Could Brazil’s Tax Reform Reopen the Debate Over Royalties?

Trademark, software, and technology licensing agreements will have to navigate Brazil’s transition to the new IBS and CBS taxes. Against this backdrop, the interpretation of existing contractual obligations and the legal limits on changes to royalty payments are becoming increasingly relevant.

By Caio Franco Lima | Valor Apropriado

On October 28, 2026, Brazil’s Federal Court of Accounts (Tribunal de Contas da União, or TCU) approved a calculation establishing an 11.3% reference rate for the Contribution on Goods and Services (CBS) in 2027. Although the rate remains subject to approval by the Federal Senate, it already provides an important benchmark for companies planning around existing trademark, software, and technology licensing agreements.

Many of these agreements were executed before the tax reform, have lengthy terms, and establish royalties calculated as a percentage of revenue or based on other economic variables. In some cases, compensation was negotiated several years ago, taking into account costs, taxes, and commercial conditions that may change throughout the life of the agreement.

Complementary Law No. 214/2025, as amended by Complementary Law No. 227/2026, governs the application of the Tax on Goods and Services (IBS) and the CBS to transactions for consideration, including the licensing and assignment of rights. The effective collection of the CBS will begin in 2027, while the IBS will be phased in over the following years.

This new tax framework raises an important contractual question: To what extent can changes in taxation affect the financial obligations agreed upon between licensors and licensees?

The answer requires careful consideration because royalty payments are often essential to maintaining a license. Disagreements over compensation can jeopardize commercial relationships and lead to disputes over the right to continue using the licensed asset.

Determining Compensation Under Licensing Agreements

In a licensing agreement, royalty payments result from negotiations that take several factors into account, including the commercial significance of the asset, the scope of the rights granted, the licensed territory, exclusivity, the term of the agreement, and the parties’ expected returns.

Compensation may be fixed, variable, or based on a combination of different criteria. A trademark license, for example, may establish royalties equal to 6% of the licensee’s gross revenue, payable monthly and subject to a guaranteed minimum payment.

However, the percentage alone does not establish how the payment obligation should be calculated. It is necessary to examine how the agreement defines revenue, which exclusions it expressly provides for, and how taxes, discounts, and other amounts are treated.

This analysis is particularly important because tax legislation and licensing agreements do not necessarily use the same definitions of revenue.

The tax base for the IBS and CBS is established by law, while the compensation owed for the use of a trademark is determined by the terms agreed upon by the parties. Accordingly, a change in the composition of the taxable base does not automatically alter the definition of revenue adopted in a licensing agreement.

Consider an agreement that establishes royalties based on gross revenue without expressly addressing the treatment of taxes introduced after its execution. Under the new tax system, the licensee may argue that certain amounts should be excluded from the royalty calculation, while the trademark owner may maintain that the contractual calculation base remains unchanged.

The outcome will depend on the interpretation of the agreement, the parties’ objectively demonstrated intent, and the circumstances surrounding its execution.

Articles 112 and 113 of the Brazilian Civil Code provide guidance for this analysis, particularly regarding expressed intent, good faith, and customary practices applicable to the transaction.

It will also be important to consider how the parties have performed their obligations over time. Historical billing practices, royalty calculation statements, and the repeated acceptance of specific calculation methods may help clarify the meaning of contractual provisions and become decisive in a potential dispute.

Allocation of Tax Burdens and the Possibility of Adjusting Royalties

Another important issue concerns how tax burdens are allocated between the parties.

Licensing agreements frequently provide that each party is responsible for the taxes legally imposed on it. Other agreements contain specific provisions addressing withholding taxes, net payments, price adjustments, and mechanisms for restoring the agreed compensation.

In international transactions, for example, gross-up clauses are common. These provisions may require adjustments to payments to preserve a specified net amount for the recipient, depending on the taxes and circumstances expressly covered by the agreement.

Whether these provisions apply to the effects of Brazil’s tax reform will depend on the contractual language, the taxes contemplated, and the circumstances that permit adjustments.

A clause providing for payment adjustments due to withholding taxes may not extend to a tax imposed on the licensing transaction itself. Likewise, a general provision allocating tax responsibilities does not necessarily authorize the unilateral transfer of new costs to the licensee.

