Brazilian Supreme Court Excludes ISS (Service Tax) from PIS/Cofins Tax Base, but Recovery of Amounts Depends on Defining the Effects of the Decision

The Brazilian Supreme Federal Court decided, on October 21, 2026, by a vote of six to five, that the ISS (Service Tax) is not included in the calculation base for PIS and Cofins (social security contributions). This ruling corresponds to Topic 118 under the General Repercussion procedure and is of particular interest to service providers who include this municipal tax in the calculation of these contributions.

The Supreme Federal Court's Understanding of the Nature of Municipal Taxes

Following a tie-breaking vote cast by Minister Luiz Fux, the prevailing understanding was that the ISS (Service Tax) only passes through the company's cash flow before being allocated to the Municipality, and does not constitute revenue or income for the purposes of PIS and Cofins (federal social security contributions). This decision may reduce the amount of contributions owed by companies affected by this legal argument.

Recovery of Past Payments and Modulation of Effects

The possibility of recovering amounts paid in the past, however, still depends on defining the temporal effects of the ruling, as the Supreme Federal Court (STF) will subsequently examine the "modulation," which may establish when the understanding will be applied and which previous situations will be preserved.

For companies that already have legal action pending, it will be necessary to monitor any applicable timeframe and conditions established by the Court, including the filing date. The existence of a prior lawsuit should be considered in this analysis.

Recommendations and Practical Steps for Service Providers

At this time, it is recommended to verify whether the ISS (Service Tax) was included in the contribution base, determine the amounts involved, and review the status of any ongoing legal proceedings. These steps will allow for an assessment of appropriate measures and the possibility of recovery.

Updated on October 21, 2026.

Article written by: João Rezende.

• The Supreme Federal Court's decision in Case 118 is a major victory for service providers, as it excludes the ISS (Service Tax) from the calculation base of PIS and Cofins (federal social security contributions). However, it will still be necessary to monitor the definition regarding the modulation of effects, which could limit the recovery of amounts paid in the past. For companies, the recommendation is to review past payments, assess the status of any potential lawsuits, and define appropriate measures to protect their rights.