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The Brazilian federal government sent to Congress on June 25e 2021, a tax reform proposal focused on income tax. The bill (PL 2.337 / 2021) makes relevant changes related to corporate income tax. Then on September 2sd2021, the bill has been approved, with amendments, by the Chamber of Deputies, and is still subject to Senate approval and presidential assent.
The proposed tax reform will gradually reduce corporate tax rates from 15% to 8%. In addition, companies are also currently subject to a 10% surtax on annual profits exceeding BRL 240,000, which would not be reduced. On the other hand, the 9% tax on social contributions (CSLL) would be reduced to 8%, if certain tax advantages are repealed. While reducing the corporate tax burden from 34% to 26%, dividends paid to most shareholders (legal entities and individuals, residents or non-residents) will no longer be exempt from tax.
Thus, according to the current wording of the bill, dividends would be subject to withholding tax at the flat rate of 15%, which would increase the effective burden of corporation tax, for companies that distribute dividends, from 34% currently to 41%. (basically), prompting companies to embark on a new race in tax planning to neutralize this tax hike.
In addition, the Brazilian version of a capital allowance (“Juros sobre Capital Próprio”) will no longer be tax deductible for corporate tax purposes, which will certainly increase the cost of repatriation of profits for investors, especially those located abroad.
However, on the bright side, another issue affected by the new bill relates to the calculation of corporate income tax, since the annual option will no longer exist and all businesses will be subject to the quarterly calculation. As a result, net operating losses will be fully offset, with no limit of 30%, over the next three quarters.
Regarding personal income tax, the bill updates the current income tax table so that income up to BRL 2,500 is exempt from tax ( currently the limit is BRL 1,900). Income above the limit will be taxed on the monthly progressive scale. In addition, the standard deduction of 20% of taxable income will be maintained for simplified declarations, but the deduction limit will be reduced from BRL 16,745.34 to BRL 10,563.60.
It is important to mention that the tax bill has displeased various industries as well as Brazilian states and municipalities, which is why its adoption in the Senate is still uncertain, even with a certain probability that the bill will be withdrawn. However, sooner or later the Brazilian income tax will be reformed, once it is without return, which is why we can expect some important news on this matter in the months to come.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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