Brazilian Tax Reform Phase 2

What is important to know

The long-awaited phase 2 of the Brazilian tax reform was presented by the Brazil finance minister Paulo Guedes on June 25, 2021. While the phase 1 of the tax reform was focused on indirect taxation at the Federal, State and Municipal levels, this second phase is now focused on corporate and individual income taxation.

The bill of law now needs to be approved by both the Chamber of Deputies and Senate and if enacted this year, will become effective as of January 2022.


  • The Corporate Income Tax rate will be reduced from the current 34% rate (comprised of 25% corporate income tax and 9% social contribution on net income) to 31.5% as of January 2022 and subsequently to 29% as of January 2023.

  • Distribution of dividends to local and foreign shareholders will be subject to a 20% withholding tax and 30% for distribution to a foreign shareholder domiciled in a tax haven or a jurisdiction considered as a privileged tax regime. Since 1996, distribution of dividends was exempted from taxation in Brazil.

  • As of January 2022, legal entities will no longer be allowed the distribute Interest on Net Equity (INE). Currently, Brazilian companies are allowed to distribute INE, which is a type of “deemed interest” to its shareholders calculated on the amount of the Brazilian company’s net equity. INE is a deductible expense for corporate income tax purposes. This so-called “interest on net equity” had the effect of neutralizing, from a Brazilian tax perspective, the decision as to whether to fund a Brazilian entity with equity or debt capital.   


  • Likewise other countries in South America (Argentina, Chile and Peru), the capital gain triggered from the Indirect Sale of Shares in a Brazilian entity by a foreign shareholder (i.e., sale of shares of a foreign entity holding shares in a Brazilian entity) will become subject to taxation (WHT of 15%-22.5% or 25% for tax haven) in Brazil under certain circumstances. One of these circumstances would be if, at any time within a period of 12 months prior to the transfer date, the market value of the assets located in the country corresponds to 50% or more of the market value of the transferred legal entity abroad.

  • Differently from the current rules where assets can be contributed to a legal entity (as Share Equity Increase) or transferred back to shareholders (as Share Equity Decrease) at book value, these transactions will now need to be implemented at fair market value and taxed accordingly.


  • Income generated by Brazilian investors from investments in Fixed Income Assets and Investment Funds, which are currently subject to taxation at rates ranging from 15% to 22.5% (depending on the maturity term), would now be subject to a flat rate of 15%.


  • The amounts of Individual Income Tax Brackets (from 0% up to 27.5%) will be adjusted, which should have the effect to exempt from taxation more than 5.6 million taxpayers.

  • Dividends received from micro and small companies will be exempted from withholding income taxation for a monthly amount of up to R$ 20,000.

FCR Law tax team has extensive experience to assist companies and individuals with the matters included in this alert.

We are available to review, together with you, the possible measures that could immediately be implemented to reduce or mitigate the negative effects that would potentially be caused by this bill of law.

Please do not hesitate to contact us for any additional information or assistance that you may require.

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FCR Law – Fleury, Coimbra & Rhomberg Advogados é um escritório de advocacia dinâmico que assessora empresas nacionais e internacionais, empreendedores e investidores nos ramos mais importantes do direito brasileiro. Nós buscamos proporcionar um serviço de alto nível de qualidade e estabelecer relações de longo prazo com nossos clientes e parceiros. Nossa gama de clientes abrange desde start ups tecnológicas até fabricantes internacionais e instituições financeiras.

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