Brazilian Supreme Court excludes ISS from the PIS and COFINS tax base
Summary
On October 21, 2026, the Full Bench of the Brazilian Supreme Court (STF) concluded the judgment of Theme 118 of general repercussion. By a 6–5 majority, the Court ruled that the Municipal Service Tax (ISS) is not part of the PIS and COFINS tax base. According to the STF, the ISS amount is a mere financial inflow that passes through the taxpayer’s books and does not constitute revenue or gross receipts. The temporal scope of the ruling, however, remains undefined, as the modulation of its effects will be addressed only in the judgment of any motions for clarification.
Further details
The judgment involved Extraordinary Appeal No. 592,616, originally reported by Justice Celso de Mello (retired). The case began in 2020 and was tied at 5–5. The outcome was decided by the tie-breaking vote of Justice Luiz Fux.
The majority was formed by Justices Celso de Mello, Rosa Weber, Ricardo Lewandowski (all three retired), Cármen Lúcia, André Mendonça, and Luiz Fux. Justices Dias Toffoli, Alexandre de Moraes, Edson Fachin, Gilmar Mendes, and Luís Roberto Barroso (retired) dissented. The votes of the retired Justices were preserved.
Thesis established
“The amount corresponding to ISS is not part of the tax base of the social contributions relating to PIS and COFINS, since ISS qualifies as a mere financial inflow that merely passes, without any definitive character, through the taxpayer’s assets and books, under penalty of violating Article 195, I, b, of the Constitution of the Republic (as amended by Constitutional Amendment No. 20/98).” (free translation)
Scope of the ruling still undefined
The scope of the ruling, however, remains undefined, as the modulation of its effects has not yet been determined.
The matter was debated during the session. Justice Luiz Fux proposed that the ruling take effect only as from the publication of the minutes of the judgment, except for judicial and administrative proceedings pending as of that date. The Justices, however, decided that the issue will be examined in the judgment of any motions for clarification.
On October 22, 2026, the Federal Government informed the Court that it will file motions for clarification requesting modulation. In the same petition, it requested the nationwide stay of all judicial and administrative proceedings on the matter until Theme 118 becomes final and unappealable or, alternatively, urgent interim relief to the same effect. The request has not yet been decided.
The outlook remains uncertain, especially because modulation will be decided by a different composition from the one that ruled on the merits. Four of the votes that formed the majority were cast by Justices who have since retired and will not take part in this new deliberation.
Attention and monitoring required
Although the ruling on the merits was favorable to taxpayers, its scope will only be known after the motions for clarification are decided.
We recommend that companies that have not yet filed lawsuits assess whether it would be advisable to do so before the publication of the minutes of the judgment (a potential cut-off date for any modulation of effects). Companies that are already litigating the matter should monitor further developments in the case, particularly the decision on the request for a nationwide stay, and assess the potential impacts of the ruling in light of their specific circumstances.
