Put Mariana Martins and Marcelo Blecher – 01/06/2020

Last Thursday, 05/28, the STF Plenary concluded the virtual trial of RE 603,136 and by 8 votes to 2 judged as the incidence of ISS on franchise contracts is constitutional (items 10.04 and 17.08 of the list of services provided for in the Annex to Complementary Law 116/2003). In the case at hand, a food retail company that entered into a business franchise agreement with a chain of fast food, which includes the transfer of use of a brand, employee training, acquisition of raw materials, etc., filed an Extraordinary Appeal with the STF against a ruling issued by the TJRJ in 2009, which had concluded that the charge was constitutional.

In summary, according to the understanding expressed by the Rapporteur, Min. Gilmar Mendes, franchise contracts do not follow a conventional model and can be labeled as eclectic because they result from the combination of several other types of agreements, such as, for example, assignment of rights, brand licensing, training, technical assistance, among other types of services, and therefore, the incidence of ISS on revenues arising from such contracts is applicable.

According to the Rapporteur Minister, in the case under analysis there would be no reason to rule out the incidence of ISS, and it would be appropriate to apply the same reasoning used by Min. Eros Grau, when judging RE 592.905, in which the taxation of the transaction of leasing financial, which had been reiterated by Justice Luiz Fux in the judgment of RE 651,703, in which the possibility of taxation of activities carried out by health plan operators was discussed. The Rapporteur also used the thesis adopted by himself in 2010, during the judgment of RE 626,706 (Theme 212), which referred to the incidence of ISS on the rental of cinematographic films, cartridges for video games and the like.

Thus, when dealing with the scope of the contract that encompasses mixed activities, he emphasized that it is customary for the STF to understand taxation by the ISS, since in the case of franchises there is no clear distinction between what would be an obligation to give and what would be an obligation to do. Furthermore, Gilmar Mendes highlighted that the aforementioned tax should be levied on both services classified as an ancillary activity and those classified as an end activity, under penalty of creating a “limbo” that could awaken the creativity of taxpayers in the sense of subverting the fulfillment of the obligations listed in the contract in order to avoid the more onerous tax burden.

On the other hand, Ministers Marco Aurélio and Celso de Mello, who voted for the unconstitutionality of the charge, adopted the understanding that “it is inappropriate to take the part for the whole: the franchise concerns the provision of a certain brand or patent – namely, the transfer of the right to use a business model – and not the provision of a service in itself, which, if any, is merely an accessory to the core of the contract”. This interpretation had already been used by the Special Body of the TJSP, in the judgment of the Incident of Argument of Unconstitutionality 0015571-31.2011.8.26.0000, in 2011, a situation in which the thesis was established, within the scope of the State of São Paulo, that the hybrid and complex nature of the franchise agreement, which would not involve, in its essence, a pure obligation to do, but varied legal relationships between franchisor and franchisee, would not allow taxation by the ISS.

In practice, this is a significant defeat for the sector. franchising, which in the midst of the economic crisis resulting from the COVID-19 pandemic, will be impacted by this decision issued in the General Repercussion section by the STF, which from then on will guide the jurisprudence of the Courts of Justice and will allow municipalities to charge ISS on amounts arising from franchise contracts.

Finally, it is important to highlight that the Brazilian Franchising Association (“ABF”) has already distributed a note to its members informing that it will file a statement of clarification regarding the ruling issued by the STF Plenary, with the aim of pointing out some mistakes made in the judgment and, alternatively, proposing the modulation of the effects of the decision so that the municipal tax is not charged retroactively.

Our tax team will continue to monitor developments in the RE 603,136 trial and is available to provide any clarification on the matter.