Proposed Brazilian tax changes: what is at stake?

01/07/21

Friday 25 June 2021, the Brazilian Government delivered to Congress its income tax reform proposal. If approved, the proposal would produce systemic changes, in particular by reducing the Corporate Income Tax (CIT) rate and eliminating the exemption of dividends. The changes could have significant implications for investors and multinational companies doing business in Brazil. Hence, the developments should be closely monitored.

What does this mean for your business?

If approved, the bill would have far reaching consequences for corporate structures involving Brazil. Relevant considerations include, in particular, the impact of the dividend withholding tax (in connection with tax treaties) and the tax implications of corporate reorganizations, internationally and within Brazil.

Considering the reform’s earliest effective date, taxpayers have a limited timeframe to prepare, under current rules, for the possible enactment of the proposed rules.

Proposed reduction of the CIT rate

Currently, Brazil levies CIT at a rate of 25% and a Social Contribution on Net Profits (CSLL) over a similar tax base at a rate of 9%. The proposal would further streamline the tax base of the levies and reduce the CIT rate by 2,5% in 2022 and by another 2,5% as of 2023. Overall, the combined CIT and CSLL tax rate would be reduced from 34% to 29%.

Dividend withholding tax

Brazil currently exempts dividend distributions from withholding tax. The proposal would eliminate the exemption and levy a withholding tax at a rate of 20% (or 30% in case the recipient is resident in a low tax jurisdiction).

To prevent economic double taxation, the withholding tax levied on distributions to entities resident in Brazil may be compensated against the withholding tax levied on their own dividend distributions. Additionally, the capitalization of profits would not be taxable, unless the entity reduces its capital in the 5 years prior or in the 5 years subsequent to the capitalization of profits.

To prevent abuse, the rules on disguised distribution of profits would be strengthened.

Other highlights

Non-deductibility of interests on net equity
Indirect capital gains rule (indirect transfer of Brazilian assets)
Assets contributed to the capital of non-resident entities to be assessed at marked value
Assets returned to the shareholder in capital reductions to be assessed at the highest book or market value
Anti-deferral rule for individuals holding investments in low tax jurisdictions
New rules on the taxation of corporate reorganizations (including goodwill deductibility)
New rules on the taxation of financial investments (including capital markets and investment funds)

Further development

The Government’s proposal will now be subject to the legislative process. As a result, Congress may or may not modify the proposed rules. If approved, the bill may be effective as early as January 1, 2022.