ISS on civil construction and the deduction of materials.
What the STF allowed, what the STJ narrowed — and what can still be recovered.

What the STF decided — and what it left open

ISS is levied on the rendering of a service, and its calculation base is the price of the service (art. 7, caput, of CL 116/2003). In civil construction, there has always been a dispute over whether the cost of the materials used in the project forms part of that price for tax purposes. The historical rule that answered this is art. 9, §2, of Decree-Law 406/1968, which required ISS to be calculated on the price after deducting (a) the value of the materials supplied by the provider and (b) the value of subcontracts already taxed by the levy.

The reception of DL 406/68 by the Constitution

The Supreme Court addressed the constitutionality of that deduction in Theme 247 of the general-repercussion docket (leading case RE 603.497/MG, Rapporteur Justice Ellen Gracie). The thesis set is direct: “Art. 9, §2, of Decree-Law No. 406/1968 was received by the legal order inaugurated by the 1988 Constitution.” The merits were judged on 07/03/2020. In other words, the STF recognized that deducting materials from the ISS base is constitutional — the rule authorizing that exclusion did not die with the 1988 Constitution.

The detail that reopened the dispute

What the STF decided was the constitutionality of the provision, not the concrete scope of the deduction. Defining what is meant by “materials supplied by the provider” — whether it includes any input acquired and applied to the project, or only a narrower category — was expressly treated as an infraconstitutional matter and delegated to the Superior Court of Justice. It was in that delegation that the construction company’s win at the STF stopped being automatic: the size of the benefit came to depend on the reading the STJ would give to the scope of the deduction.

The STJ turn in 2023 — the base became the full price again

The current STJ thesis

The definition of scope came in REsp 1.916.376/RS (Rapporteur Justice Gurgel de Faria, 1st Panel, judged on 03/14/2023, reported in Bulletin 769), in a concrete-pouring case. The STJ’s reading was restrictive: the ISS calculation base is the price of the contracted civil construction service, and it is not possible to deduct the materials used — except where they are produced by the provider off the site and sold separately by it with ICMS charged. In short, the rule returned to the full price; the deduction became the exception.

This is not the isolated position of one of the panels. The 2nd Panel followed the same restrictive orientation — for example, in AgInt no AREsp 2.486.358/SP (Rapporteur Justice Herman Benjamin, judged on 05/13/2024) —, so that both public-law panels of the STJ today apply the reading that denies the broad deduction of materials.

The exception that still works

The door that remains open is narrow and must be read carefully: what is deductible is the material that the provider produces off the site and sells with ICMS charged and levied. The logic is that of the division of tax jurisdictions — what is already goods taxed by ICMS cannot, at the same time, form part of the ISS base. The paradigm case is concrete batched at the provider’s own plant and sold under an ICMS invoice, or the precast element industrialized off the site. It is not enough, however, to hold a purchase invoice for inputs: material acquired from third parties and simply applied to the project does not reduce the base, according to the current STJ.

Concrete pouring and Precedent 167

It is worth recording a point that often causes confusion. Precedent 167 of the STJ states that the supply of concrete, on a contract basis, prepared en route to the site in mixers attached to trucks, is a service subject only to ISS. It resolves an ISS vs. ICMS conflict over pumped concrete — it does not, on its own, authorize deducting the cost of the concrete from the ISS base. It was precisely in a concrete-pouring case that the STJ, in REsp 1.916.376/RS, denied the deduction of the input from the base. These are two distinct planes: what is levied (ISS, under Precedent 167) and what is deducted (next to nothing, under the 2023 thesis).

Subcontracts, the CL 116 veto and the place of remittance

Deducting a subcontract became risky ground

DL 406/68 (art. 9, §2, “b”) allowed deducting from the ISS base the value of subcontracts already taxed by the levy — a way of preventing the same service from being taxed twice along the chain. When CL 116/2003 came into force, the provision that would repeat that deduction — art. 7, §2, II — was vetoed. Since then, deducting a subcontract from the ISS base has lacked express footing in national law and has become controversial, mostly denied after the STJ realignment in 2023. It is a possible thesis in specific situations — above all where the municipality admits the deduction in its own legislation —, but one that today carries high risk and requires case-by-case analysis before litigating.

Where the ISS on the project is remitted

There is also a point that directly affects how much is paid and to whom: the place of remittance. The general ISS rule is remittance at the provider’s place of business (art. 3, caput, of CL 116/2003), but civil construction is an exception. For the services in sub-item 7.02 (execution of works by administration, contract or subcontract), the ISS is due at the place where the work is carried out (art. 3, III); the same applies to demolition (item IV) and to the works in sub-item 7.05 (item V). Companies operating across several municipalities frequently remit in the wrong place — or remit twice, pressured by two tax authorities —, which opens its own line of review and, often, of recovery of overpaid amounts.

What items 7.02 and 7.05 say. Both items in the list annexed to CL 116/2003 carry an express proviso: the service is taxed, “except for the supply of goods produced by the service provider off the place of the service, which is subject to ICMS”. It is this clause — and not a generic deduction of inputs — that supports the only exclusion of materials the STJ admits today.

The rule changes from one municipality to another

The rate band: from 2% to 5%

ISS is a municipal tax, and each municipality sets its rate within a national band: a minimum of 2% (art. 8-A of CL 116/2003, added by CL 157/2016, originating in art. 88, I, of the ADCT, inserted by EC 37/2002) and a maximum of 5% (art. 8 of CL 116/2003). This variation scales the recoverable amount: the same overstated calculation base weighs more in a 5% municipality than in a 2% one. Rate-classification errors — applying 5% to a service that local law taxes at 3%, for instance — are a frequent source of overpayment that is independent of the dispute over materials.

