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June 28, 2021

Brazilian Government proposes changes to corporate income tax system as second phase of comprehensive tax reform

If enacted, the bill would reduce the corporate income tax rate, eliminate the withholding tax exemption for dividends and strengthen the rules on the disguised distribution of profits. Taxpayers should continue to monitor the progress of the bill through Congress and should determine the impact the bill’s provisions could have on their operations.

On 25 June 2021, the Brazilian Government proposed a bill that would change the corporate income tax system by reducing the corporate income tax rate, establishing a withholding tax on dividends and strengthening the rules on the disguised distribution of profits, among other things. This bill is the second phase of Brazil’s comprehensive tax reform. For information on the first phase, see EY Global Tax Alerts, Brazilian Federal Government has announced comprehensive tax reform to be implemented in 2020, dated 5 December 2019, and Brazilian Government proposes new federal VAT as first phase of comprehensive tax reform, dated 22 July 2020.

The main provisions of the bill consist of the following:

Legal entities

The bill would reduce the current 34% combined corporate income tax rate (which includes both the 25% corporate income tax (IRPJ) and the 9% social contribution on net profit (CSLL)) to 29%. The rate would be reduced by 2.5 percentage points in 2022 and another 2.5 percentage points in 2023.

Additionally, the bill would eliminate the withholding tax exemption for dividends and would subject dividends to a 20% withholding tax rate. The withholding tax rate would increase to 30% if the payments’ beneficiary is located in a low-tax jurisdiction, as defined by Brazilian tax regulations.

The bill also would strengthen the rules on the disguised distribution of profits and add new transactions that may qualify as a disguised distribution of profits (e.g., a loan granted by an entity with distributable profits to a related entity).

In addition, the bill would:

  • Eliminate the interest on net equity (i.e., similar to a dividend payment that is deductible in Brazil)
  • Modify the tax regimes that apply to corporate restructurings (e.g., the requirement to carry forward a capital reduction at fair market value as part of a restructuring)
  • Tax an indirect sale of shares in a Brazilian entity once certain conditions are met (e.g., when the fair market value of a Brazilian business represents more than 50% of a foreign entity being sold)
  • Eliminate the deduction for the payment of stock options to non-employees

Investment funds

In general, the bill would overhaul the taxation applicable to Brazilian investment funds. According to the bill, the intent is to achieve a symmetric tax treatment across investment funds and asset classes.

Currently, open-end funds are subject to a regressive withholding tax rate ranging from 22.5% to 15% at maturity, depending on the investments’ maturity term. The bill would subject open-end funds and closed-end funds to a 15% withholding tax upon redemption. Distributions and certain undistributed income events, so-called come-cotas, also would be subject to the 15% withholding tax rate.

Additionally, the bill would eliminate the withholding tax exemption for distributions received by individuals from real estate investment funds. Those distributions would be subject to a 15% withholding tax.

The bill would eliminate deferral opportunities currently achieved under certain investment fund structures. For example, private equity funds that would not qualify as investment entities under the local Securities and Exchange Commission regulations would no longer be exempt from income tax. Instead, those funds would be taxed as regular corporate entities.


The bill would increase the amount of income exempt from income taxes every month from BRL1,903.98 to BRL2,500. In addition, the bill would reduce access to the simplified method, which allows individuals to deduct a presumed amount of expenses. Under the bill, only taxpayers with annual income of BRL40k or less would be entitled to the simplified method.

Effective date

If enacted this year, the corporate income tax reform would be effective 1 January 2022. Both chambers of the National Congress (i.e., Chamber of Deputies and Senate) still need to discuss and approve the bill in different voting rounds. The legislative process usually takes time in Brazil, and the current wording of the bill may be changed during this process.


Taxpayers in Brazil should evaluate whether they need to act before year end in view of the expected changes to Brazilian income tax legislation. Some relevant aspects to be considered include (but are not limited to):

  • Evaluating the double tax treaty network and the impact on future withholding taxes on dividends
  • Reassessing repatriation alternatives
  • Analyzing possible corporate restructurings under the current income tax regime
  • Taking maximum advantage of allowable deductions in 2021
  • Revisiting investment funds strategies and implications to future investments/divestments


For additional information with respect to this Alert, please contact the following:

EY Assessoria Empresarial Ltda, São Paulo

Ernst & Young LLP (United States), Latin American Business Center, New York

Ernst & Young LLP (United Kingdom), Latin American Business Center, London

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific


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