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Corporate income tax changes ahead for Brazil

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The reform will progressively reduce corporate income tax

Alice Oliveira, Pedro Buffolo and Bruno Santo of Finocchio & Ustra discuss Brazil’s potential corporate income tax changes that may impact companies and investors.

The Brazilian federal government sent to congress a new tax reform proposal focusing on income tax on June 25 2021. The proposed bill (PL 2.337/2021) highlights relevant changes related to corporate income tax (CIT). Subsequently, on July 13 2021, Deputy Celso Sabino on presented a series of amendments to the proposed bill. As part of the legislature process, the bill has to be voted by the Congress and may be modified.

Key changes

The tax reform, as amended by Deputy Celso Sabino, will progressively reduce the rates of the Imposto de Renda da Pessoa Jurídica (IRPJ), which is the tax on corporate income, from 15% to 5% in 2022 and to 2.5% in 2023.

The IRPJ is also subject to a 10% surcharge on yearly profits that exceed BRL 240 thousand and to a 9% social contribution tax (CSLL), which remain unchanged. While decreasing the corporate tax burden from 34% to 24% (in 2022) and 21.5% (in 2023) dividends paid to any shareholder (legal entities, individuals, residents and non-residents) will no longer be tax-exempt.

Dividends will be subject to withholding tax (WHT) at a flat 20% rate. If the beneficiary is located in a tax heaven jurisdiction or under a privileged tax regime or if there is hidden/constructive dividend, the rate goes to 30%.

Under the original proposal from the government, holding companies and other legal entities that invest in other companies will have a potential tax leakage from the WHT on dividends, if the invested entity pays dividends the 20% WHT rate should be applied as well and could only be utilised to offset from dividends paid by the controlling entity to its shareholders (potentially creating tax assets at the level of these holding companies which are difficult to be recovered/reimbursed before the Federal tax authorities).

However, this item has been modified in Deputy Celso Sabino´s amendment and as long as the Brazilian legal entity receiving the dividend is characterised as the controlling entity or part of the same controlling group, there would be no WHT.

Therefore, the tax burden reduced from the company, due to changes in the CIT rate will be compensated and surpassed by the new dividends rates. In the end, the overall income taxation on corporate profits, assuming full dividend payout, could rise from 34% (current) to 39% (in 2022) and 37% (in 2023).

The withholding income tax on dividends at a 20% rate is higher than most of the limited WHT rates provided for in international double taxation agreements entered into by Brazil. With dividend taxation in place, international tax planning becomes far more important than in the current scenario (tax sparing clauses, exemptions, reliefs, etc.). It is important to mention that dividends paid from accumulated profits (generated prior to 2022) would also be taxed under the proposed bill.

Another matter affected by the new bill is CIT computation, the annual option will no longer exist and all companies will be subject to the quarterly computation. As a result, net operating losses (NOL) can be fully compensated (without the 30% limitation) in the three immediately subsequent quarters.

The Brazilian version of an allowance for corporate equity (Juros sobre Capital Próprio or interest on net equity (INE), will no longer be tax deductible for CIT, however it would be subject to a 15% WHT opposed to the 20% rate for dividends.

Relevant changes in the bill comprise capital reductions would need to be done, from a tax perspective, at market value (in opposition to the current legislation that allows book value to be utilised), generating taxation.

As per the original bill by the government, goodwill derived from acquisition of Brazilian targets would no longer be amortisable in five years, acquisitions that already took place up to December 2021 would need to undergo merger events by December 2022 in order to allow tax deduction of the goodwill.

Since this measure would have a high impact in M&A activity in Brazil, Deputy Celso Sabino´s proposal is to maintain the current treatment provided in the legislation.

Along with these measures that tend to make corporate reorganisations not tax neutral, stock option plans would only be tax deductible when an employee is the beneficiary (i.e. not tax deductible for officers, executives).

Private equity funds

Private equity funds (FIPs) would also be subject to the new rules and would only be an attractive vehicle if they are qualified as an investment entity before the Brazilian Securities Commission (CVM).

Furthermore, a FIP under current rules when selling an asset can defer taxation to the moment when proceeds are paid to its investors (cota-holders), the proposed new legislation determines a FIP pays income tax regardless if distributions are effectively paid or not to the investors.

Looking ahead

It is important to mention that the initially proposed tax bill (PL 2337/2021) is likely to be modified and amended during congressional discussions and a few different drafts of the proposed new legislation should be released until a final wording is aligned, which already started to take place as seen in the modifications proposed by Congressman Sabino.

Our view is that many of the measures are not likely to be passed into law, however income tax reform is expected and could be implemented in 2021.

  Alice Oliveira

Lawyer, Finocchio & Ustra




Pedro Buffolo

Partner, Finocchio & Ustra




Bruno Santo

Partner, Finocchio & Ustra


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