One of the taxes imposed by the Brazilian government is the services tax (known as the ISS), which is levied on the provision of certain services at a rate of between 2% and 5% of the cost of the service. The ISS regulations (which until recently were set out in Decree-Law 406/68 and Complementary Laws 56/87 and 100/99) list the types of services and activities that are subject to the ISS.

These activities include the licensing of movable properties (chattels). Given that patents and trademarks are considered chattels according to the Brazilian Industrial Property Law, some elements of the government considered that the licensing of patents and trademarks (although not expressly mentioned in the ISS regulations) was to be considered as a licence of chattels, and therefore as a taxable activity. This understanding was enough to create a major discussion on whether franchising was thus an activity which was subject to the ISS, since franchising directly involves the licensing of patents and/or trademarks as part of its business model.

After a long battle, Brazilian franchisors obtained an important victory in the superior courts to the effect that no ISS should be levied on franchising activities. The court decisions were based on the fact that franchising is a diverse and complex type of activity which involves more than the simple licensing of trademarks and/or the provision of a service, and, more importantly, that franchising was not listed in the ISS regulations. The court decisions settled all debate on this issue.

Unfortunately, however, the situation has once more been thrown into doubt with the enactment of Law 116/2003 in July this year. The new law introduces changes to the ISS regulations by revoking certain sections of Decree-Law 406/68 and by completely revoking Complementary Laws 56/87 and 100/99.

The new law expressly includes franchising as a taxable activity - in addition to the licensing of trademarks - thus creating one more financial burden for franchisors in Brazil. In addition, the new law also imposes ISS on services provided by foreign companies to Brazilian entities. As a result, the ISS will also be imposed on a foreign franchisor when contracting with Brazilian franchisees. In such cases, however, the Brazilian franchisees will be responsible for payment of the tax. This change is even more critical for Brazilian master franchisors (ie, Brazilian companies that have the right to develop a certain franchise and to grant sub-franchises to Brazilian franchisees), which are doubly affected. They must now pay the ISS both as importers of services (ie, as the recipient of the franchise right from the foreign franchisor) and as providers of services (ie, as the grantor of sub-franchise rights to third parties).

Although the old argument that franchising was not a listed activity for the purposes of the ISS is no longer valid, other arguments have been discussed as a basis for questioning certain provisions of the new law. The definition of franchising as a 'service' is one of these arguments, given that the Franchise Law itself (Law 8955/1994) does not define franchising as a service.(1)

Law 116/03 is not automatically applicable, however. It will have to be confirmed by municipal laws, as the ISS is levied by each city. It is expected that municipal laws will confirm the federal list of services, and that only future court decisions will be able to resolve the issue of whether the ISS is in fact payable for franchising activities. Until then, it is wise for franchisors to take a conservative approach to the issue and comply with the terms of the new law.

For further information on this topic please contact Juliana Viegas at Trench Rossi e Watanabe Advogados (associated to Baker & McKenzie) by telephone (+55 11 3048 6870) or by fax (+55 11 5506 3455) or by email ([email protected]).


(1) The Brazilian Franchise Law defines a 'franchise' as a system through which a franchisor grants to a franchisee the right to use its marks and/or patents, along with the exclusive or semi-exclusive right to distribute products or services, and in some cases the right to use technology in order to implement and manage a specific business or operational system developed by the franchisor.