Brazil’s Supreme Court excludes ISS from the PIS/COFINS base.
Theme 118 after the 6-5 ruling.

What the STF decided in Theme 118

The official Theme 118 record asks whether ISS, a municipal tax on services, belongs in the base of PIS and COFINS, two federal contributions levied on revenue. The case reached the 21 October 2026 plenary session tied 5-5. Justice Luiz Fux joined the taxpayer-favorable line and formed a 6-5 majority for exclusion.

The winning rationale is that ISS collected within the service price is destined for the municipality and is not the provider’s own revenue for purposes of Federal Constitution article 195, I, “b”. The opposing view treated ISS as part of the service price and gross revenue. That position explains the five dissenting votes, but it did not prevail on the merits.

What remains undecided: temporal modulation

The constitutional issue has been resolved, but the financial reach has not. Modulation allows the Court to limit a ruling over time: it may distinguish pending court or administrative claims, unpaid liabilities, amounts already collected and future periods. Under article 27 of Law 9.868/1999, temporal limits require a qualified judicial decision; motions for clarification are governed by article 1,022 of the Code of Civil Procedure.

During the session, Justice Fux proposed prospective effects from publication of the minutes, with exceptions for pending judicial and administrative proceedings and for earlier taxable events whose tax had not yet been paid. Justice André Mendonça joined that proposal. It was not adopted as the Court’s final modulation. The plenary instead agreed to deliberate on temporal effects in the motions for clarification. The proposal is therefore a relevant scenario, not the rule in force.

The decision matrix for companies now

The correct response depends first on the Brazilian entity’s procedural position. A group should inventory each CNPJ separately, because a pending lawsuit, an administrative claim, a judicial deposit, an injunction or no prior action can lead to different consequences when the STF defines modulation.

A new filing after the merits session does not automatically preserve retroactivity. The practical objective is to document the position, quantify the exposure and compare lawful routes without representing an analogy to Theme 69 as a cut-off already fixed for Theme 118.

Which companies should review Theme 118 first

Priority tends to be highest for Brazilian service businesses with substantial taxable revenue and recurring ISS: technology and software services, healthcare, education, engineering, architecture, consulting, advertising, facilities and other large service operations. Foreign-headquartered groups should include Brazilian subsidiaries, permanent establishments and acquired entities in the perimeter review.

Materiality is influenced by the municipal ISS rate, the PIS/COFINS regime, the portion of revenue actually subject to ISS, withholding or substitution arrangements, exempt or zero-rated revenue, available periods and the company’s litigation history. Companies under the cumulative regime often see the issue more directly; businesses under the non-cumulative regime must also reconcile their credit mechanics. Simples Nacional, fixed-ISS professional entities and sector-specific regimes require separate analysis.

How to size the amount without calling it a credit

The first calculation is the nominal PIS/COFINS amount associated with ISS included in the contribution base. As a simplified screen: ISS included in the base × applicable PIS/COFINS rate. It is an exposure estimate, not a receivable, savings forecast or authorization to offset.

The actual model must use ISS and contribution records by month, municipality, service line and legal entity. It must then apply payments, deposits, prior offsets, procedural scope, statutory limits and the future modulation. The common phrase “recover the last five years” is therefore unsafe: five years is not an automatic credit, and the STF has not yet defined the temporal reach of Theme 118.

For a broader review of contribution records, see TaxUp’s PIS/COFINS recovery assessment.

The evidence file a multinational group should build

A reliable Theme 118 assessment starts with a reconciled data room. At minimum, the Brazilian entity should connect service invoices and municipal ISS returns to EFD-Contribuições, PIS/COFINS calculation workpapers, payment records, the general ledger and every judicial or administrative file related to the issue.

Headquarters should request a bridge from tax-return data to the amount reported in management currency, while preserving the Brazilian-real source calculation. Foreign-exchange translation is a reporting step; it does not replace the tax-base evidence.

Governance, accounting and M&A implications

Theme 118 should be handled as a cross-functional workstream. Tax determines the base and filings; legal maps the decision and procedural position; accounting evaluates recognition and disclosure under the standards applicable to the group; treasury assesses cash constraints; systems controls any change to current calculation; and the external auditor may require the underlying evidence and legal analysis.

A 6-5 merits ruling does not, by itself, establish that an asset must be booked or that an uncertain position can be reversed. Recognition, measurement and disclosure depend on the final legal reach and the group’s applicable accounting framework. The same discipline applies in M&A: a buyer should not price an unmodulated claim as cash, and a seller should disclose the litigation, tax payments and data quality that support any asserted upside.

Theme 118 and Brazil’s tax reform: closing the legacy

The reform does not make Theme 118 irrelevant. It turns the case into a legacy-closing issue. Constitutional Amendment 132/2023, Transitional Provisions article 126, II, provides for PIS and COFINS to be extinguished from 2027 once CBS is instituted. Periods through the end of 2026 still generate payments, filings, litigation and potential overpayments whose treatment depends on Theme 118.

For the new system, Complementary Law 214/2025, article 12, paragraph 2, V, excludes ISS from the IBS/CBS base during the transition from 1 January 2026 through 31 December 2032. That rule governs the new taxes; it does not determine the historical reach of the PIS/COFINS judgment.

Theme 118 timeline and next official events

Theme 118 followed the broader debate opened by Theme 69, which excluded ICMS from the PIS/COFINS base. The ISS case later reached a 5-5 split. On 21 October 2026, Justice Fux cast the remaining vote and the plenary proclaimed a 6-5 taxpayer-favorable merits result.

The next legal milestones are the publication of the formal judgment records, the motions for clarification, the decision on modulation and, later, finality. Each can affect what a group may implement and for which periods. TaxUp will update this page if the official minutes, the final wording of the holding or the modulation decision changes the analysis.

Official sources and update status

This page was materially updated on 21 October 2026 after the plenary discussion ended. The 6-5 result and the decision to reserve modulation for motions for clarification were checked against the official session. The Court’s online records may continue to receive documents after the live ruling.

• STF plenary session of 21 October 2026 — official video of the tie-breaking vote, the modulation proposal and the decision to leave temporal effects for motions.
• STF Theme 118 record — question presented and procedural history.
• RE 592.616 official case page — docket and case documents.
• Federal Constitution, article 195, I, “b” — constitutional revenue base.
• Code of Civil Procedure, article 1,022 — motions for clarification.
• Law 9.868/1999, article 27 — temporal modulation.

Citation caution: Theme 118 is RE 592.616, concerning ISS in the PIS/COFINS base. RE 547.245 concerns ISS on financial leasing and is a different case. The next review trigger for this page is the publication of the minutes, the formal holding, the judgment or a decision on the motions for clarification.