In brief

On 25 June 2021, the Brazilian federal government submitted to the National Congress the second phase of the tax reform project.

The proposed legislation (“Proposal“) will be sent to the Senate after approval by the House of Representatives. If no amendments are deemed necessary and the president promulgates the proposed legislation, the law will enter into force on 1 January 2022.

In depth

The Brazilian government unveiled the next phase of the broader reform proposal on 25 June 2021. This Proposal includes income tax cuts for 30 million workers, corporate tax cuts, and tax increases on profits and financial market activities. In general, the Brazilian tax system is considered one of the most complex systems in the world. The Brazilian government considers the simplification of the tax system and the simultaneous reduction of the overall tax burden to be crucial for the promotion of (sustainable) investment and economic growth.

The Proposal’s key amendments focus on the following subjects.

I. Corporate income tax and social contribution on net profits

  • Reduction of the corporate income tax rate

It is proposed to reduce the corporate income tax rate from 15% to 12.5% in 2022 and to 10% as of 2023. The additional 10% corporate income tax for profits exceeding BRL 20,000 per month remains in place.

  • Taxation of profits and dividends distributed

The federal government introduced a general tax against a rate of 20% on distributed profits and dividends for individuals and non-resident investors. According to the Proposal, an increased rate of 30% will apply in case the investors are located in low-tax jurisdictions or are subject to a privileged tax regime.

Dividends/profit distributions by small entities (up to BRL 20,000 per month) are exempted from the above rules.

  • Capital reductions and contribution abroad

The Proposal states that capital reductions should be carried out at fair market value, except in situations where the book value is higher than the fair market value. Furthermore, the proposed law provides that business reorganizations should be carried out at fair market value.

  • The taxation of capital gains on the indirect transfer of the shares of a Brazilian company

The Proposal also relates to the tax treatment of capital gains arising from the indirect disposal of assets located in Brazil. Under the Proposal, the taxation of capital gains from the indirect transfer of Brazilian shares is based on the assumption that the fair market value of the disposed interest abroad is derived (to a significant extent) from the assets located in Brazil.

II. Financial and capital markets

The Proposal also includes the suggestion to impose a flat rate of 15% for investments in bonds and securities, instead of the current regressive rate of 22.5% to 15% (depending on the maturity of the investment).

In addition, a 15% flat rate should apply to the taxation of real estate funds, open-ended investment funds and closed-ended investment funds.

Furthermore, a 15% flat rate will be introduced to the taxation of transactions on the stock exchange market. This rate will also apply to day-trade transactions.

Key takeaways

  • Currently, dividend distributions by Brazilian resident entities are not subject to the dividend withholding tax, regardless of the shareholder’s location. The draft law provides for a 20% (or 30%) dividend withholding tax on dividends paid to individual and corporate shareholders.
  • Certain business reorganizations will have to be carried out at fair market value.
  • An indirect transfer tax in relation to the indirect transfer of Brazilian assets will be introduced.