Brazil’s Proposed Income Tax Reform

On March 18, 2025, President Luiz Inácio Lula da Silva’s administration introduced its proposed income tax reform in Brazil’s National Congress. The reform is an administration policy priority in 2025. While its main goal is to expand the income tax-free bracket for individuals, the bill also includes changes that will directly impact businesses and investors, particularly the introduction of a tax on dividends.

The proposed reform aims to increase the monthly individual income tax exemption to BRL 5,000.00 (approximately USD 900.00), which seeks to benefit lower-income earners. But it also aims to offset the revenue loss from this exemption by increasing taxes on higher-income individuals and certain corporate distributions. This approach reflects the administration’s effort to balance tax revenue needs with income distribution considerations.

Proposed Changes Impacting Businesses and Investors

The bill introduces several measures that will impact businesses and investors, particularly regarding profit-distribution strategies. 

1. Taxation on Dividends Paid to Resident Individuals:
   Currently, dividends distributed by Brazilian or Brazilian tax resident companies are exempt from income tax. The administration proposes a 10 percent withholding tax on monthly dividend payments exceeding BRL 50,000.00 (approximately USD 9,100.00) to resident individuals.
   
   
2. Taxation on Dividends Paid to Non-Residents: 
   Dividends paid to non-resident individuals or entities would be subject to a 10 percent withholding tax, regardless of the amount. The administration’s stated goal is to ensure equitable tax contributions from both domestic and international beneficiaries of corporate profits generated in Brazil.
   
   
3. Interest on Equity:
   The administration does not propose changes to the existing treatment of interest on equity payments (Juros sobre Capital Próprio or JCP). These payments will continue to be deductible for corporate income tax purposes and subject to withholding tax at the source. Maintaining the current JCP framework preserves a mechanism for companies to remunerate their shareholders that potentially can be tax efficient from a Brazilian perspective.
   
   
4. Minimum Effective Income Tax Rate (IRPFM):
   The administration introduced a minimum effective income tax rate (Imposto sobre a Renda das Pessoas Físicas Mínimo or IRPFM) targeting individuals with annual income exceeding BRL 600,000.00 (approximately USD 109,000.00). This tax starts at zero percent and increases linearly, reaching ten percent for income of BRL 1,200,000.00 (approximately USD 218,000.00) or more. The IRPFM encompasses all income sources, including those previously exempt or subject to reduced rates, which the administration views as necessary to ensure high-income earners contribute a baseline tax amount.
   
   
5. Corporate Tax Cap:
   The bill sets a cap on the combined corporate income tax rate and the ten percent withholding tax on dividends, ensuring that the total tax burden does not exceed 34 percent for non-financial entities and 45 percent for financial entities.

Implications for Stakeholders

The proposed changes carry several implications for different stakeholders.

• Companies distributing substantial dividends may need to reassess their business decisions regarding reinvestment versus distribution, including whether to reinvest profits or distribute them to shareholders. Additionally, businesses may need to prepare for the administrative responsibilities associated with withholding and remitting the new taxes.
• High-net-worth individuals receiving significant dividends should anticipate an increased tax burden. Engaging with Brazilian tax professionals to explore potential restructuring or alternative investment avenues will be crucial to optimize tax efficiency under the new regime.
• Foreign investors should evaluate how this change aligns with their overall tax planning strategies. The uniform ten percent tax on dividends remitted abroad highlights the importance of understanding Brazil’s tax treaties, where available, and their impact on effective tax rates.
• Countries that do not have Bilateral Tax Treaties (“BTT”) in place with Brazil, such as the United States and Germany, might consider reviewing their negotiating priorities as their companies would be in a less tax-efficient situation than competitors in countries with BTTs.
• Brazilian subsidiaries of foreign multinationals that historically distributed a large portion of profits as dividends—particularly before Brazil adopted the arm’s length standard—may consider reassessing their intercompany pricing policies. Ensuring that cross-border transactions reflect arm’s-length terms under Brazil’s current pricing rules may help reduce excess profit accumulation in Brazil and, consequently, the need for significant dividend distributions subject to the new withholding tax.

Considerations and Next Steps

President Lula asked the congressional leadership to prioritize the income tax reform. The Speaker of the House of Deputies voiced his support for the bill, although also making clear that Congress will amend it. The bill’s rapporteur in the House is former Speaker Arthur Lira, who played a key role in the approval of a historic consumption tax reform in 2023.

Five permanent House committees and a special committee established on April 4, 2025, will mark-up the bill. The main debate, including key changes to administration’s text, will take place in the special committee. The bill is under the House urgency rule, to speed up its discussion and approval, and, once marked-up, will require a floor vote by simple majority. If approved, it will be sent to the Federal Senate.

The proposed income tax reform represents a significant shift in Brazil’s taxation landscape, particularly concerning dividend distribution. However, it does not address long-standing priorities of the business community, including the simplification of the corporate tax system, the reduction of Brazil’s corporate tax level to the G20 economies’ average, and the modernization of legislation regulating Brazilian overseas investment. 

While the proposed reform aims to adjust the tax structure and generate additional revenue, it also introduces complexities that require careful consideration and strategic planning by affected parties. We recommend that those potentially impacted by the reforms discuss them with their Brazilian tax advisor.

As the bill progresses through the legislative process, stakeholders should stay informed about any amendments or clarifications that may arise. Active participation in consultations and engagement of the Lula administration and congressional leadership can provide opportunities to voice concerns about the bill’s implications for businesses.

If you have any questions concerning the tax legislation discussed in this update, please contact Diego Bonomo or Melina Biasetto. 

For the potential U.S. federal income tax implications of the tax legislation, please contact Dirk Suringa or Lauren Ann Ross.