Brazilian Congress approves taxation of dividends

On November 5, 2025, Brazil’s Senate approved Bill No. 1,087/2025 to introduce minimum taxation rules on income and on profits and dividends at source.

Originally proposed by the Brazilian government in March this year, Bill No. 1,087/2025 was approved in the House of Representatives in October before being approved in the Senate. The bill is now subject to presidential assent, which is expected in the coming days. After this final step, the bill will be signed into law and become effective as of January 1, 2026.

New tax rules for incomes of Brazilian individuals

The new rules will result in significant changes to how the incomes of Brazilian individuals are taxed. On the one hand, Bill No. 1,087/2025 lifts the income tax exemption brackets for individuals with lower incomes (including salaries).

To counterbalance the economic impacts of this measure, the new rules introduce a 10% minimum taxation system on the income of individuals with higher earnings (Minimum Tax), and a withholding tax (WHT) on dividends paid out to individuals residing in Brazil (above certain limits). This Minimum Tax system has complex calculation rules – including consolidated of income and gains – with certain exclusions and deductions. Depending on the outcome, additional tax may be required to achieve the Minimum Tax, or the WHT on dividends may be partially or fully recovered.

The tax burden of the companies that distribute the dividends is an important component of this calculation. Depending on the amount of corporate income tax paid, they may be eligible for a credit in relation to the Minimum Tax (Tax Credit Relief).

Taxation of non-resident investors’ dividends  

As well as changes to the taxation of Brazilian individuals, Bill No. 1,087/2025 also proposes taxing dividends paid or deemed paid by Brazilian entities to non-resident investors, which will become subject to WHT at a rate of 10%. This marks a significant departure from the tax regime introduced in 1996, in which dividend distributions were generally exempt from withholding taxation.

• The bill also introduces the Tax Credit Relief for non-resident investors as a way of addressing concerns about increasing the tax burden and adverse impacts on foreign investment in Brazil. The rule aims to ensure that the effective corporate income tax applicable at the level of the entity paying dividends, plus the WHT on the dividends do not exceed the nominal corporate income tax rates of 34% (or 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 institutions.

If the effective tax rate on the corporate income tax rate exceeds the applicable nominal rates when combined with the 10% WHT, the non-resident investors will be entitled to recover the WHT paid in excess.

At present, the rules governing this tax refund still await the introduction of further regulations.

Taxation of the retained profits balance

The final draft approved in Congress also introduces special rules covering the transition period and taxation of the retained profits balance. As such, profits and dividends related to results reported up to the end of 2025 (whose distribution is approved by December 31, 2025) are exempt from WHT if paid to Brazilian resident individuals and to non-resident investors, as provided for in approved corporate documents.

Potential issues and concerns

The approved version of the bill has raised important questions and concerns, as outlined below:

• Taxation of the retained profits balance:The bill provides for WHT exemptions for profits and dividends related to results earned up to December 31, 2025, if their distribution is approved by year-end and their payment is made as provided in corporate documentation. However, this rule leaves room for interpretation and raises certain questions:
  • The provision was not aligned with the Brazilian Corporations Law (Law No. 6,404/1976), which requires dividends to be paid within 60 days (unless otherwise resolved by the general meeting), and in any event, within the same year.
  • To some extent, this issue also applies to limited liability companies, regardless of whether they are subject to supplementary application of the Corporations Law. The legal form of each company may impact strategies for distributing the retained profits determined up to December 31, 2025, in order to mitigate potential risks for companies that lack sufficient funds for such profits in 2025.
  • Furthermore, the imposition of conditions for exempting profits already retained may create room for disputes (including court disputes) on the grounds of a possible violation of the non-retroactivity principle in relation to laws. Since Brazil’s Constitution guarantees taxpayers that laws may not be applied retroactively to past facts, the legislature should not be permitted to obstruct the effectiveness of this principle.
• Tax Credit Relief: Although the bill provides for the Tax Credit Relief, it is still subject to regulation. Here, there are also certain questions:
  • How will the Tax Credit Relief be calculated? Will companies be required to report their effective tax rates? In regard to rectifying tax returns, or even tax assessments that may affect the effective rate for past periods, what impacts will there be on shareholders’ income tax?
  • Will additional controls be needed to segregate the accumulated profits account by period?
  • How would deferred tax assets and liabilities affect the calculation of the effective rate? What impacts would there be from carrying forward tax losses from prior years?
  • The bill permits the calculation of the effective rate on a consolidated basis, which is inconsistent with the current entity-by-entity tax regime. How, then, will the calculation work with respect to controlled entities and affiliates?
  • Specifically for non-resident investors, the bill provides that any WHT refunds stemming from the Tax Credit Relief balance will need to be requested via a specific petition to the Brazilian Federal Revenue Service. How will this work in practice? Will there be a deadline for refunds, audits by the tax authorities, or even the possibility of appeals?
• Indirect impacts on legal entities:The new rules will probably indirectly impact corporate taxation, especially for legal entities with tax incentives or more favorable tax regimes with effective rates lower than the nominal rate. These companies will have less room to provide their investors with Tax Credit Relief.
  • How does the Brazilian government intend to deal with the indirect impacts on various tax incentives? Will there be any form of compensation, or is there a risk that some of them will essentially be hollowed out?
• Tax planning more generally: The use of the Tax Credit Relief tends to affect corporate structures and reorganizations, their capacity to use tax losses, and other tax efficiencies.
• Distributed profits and dividends vs. Double Taxation Treaties:Although the Bill permits WHT refunds, it does not address the effects of tax credits obtained within the beneficiary’s jurisdiction – including those provided by double taxation treaties signed with Brazil.

For more information about this topic and potential related disputes, please contact Mattos Filho’s Private Client and Tax practice areas.