Brazilian Tax Reform and Dividend Taxation

Most of Brazilian companies are taxed under a 34% nominal CIT, of which 25% refers to the Imposto de Renda de Pessoa Jurídica – IRPJ, and 9% to the Contribuicao Social sobre o Lucro Liquido – CSLL.

However, most small companies qualify for a qualified – and extremely favorable – tax regime (SIMPLES and Lucro Presumido). 

Currently, dividends are not taxable.

The tax Bill 2,337/2021 proposes a 20% withholding taxes (WHT) on dividends over R$20,000.00/month (aprox. U$ 3,600.00) from any 2022 distributions, including those referring to profits accrued in previous fiscal years.

To neutralize the adverse effect that the dividend taxation will cause, the Brazilian economic team is considering options that include: i) cutting down corporate taxes (from the actual 25% to 12,5% from 2023 - Currently, the max IRPJ rate is 15% plus a 10% additional on a taxable income over a R$ 20,000.00/month exemption – or ii) recognize a credit on the 20% WHT to be offset against subsequent distributions over the corporate chain.

The dividend taxation may create an intense flow of capital offshore since the 20% WHT combined with the 5% suggested reduction will result in an aprox. 27% tax burden on corporate’s profits.