Municipal presumed deductions — and the window that closes

Several municipalities have adopted, in their own legislation, presumed deductions of materials — fixed percentages subtracted from the base that dispense with item-by-item proof. These regimes are unstable and change by local decision. A concrete example: Porto Alegre allowed a presumed deduction of up to 60% of the ISS base for residential, commercial and mixed-use buildings; that deduction was revoked by Municipal Complementary Law 998/2023, effective from 06/01/2024. The practical lesson for the sector: when a municipality revokes a benefit, a retroactive window opens — the taxpayer can still claim, within the five-year window, the amounts in which the presumed deduction was not applied while it was in force. Mapping the legislation of each municipality where the construction company operated is an essential part of the diagnosis.

How to recover overpaid ISS

The right and the window

Whoever remitted ISS on a base larger than the one due has the right to refund of the undue payment (art. 165 of the National Tax Code). The window is five years (art. 168, I, of the National Tax Code); for taxes assessed by self-assessment, such as ISS, LC 118/2005 (art. 3) set that the count runs from the date of the advance payment. In practice, the recoverable universe is, as a rule, the last five years of remittances — and each month that passes without acting lapses the oldest period. That is why the diagnosis precedes the decision: first you measure what there is to recover, then you choose the path.

Administrative or judicial channel

There are two paths. The administrative one is the refund or offset request addressed to the City Hall, suitable where the thesis is objective — an incorrect rate, a base error, a municipal presumed deduction not applied — and the documentation is clean. The judicial one comes in where there is resistance from the tax authority or the thesis depends on the recognition of a right: the writ-of-mandamus route serves to declare the right to offset where there is pre-constituted evidence, and the action for repetition of undue payment to recover the amounts in cash, adjusted. The choice between administrative and judicial is not a matter of style: it depends on the type of thesis, the size of the credit and the evidence available.

Proof is per project

The core of recovery is documentary, and the unit of analysis is the project, not the company as a whole. The file must gather the electronic service invoices (NFS-e) issued, the ISS remittance slips, the contracts for contract work and subcontracting and, in the exception admitted by the STJ, proof that the material was produced off the site and sold with ICMS charged. Without that support per project and per period, neither the administrative request nor the action succeeds — and it is precisely the assembly of this file that separates a sellable thesis from a denied claim. The work speaks directly to the digital tax audit of the company’s records.

Illustrative case — a construction company with its own concrete plant

Illustrative case. The figures are examples and do not correspond to a specific client — they serve to show the TaxUp team’s working method.

The context

A construction company that carries out works on a contract basis keeps its own concrete plant, off the sites, and supplies concrete to its projects. For years, it remitted ISS on the full price of each contract, without separating the value of the concrete produced at the plant. In parallel, it remitted the tax at a uniform rate of 5% across all municipalities, including those whose local law set 3% for sub-item 7.02.

The team’s reading

The TaxUp team identified two distinct fronts. The first is the concrete: because it is produced off the site and capable of being sold with ICMS, it fits the exception the STJ admits in REsp 1.916.376/RS — a portion that can be excluded from the ISS base, provided the outbound movement with ICMS charged is documented. The second, and more immediate, is the rate: remitting at 5% in municipalities whose law sets 3% generated pure overpayment, independent of the dispute over materials.

The execution

The work consisted of reconstructing, project by project and period by period, the base and the rate actually due over the last five years; separating the portion of concrete with ICMS charged; and quantifying the overpayment from the rate applied in excess. For the objective rate front, the claim went through the municipal administrative channel; for the concrete portion, subject to greater resistance from the tax authority, a judicial measure was structured with pre-constituted evidence. The result combined the recovery of what was overpaid with the correction of the remittance going forward — without ever promising a deduction of materials that the STJ does not recognize.

How the firm acts — and the Tax Reform window

An honest diagnosis, a surgical recovery

The TaxUp team’s starting point is an honest reading of the scenario: after 2023, the STJ does not admit the broad deduction of materials acquired from third parties and applied to the project. Selling the client an automatic recovery over the entire material cost would be misleading. What the firm does is map, precisely, the fronts that actually reduce the base or generate overpayment: material produced off the site with ICMS charged; the presumed deduction set in each municipality’s law, including the retroactive windows opened by revocations; the overstated rate and base; and the place of remittance. Each front is quantified project by project, with the documentary support that sustains the claim.

The Tax Reform window

There is a reason for urgency that often goes unnoticed. The Tax Reform (CL 214/2025) will replace ISS with IBS, but the transition is long: ISS remains payable and will only be extinguished in 2033. This means construction companies keep remitting ISS throughout the transition — and keep accruing, in each period, any tax overpaid. The five-year window to recover does not stop running because of the reform. Reviewing the ISS base now therefore serves two functions: to recover the overpayment of the last five years before it lapses and to correct the current remittance until the tax is extinguished. The context of the Tax Reform reinforces the urgency, rather than making it dispensable.

An exposed sector

Civil construction is one of the sectors where this review tends to be material. The sector grew 4.3% in 2024, with sectoral GDP on the order of BRL 359.5 billion (CBIC) — an economic base large enough for differences in rate and base, repeated project after project, to add up to relevant amounts over five years. For construction companies, developers and contractors with a volume of works across several municipalities, the ISS review is often one of the highest-return recoveries per hour of technical work — precisely because much of the overpayment sits in objective fronts that do not depend on the outcome of the dispute over materials.