On 18 March 2025, the Brazilian Government presented to Congress a bill of law that would modify the income tax exemption brackets for Brazilian individuals. The proposal would increase the exemption applicable to low-income earners. To offset the anticipated loss in tax revenue, the bill would implement additional taxes on high-income individuals and reintroduce withholding taxes on dividends paid to nonresident shareholders (both foreign individuals and legal entities).

Background

Reducing taxes for low-income individuals was a key promise made by the current President, Luis Inacio Lula da Silva, during his presidential campaign. However, due to legislative and budgetary restraints, any proposal that reduces tax revenue must be accompanied by a corresponding reduction in public spending or an increase in taxes elsewhere.

One of the measures proposed is focused on the taxation of individuals. It involves creating a Minimum Individual Income Tax (IRPFM, in the Brazilian acronym), to be imposed on individuals earning more than 600,000 Brazilian Real (BRL 600,000, approx. US$105,000) per year. The IRPFM would guarantee a minimum 10% effective tax rate for such individuals.

Another proposed measure would directly impact nonresidents investing in Brazil. It would introduce a 10% withholding tax on dividends paid by Brazilian residents to any nonresident shareholders. Currently, dividends paid by Brazilian legal entities to both Brazilian residents and nonresidents (individuals and legal entities) are exempt from taxation, as established by Law 9.249/95. If the proposed bill is approved, nonresidents would become subject to a 10% withholding income tax (and Brazilian individuals may end up being subject to taxation under the IRPFM).

If the nonresident demonstrates that the effective tax rate imposed on the profits that generate the dividends (computed together with the 10% withholding) exceeds the combined nominal rates of the Domestic Corporate Income Tax (IRPJ) and the Social Contribution on Net Profit (CSLL), the nonresident may claim a credit equal to the positive difference. This credit must be requested within 360 days from the end of each tax year.

Effective date

If enacted this year, the new rule would take effect on 1 January 2026. Both chambers of the National Congress (the Chamber of Deputies and the Senate) still need to discuss and approve the bill through multiple voting rounds. The legislative process in Brazil typically takes time, and the current wording of the bill may be amended during subsequent stages.

Implications

Multinational groups with operations in Brazil should assess how the proposed amendments to Brazilian legislation would affect their businesses, as well as evaluate aspects that could influence efficient repatriation strategies moving forward.