News and Business
Brazilian government proposes changes to taxation of dividends
Government bill proposes income taxation for dividends, which may affect non-resident investors
Subjects
On March 18, 2025, the Brazilian government proposed Bill No. 1,087/2025, aiming to reduce income tax for low-income individuals and, in consideration of this, establish a minimum tax for high-income earners. A key aspect of this bill is the introduction of new taxation rules for dividends, which will have implications for both resident and non-resident investors as of January 2026.
Taxation of dividends of non-resident investors
Under the proposed legislation, dividends paid or deemed paid to non-resident investors will be subject to withholding income tax at a rate of 10%. This marks a significant departure from the tax regime introduced in 1996, in which dividend distributions are generally exempt from withholding taxation.
Tax credit relief
To address concerns about a tax burden increase with the potential to adversely impact foreign investments in Brazil, the proposed bill introduces a tax credit relief rule to ensure that effective corporate income taxation (when combined with taxation on dividend distribution to non-residents) does not exceed one of the following nominal corporate income tax rates shown below:
- 34% generally applicable to legal entities;
- 40% applicable to private insurance companies, capitalization companies, and certain companies subject to the control of the Brazilian Central Bank; and
- 45% applicable to financial banks.
If the effective tax rate on the corporate income tax rate (when combined with the 10% withholding income tax rate on dividends) exceeds one of the rates established above, non-resident investors will be entitled to a tax credit relief aimed at eliminating the excess tax burden, calculated based on the difference of such values.
Non-Brazilian shareholders subject to the Brazilian dividend withholding tax should seek refunds for any excess dividend withholding tax triggered on the dividend distribution based on the above rule. The rules governing such a tax refund are still awaiting the introduction of further regulations.
Tax treaties
From a Brazilian perspective, the potential new statutory withholding tax rate on dividends is set below the dividend tax rate established in most of the tax treaties signed with Brazil, which is generally set at a rate of 10% to 15%. Accordingly, the Brazilian tax treaty network is likely to stay mute in regard to reducing the 10% withholding tax rate on dividend distributions made by Brazilian residents.
An exception is the tax treaty signed with the United Arab Emirates, which establishes a withholding tax rate of 5% on dividends paid by Brazilian residents to that state (or to its corresponding agencies). Thus, remittances should be reviewed on a case-by-case basis. In some of the tax treaties signed by Brazil (and depending on the beneficiary), the most favorable nation clauses may kick in to establish a withholding tax rate of 5%.
Potential disputes
A 10% withholding tax rate applies to monthly dividends higher than BRL 50,000 (approximately USD 9,000) paid to Brazilian residents. This different treatment – not applicable to non-resident investors – may generate controversy. Historically, foreign investors have received at least equivalent treatment to Brazilian individuals and, in some cases, additional benefits. The proposal represents an important shift in the tax policy adopted for decades and should be carefully reviewed by Congress.
At the same time, there is no transition rule. Because the new rule simply imposes the 10% burden on dividends paid or deemed paid as of 2026, it is implied that dividends generated from earnings realized pre-2026, if paid out 2026 onwards, will also be subject to dividend withholding taxation and not subject to a grandfather rule. This potential view from the Brazilian tax authorities on the taxation of dividends generated pre-2026 may conflict with the existing rule exempting dividend taxation grounded on the year of taxation of the profit, creating a potential position for tax litigation.
The new rules will likely require detailed documentation and compliance with Brazilian tax regulations. Moreover, the process of calculating the effective tax rates and the corresponding credits may lead to broader discussions on the taxation of the Brazilian entity.
Finally, it seems that these new dividend tax rules have been introduced to induce taxpayers to revisit their tax position and planning structure in Brazil going forward (if passed in Congress). Local companies with a more aggressive tax position – causing their effective corporate income tax rate to fall below 24% – are more exposed to an effective 10% dividend withholding tax. These rules, along with Pillar 2 rules (effective in Brazil as of 2025), will play a major role in how Brazilian companies structure their business in a tax-efficient manner in the future.
Legislative steps
Though the bill is intended to be signed into law this year, it still needs to be reviewed in Congress, and therefore none of the proposed measures are valid at this time. Monitoring legislative developments concerning the bill in Congress will be essential for assessing the impacts of the new rules as well as any amendments, clarifications, and adaptations to the version originally presented.
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For more information on this topic, please contact Mattos Filho’s Private Client and Tax practice areas.
