholding tax

A reader asked me interesting questions about the taxation of software licenses sold to Brazilian individuals (end customers). 

He linked me to this article about problems foreign companies face to invoice Brazilian customers. 

Selling through a subscription model in Brazil. 

The article is very good in laying down a practical business perspective of the problem. 

His questions to me was: "is there realy a withholding tax when you send a normal invoice or get a payment via credit card, made by an individual"?

Apparently, his accountants thought it was very odd that a country would limit its online sales in such way. 

Here is my answer: 

The withholding income tax works the same for companies and individuals, for the greater part. 

In short, withholding tax is due even when payments are made via credit card. However, there is little government oversight so most customers just don't bother to pay it. 

But, if you start selling to hundreds or thousands of customers in Brazil, the local bank, credit card company or payment gateway will probably start asking questions and will try to make you responsible for collectint the income tax. 

Also, you won't be able to sell to corporate clients in Brazil, who simply cannot dodge the taxation. 

The usual solutions are: 

a) sale of a master license to your distributor in Brazil, who will then resell it;

b) incorporate in Brazil"
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You may find more information about this topic in this post:

0% withholding tax on services - if you are from the right country

BRAZILIAN TAXATION OF IMPORTED SOFTWARE - SERVICES --SAAS

  

Since so many readers have asked, I`m presenting a very simplified tax tables for importation of software into Brazil. 

Please do not  take this as a final answers to your questions. This is just the very basics. A lot more of data is needed before you can make a decision. For example: should you incorporate in Brazil and sell through a subsdiary? Should you invoice services separately? 

Also, some convetions to avoid double taxation may apply, with the effect of reducing or cancelling the withholding tax. 

So, take this with a grain of salt and look for specialized advice before issuing any invoices. 

1.            SOFTWARE LICENSES

IRRF – WITHHOLDING TAX

15%*

*25% for tax havens.

Some cities may also charge the service tax:

ISSQN

2%*

NOTE: Some states, including São Paulo, are trying to charge additional 18% of ICMS (state VAT) tax over licensing of software, whenever the software is considered “off the shelf” software. 

Special measures should be taken to ensure that the state will not apply this additional tax.

2.             TECHNICAL SERVICES AND CONSULTANCY

IRRF	15%*
CIDE	10%
PIS/Importação	1,65%
Cofins/Importação	7,6%
ISSQN	2%-5%

  *25% for tax havens.

Choice of venue and applicable law in Brazil

From time to time, I will post some interesting conversations I have had with readers. Content is true, names, maybe.

Mr. Martins,

I am a law student at the University of Gotham in the United States.

I'm doing class research on accepting Brazilian law as the governing law for a contract between an American software company and a Brazilian telecommunications company, and was wondering if you had any insight. 

I am also researching how to establish Brazil as the jurisdiction or venue for any disputes that may arise during the course of this contract.

I read your article on electronic contracts posted on February 11th, and it was helpful (though I can't read the Portuguese article you linked to).

However, I was wondering if it would apply to a paper contract that would be mailed back and forth between the two companies.

Thank you in advance for any help you can provide.

Sincerely,

Bruce Attman Wayne

_____________

Dear B. Attman,

Thank you for your message. It is always a pleasure to help readers of my blog.  

What is the contract about? Brazil has a regulatory agency for Telecommunication issues, called Anatel, which issues a considerable number of regulations: http://www.anatel.gov.br/Portal/exibirPortalInternet.do .

However, if the subject is related only to software, the American company may be able to skip these regulations. 

Brazil accepts choice of venue clauses, generally speaking (not to be confuse with choice of Law clauses. Those are only applicable in case of arbitration).

So, you won't have a problem with that, unless the agreement deals with real estate or inheritance. In these cases, the Brazilian venue shall generally apply. 

The same rules regarding electronic contracts apply to paper ones mailed back and forth (the law applicable to the agreement is the law of the country where the final proposal has been made).

The regulations are contained in articles 427 to 435 of the Brazilian Civil Code.  However, since the acceptance is not instantaneous, the contract will be reputed as celebrated once the acceptance is received by the offeror, or declined if an acceptance fails to reach the offeror within reasonable time. 

Adler

__________

Mr. Martins,

Thank you for your quick response.

The contract covers the sale of software services to the telecommunications company.  Would the American software company still need to comply with the Anatel regulations?

Glad to hear about the choice of venue clause and the contract does not cover real estate or heritages.  What about the governing law of the contract (and any disputes that may arise)?  Are there any issues with creating a contract that is governed by Brazilian law?

I will look at those sections of the civil code and thanks again for your help!

B. Wayne

__________

Master Wayne, 

Sorry for the late response this time. 

It looks like only the Telecommunication company should worry about Anatel's regulations. But I'd have to take a closer look to be sure. 

About the governing law: Brazilian courts will always use Brazilian conflict of law rules to determine the applicable law, regardless of the choice of the parties, unless the parties choose arbitration. 

Regarding the Brazilian law, if the contract is to be executed directly in Brazil, it might be the safest bet.

__________

Mr. Martins,

Thanks again for your response and your willingness to talk to a student about an obscure (dark) Brazilian contract law problem.

You've been a great help and if I have any further questions, I will definitely email you back.

By the way, the company is called Wayne Enterprises.