The IBS and CBS also have an important distinguishing feature: the non-cumulative tax system.

The ability to claim tax credits, when permitted, affects the actual economic cost of a transaction. For this reason, the impact of the new taxes cannot be determined solely by comparing statutory tax rates. Companies using similar technologies may have different eligibility for tax credits.

Before discussing royalty adjustments, the parties will need to identify the transaction’s actual cost and determine whether the agreement allocated the risk of tax changes to either party.

This assessment makes it possible to distinguish between the commercial desirability of renegotiating an agreement and the existence of a legally enforceable right to modify its terms.

The parties may consider it appropriate to adjust compensation to preserve their commercial relationship. However, this does not mean that either party can impose changes without a contractual provision or sufficient legal grounds.

Legal Limits on Contractual Revision

The issue becomes more complex when one party argues that changes in taxation have undermined the economic balance originally contemplated when the agreement was executed.

The Brazilian Civil Code provides mechanisms for exceptional changes in contractual circumstances.

Article 317 allows courts to adjust the amount of a contractual obligation when unforeseeable circumstances create a manifest disproportion between the amount owed and the value corresponding to the time of performance.

Article 478, in turn, addresses the termination of contracts involving continuous or deferred performance when extraordinary and unforeseeable events make one party’s obligation excessively burdensome while providing an extreme advantage to the other party.

These provisions establish distinct legal requirements. A legislative change, by itself, is not sufficient to justify contractual revision.

For business-to-business agreements, Article 421-A also establishes relevant principles, including the presumption of parity and symmetry between contracting parties, respect for the contractual allocation of risks, and the exceptional and limited nature of judicial intervention to revise contractual terms.

Applying these rules to licensing agreements first requires consideration of when the agreements were executed.

A license negotiated in 2018 presents a different context from one executed in 2025, when the tax reform had already been approved and part of its regulatory framework was known. This distinction may influence the assessment of whether the changes were foreseeable and which risks the parties could reasonably have considered when entering into the agreement.

The extent of the alleged economic impact must also be examined.

Reduced profitability, additional administrative costs, or the need to adapt billing systems do not, in themselves, establish that the legal requirements for contractual revision or termination have been met.

The analysis must consider the contractual obligations as a whole, the compensation structure, the risks assumed by the parties, and the actual effects of the changes.

In an agreement providing for variable royalties, for example, certain economic fluctuations may fall within the risks inherent in the contractual arrangement. By contrast, a license involving fixed compensation, guaranteed minimum payments, and additional investment obligations may require a different assessment.

The outcome will depend on whether the legal requirements for the requested remedy can be demonstrated, taking into account good faith and the limits of judicial intervention in commercial relationships.

The Consequences of Nonpayment for the Right to Use Licensed Assets

Under certain agreements, royalty payments are directly tied to the continued authorization to use the licensed asset.

Consider a company that licenses technology used in its manufacturing process. The agreement requires periodic payments and provides for termination in the event of nonpayment, following notice and an opportunity to cure the default.

As the new tax rules are implemented, the licensee begins disputing part of the amounts charged. The rights holder considers the payments incomplete and announces its intention to terminate the agreement.

In this scenario, the legal analysis must determine whether the amounts demanded are actually owed, whether a material contractual breach has occurred, and whether the requirements for terminating the license have been satisfied.

It will also be necessary to determine the legal consequences of termination.

As long as the authorization remains valid, the licensee’s continued use of the technology may still be protected by the agreement, even if a payment dispute is ongoing.

If the license is validly terminated and the former licensee continues exploiting exclusive rights without authorization, specific consequences under intellectual property law may arise.

Law No. 9,279/1996, which governs industrial property rights, and Law No. 9,609/1998, which protects intellectual property rights in computer software, establish distinct legal frameworks that must be considered according to the nature of the licensed asset.

Contractual nonperformance and unauthorized use of intellectual property are subject to different legal requirements. This distinction affects the claims that may be brought, the evidence required, and the choice of appropriate judicial remedies.

