As widely reported in the Brazilian media, in June 2021, the federal government sent a bill of law (PL 2,337/2021) to congress proposing an income tax reform.
The bill of law has been approved by the Chamber of Deputies but until its successful appreciation on September 1 2021, it faced two frustrated attempts for voting in early August, when it was put aside for more than 15 days, and was also subject to several changes since the initial text.
This sinuous path made some believe that the bill was destined to fail, however, in a surprising movement, the Chamber of Deputies voted and approved the amended version by rapporteur Deputy Celso Sabino, and appreciated on the following day more than 40 separate votes raised by the deputies.
In the sections below, the main aspects of the current text are highlighted:
Tax on dividends
15% withholding income tax on dividends, including when paid to non-resident shareholders.
Application for dividends paid based on retained earnings from periods prior to 2022.
Exception on withholding income tax for dividends paid by Brazilian legal entities:
- Which opt to Simples Nacional (optional taxation regime for companies whose gross revenue up to R$4.8 million (approximately $0.88 million) that allows the unified collection of federal, state and municipal taxes);
- To local individual shareholders provided that the company opts to the Lucro Presumido (Deemed taxable income method, an optional regime for companies whose gross revenue in the previous year was less than BRL 78 million which subject the corporate income taxation over an estimated profit margin instead of the real one); and
- To its controller or to another entity subjected to common corporate control and which holds at least 10% of the voting capital of the company that is paying the dividends.
Capitalisation of profits will not be subject to withholding taxation:
- Provided that it observes the five years limit, backward or forward, without returning capital to its shareholders; and
- Shares or quotas will have an acquisition cost equal to zero.
When the company assumes the economic burden of the withholding income tax, the tax base will be readjusted (effective rate of approximately 17.6%).
Corporate income tax
Corporate income tax (IRPJ) and social contribution tax (CSLL):
- IRPJ reduced from the actual 15% to 8%;
- Maintenance of the 10% surcharge on yearly profits that exceed BRL 240,000 for the IRPJ;
- Social contribution tax (CSLL) reduction, from 9% to 8%, linked to tax benefits abrogation; and
- Effective tax rate: reduction from actual 34% to 26%.
Mandatory model for calculating the quarterly corporate tax rates:
- Without limitation to offset tax losses on a quarterly basis (with a limit then applied after three quarters).
Extinction of the interest on equity (JCP).
Uniformisation between the IRPJ and CSLL calculation basis.
Corporate reorganisations and hidden profit distribution
Payment of dividends with company assets must be valued at market value.
Capital reductions with delivery of goods and rights to the shareholders also valued at market value, with taxation on the surplus. Exceptions, when the book value could continue to be utilised:
- Capital reduction in the context of a corporate reorganisation involving local shareholders; and
- Capital reduction from a foreign entity to a local shareholder.
Rules on the form and documentation (report) required for transactions between groups.
Improvement of rules to prevent hidden profit distribution (distribuição disfarçada de lucros or DDL), such as:
- Trades carried out for values below or above the market value between partners and the company;
- Interest, rental, royalties or technical assistance payment below market value;
- Personal expenses of partners or relatives, paid by the company;
- Cancellation of the debt; and
- Loan when entity has retained earnings from periods from 2022 on.
Private equity funds
Taxation on profit stock of exclusive or closed-end funds:
- Tax rate of 6% if integral payment until May 31 2022, or payment in 24 instalments; and
- Tax rate of 15% if payment until November 15 2022.
Come-quotas (particular temporal income tax withholding method applicable to investment funds in Brazil) – extension to exclusive or closed-end funds. Some exceptions:
- FIA, FIC, FIDC, FIEE, FII, and FIP, provided that qualified as investment entities before the Brazilian Securities Commission (CVM)
FIP and FIEE: Taxation in the month following the asset disposal, regardless if distributions are effectively paid or not to the investors.
Following the legislature process, the bill of law has already been sent to the senate in order to be appreciated, but the house is yet to put it on the agenda for voting.
While there are almost two and half more months until the end of 2021, there is still belief that the reform is expected this year and will likely be implemented in 2022.
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