The current tally in Brazil’s highest court signals a likely loss for the government. Both the STF’s Virtual Plenary and lower court rulings mirror the dominance of favorable rulings for companies. Between January 2024 and January 2025, 75% of 602 decisions from regional federal courts ordered the removal of ISS from the tax base, according to a survey by law firm Velloza Advogados.

The case, listed as Theme 118, resembles the ICMS case and remains pending in the Supreme Court. A defeat could deal a R$35.4 billion blow to public finances, based on figures from the 2025 Budget Guidelines Law, at a time when the federal government is pushing to increase revenue and eliminate the primary deficit.

The STF began reviewing the case in 2020, but the trial was suspended in August 2023. The outcome is critical for defining the constitutional concept of gross revenue. In some earlier rulings on related cases, the Supreme Court classified taxes as part of corporate revenue. However, with Brazil’s new tax reform introducing a dual VAT system, taxes will be levied separately—clarifying that they do not constitute revenue for companies.

Appeal rulings

Velloza Advogados analyzed appeal rulings from Brazil’s six federal appellate courts. All decisions from TRF-1, TRF-2, and TRF-3—which handle most of the lawsuits—favored the taxpayers, applying the same rationale used in the ICMS exclusion case (Theme 69).

TRF-4, based in Southern Brazil, diverged. Of its 119 decisions, all went against the companies. TRF-5 issued mixed rulings but mostly sided with businesses, agreeing that the ISS does not constitute revenue and should therefore not be included in the PIS/Cofins tax base. TRF-6, based in Minas Gerais, opted to suspend proceedings until the Supreme Court rules—even though a formal stay has not been ordered.

So far, the STF’s physical plenary shows a score of four votes against the federal government and two in its favor. Five justices have yet to cast their votes, but tax lawyers expect a victory for taxpayers. Optimism stems from Justice André Mendonça, who had been a wildcard but voted in favor of the companies in 2024. Considering votes from both the Virtual Plenary—previously split 4–4—and those cast in the ICMS case, there would already be a majority in favor of businesses.

Three justices have voted in this case so far: Dias Toffoli and Gilmar Mendes against the companies, and Justice Mendonça in favor. Votes from retired justices Celso de Mello (the rapporteur), Rosa Weber, and Ricardo Lewandowski—also in favor of taxpayers—remain valid. As a result, current justices Nunes Marques, Flávio Dino, and Cristiano Zanin, who succeeded them, will not vote.

Taking all these votes into account, there is currently a 5–5 tie. Only Justice Luiz Fux has yet to vote. Given his prior stance in the ICMS case, the expectation is that he will vote for the companies, securing their win.

Lead case

The lead case involves Viação Alvorada, a bus operator in Porto Alegre, Rio Grande do Sul. Both the trial court and TRF-4 ruled against the company. Heron Charneski, lead attorney at Charneski Advogados, is representing Viação Alvorada at the Supreme Court. He said TRF-4’s stance mirrors its position in the ICMS case.

“After the ICMS ruling, the court began following the STF’s guidance. But since the ISS hasn’t been ruled on, it reverted to its earlier jurisprudence,” Mr. Charneski said. A ruling by the Supreme Court would help standardize decisions across appellate courts, especially important during the transition to Brazil’s tax reform, under which the ISS will no longer be included in the base of the new Contribution on Goods and Services (CBS), which will replace PIS and Cofins.

Mr. Charneski argued that the ISS exclusion case is not a derivative, but rather a “sister” case to the ICMS one—similar to another major issue, Theme 1037, which discusses excluding PIS and Cofins from their own tax bases. “All these cases depend on the definition of revenue, which determines whether PIS and Cofins are due. We’re looking for a consistent interpretation—a single concept of revenue for both taxes,” he said.

Gross revenue definition

At the core of these cases is how to define gross revenue. “It’s a concept that has haunted Brazil for a long time,” said economist and tax lawyer Eduardo Fleury, founding partner of FCR Law. Many major rulings by the Supreme Court, he added, have included taxes to be remitted to the government within the definition of gross revenue. “You won’t find this concept in the rest of the world,” he said.

Mr. Fleury warned that this is a “harmful path,” especially now that Brazil has approved its tax reform and is adopting a split payment system. “The new system makes it clear that taxes are external to revenue and should be charged separately,” he said. He noted that the ISS is similar to the U.S. sales tax, which is itemized separately. “The tax is charged on top of the product and clearly shown because it doesn’t belong to the seller—it’s owed to the municipal government.”

Tax lawyer Fernanda Secco, a partner at Velloza Advogados, argued that since court rulings overwhelmingly favor taxpayers, there is no reason to restrict the impact of the ruling to future cases—a proposal made by Justice Mendonça. “There’s no surprise here that would justify such limitation,” she said.

Mr. Mendonça suggested that companies which didn’t include ISS in their PIS/Cofins tax base or whose amounts remain in escrow would not owe the tax. But for those who already paid over the years and whose tax credits have expired, there would be no retroactive recovery—citing a “social interest” in protecting the integrity of the budget cycle.

Ms. Secco expressed concern over the proposal, saying it undermines legal certainty and equal treatment among businesses. “Companies that acted conservatively and chose not to benefit from favorable rulings and paid the tax would be barred from recovering what they paid,” she said. “The proposal rewards those who didn’t pay, which could even distort competition.”