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May 17, 2021

Brazilian Superior Court rules municipal service tax applies to income from fund management services provided in Brazil

The result of this ruling could cause fund management service providers to include the municipal service tax in their fees.

On 4 May 2021, the Brazilian Superior Court (STJ) held that the municipal service tax (ISS) applies to the income from fund management services provided to a foreign entity because the services are rendered in Brazil and the result of the service is verified in Brazil, even though the foreign entity pays for the services.


A United States (US) tax resident hired a Brazilian entity to provide fund management services. The Brazilian entity did not pay ISS on the income derived from providing the services, asserting that exports of services should be exempt from ISS, even though the services were provided in Brazil.


Based on the ISS national guidelines (Supplementary Law 116/2003), exports of services are exempt from the ISS when the result of the service (i.e., the result or outcome of the service is the fund’s equity variation resulting from the service provider’s performance) is verified outside of the Brazilian territory. However, if the outcome of the service rendered is verified in Brazil, the service should be considered as a local rendering of service and subject to ISS, even if a foreign party pays for the services.

The STJ ruled that the income from the fund management services is subject to ISS because the outcome of the service is verified at the place where the provider is located. This ruling is based on the understanding that where the income or losses resulting from the purchase and sales orders are recognized determines whether the ISS applies.

Judge Gurgel de Faria also stated that the effects of the services provided by the Brazilian asset manager on the foreign fund's equity variation are felt immediately in the local territory where the investment orders originated, not abroad where the fund was established. Additionally, he points out that the return of the invested capital to the country of origin (in this case, the US), does not imply that the fund management service has not had its outcome verified in Brazil.


Although a majority of the STJ agreed to this holding, the judges stated that they are not establishing a precedent that there is no exemption from the ISS. Rather, each case must be examined on a case-by-case basis.

This decision could result in fund management service providers including the ISS in its fees. Multinational funds with investments in Brazil may want to consider how their operations may be affected by the inclusion of the ISS in the fees they will pay.


For additional information with respect to this Alert, please contact the following:

EY Assessoria Empresarial Ltda, São Paulo

Ernst & Young LLP (United States), Latin American Business Center, New York

Ernst & Young LLP (United Kingdom), Latin American Business Center, London

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific


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