In a technology licensing dispute, for example, the rights holder may need to establish both that the agreement was validly terminated and that the former licensee continued engaging in activities requiring authorization.

It will also be necessary to assess the consequences of any measure intended to stop the use of the technology, particularly when it is integrated into manufacturing processes or services provided to third parties.

The urgency of judicial relief, the likelihood of success on the merits, and the risk of harm must be evaluated in light of the specific circumstances.

A litigation strategy that overlooks the nature of the authorization granted or the requirements for its termination may face significant challenges, even where a legitimate financial dispute exists.

The Importance of Clearly Defining the Contractual Scope

Another relevant issue involves agreements that combine intellectual property licensing with other contractual obligations.

In a franchise arrangement, for example, trademark use may be accompanied by training, technical know-how transfer, operational assistance, and access to business systems.

Technology agreements may include compensation for usage rights, maintenance, updates, technical support, and the development of additional features.

Complementary Law No. 214/2025 establishes rules for transactions involving multiple supplies of goods or services. Applying these rules requires identifying the obligations actually performed and determining the appropriate tax treatment for each component.

In this context, it becomes important to ensure consistency between the contractual terms, the actual performance of the transaction, and the corresponding tax documentation.

From an intellectual property perspective, accurately identifying the subject matter of the agreement also has significant legal consequences.

A commercial relationship may be governed by a single agreement even though it involves obligations of different legal natures.

A trademark license is not the same as an agreement to provide training services. Likewise, authorization to use software does not necessarily constitute an agreement for its development or maintenance.

These distinctions may affect the interpretation of compensation provisions, the calculation of amounts owed, and the consequences of termination.

When an agreement establishes a single payment covering different obligations, it will be necessary to understand how the parties structured that payment and which rights remain enforceable if the relationship is partially or fully terminated.

Contractual documentation should reflect the transaction as it is actually performed, since assigning different labels to the amounts charged does not, by itself, change their legal nature.

Priorities During the Tax Transition

As 2027 approaches, I believe the review process should begin with licensing agreements that generate recurring revenue and will remain in force throughout the tax transition.

For these agreements, it is important to examine how compensation is defined, how tax-related risks are allocated, and what mechanisms are available to address legislative changes. The analysis should also cover nonpayment, termination, and the continued use of licensed rights.

Agreements involving guaranteed minimum payments, revenue-based royalties, and exclusivity obligations deserve particular attention, as changes in compensation may affect the commercial conditions that originally justified the agreement.

This does not mean that every agreement will need to be renegotiated.

In many cases, existing provisions may offer sufficient guidance for addressing the effects of the tax reform. In others, gaps or ambiguities may justify additional negotiations.

The assessment should take into account the actual effects of the new tax system and the obligations already assumed, avoiding unilateral decisions based solely on estimated tax rates.

Final Considerations

Brazil’s tax transition will affect licensing agreements executed at different times and under economic conditions that were not always documented with the same degree of precision.

The main disputes may involve the interpretation of royalty calculation bases, the allocation of tax burdens, and the contractual mechanisms established for revising compensation.

In some commercial relationships, mutually agreed adjustments may be sufficient. In others, payment disputes may require the application of the legal rules governing contractual revision, nonperformance, and termination.

When the continued authorization to use licensed assets is at issue, the analysis must also address the underlying intellectual property rights and the limits of the remedies available to the rights holder.

My concern in this context is that commercial decisions may be made based on an incomplete understanding of the tax reform’s effects.

The announcement of a reference tax rate does not, by itself, establish a contractual imbalance or authorize either party to demand compensation different from what was originally negotiated.

To establish a legal basis for changing contractual terms, it will be necessary to demonstrate the actual impact, interpret the existing obligations, and identify the legal grounds permitting changes to their performance.

Companies that depend on licensing agreements to generate revenue or maintain their operations should begin this assessment before 2027.

An early review makes it possible to clarify payment criteria, document responsibilities, and negotiate potential adjustments while the commercial relationship remains operational.

When these issues are addressed only after payments have been suspended or an attempt has been made to terminate the license, the available options may be more limited and the cost of the dispute significantly higher.

Caio C. Franco LimaBrazilian Attorney — OAB/SP 386.222