The Brazilian Federal Government sent to Congress, on June 25th 2021, a tax reform proposal focusing on income tax. The proposed bill (PL 2.337/2021) brings relevant changes related to Corporate Income Tax. Afterwards, on September 2nd 2021, the bill was approved, with amendments, by the Chamber of Deputies, and is still subject to approval by the Senate and to presidential sanction.
The proposed tax reform will progressively reduce the rates of the Corporate Income Tax, from 15% to 8%. Moreover, companies are also currently subject to a 10% surcharge on yearly profits that exceed BRL 240,000, which would not be reduced. On the other hand, the 9% social contribution tax (CSLL) would be reduced to 8%, if certain tax benefits are repealed. While decreasing the corporate tax burden from 34% to 26%, dividends paid to most shareholders (legal entities and individuals, either residents or non-residents) will no longer be tax-exempt.
Hence, according to the current wording of the bill, dividends would be subject to the withholding income tax at a flat 15% rate, which would increase the Corporate Income Tax effective burden, for companies who distribute dividends, from current 34% to 41% (roughly speaking), inducing companies to run on a new tax planning race to neutralize this tax increase.
Furthermore, the Brazilian version of an allowance for corporate equity (“Juros sobre Capital Próprio”) will no longer be tax deductible for Corporate Income Tax purposes, what will certainly increase the cost of repatriation of profits to investors, specially to those located abroad.
However, on the bright side, another matter affected by the new bill is related to the Corporate Income Tax calculation, since the annual option will no longer exist and all companies will be subject to the quarterly calculation. As a result, net operating losses will be fully compensated, without the 30% limitation, in the three immediately subsequent quarters.
Regarding the Individual Income Tax, the bill updates the current Income Tax Table in a way that income up to BRL 2,500 will be exempt from taxation (currently the limit is BRL 1,900). Income above the limit will be taxed according to the monthly progressive table. Additionally, standard deduction of 20% of the taxable income will be maintained for simplified returns, but deduction limitation drops from BRL 16,745.34 to BRL 10,563.60.
It is important to mention that the proposed tax bill displeased various industries and also the Brazilian States and Municipalities, which is why its passing in Senate is still uncertain, even with some likelihood for the bill to be withdrawn. However, sooner or later Brazilian income tax will be reformed, once it is a no return path, reason why we can expect some important news on this matter on the upcoming months.
*Article originally posted on Mondaq.