URGENT UPDATE ON THE BRAZILIAN TAX REFORM – DONT WAIT 2022 TO READ AND TAKE DECISION:

The Tax reform in Brazil has been discussed for over 20 years – unfortunately with no tangible result – but it might be worth paying attention at the current situation.

The proposed tax reform (PL 2.337/2021) brings relevant changes related to Corporate Income Tax, and Individual Income Tax.

The bill was approved on September 2nd, 2021, with amendments, by the Chamber of Deputies, and is still subject to approval by the Senate and to presidential sanction.

Some key information on the proposed tax reform: 

• The Corporate Income Tax (IRPJ) will be reduced from 15% to 8%.
• The 9% social contribution tax (CSLL) would be reduced to 8%.
• Dividends would be subject to a withholding income tax at a flat 15% rate (this would increase the Corporate Income Tax effective burden). This 15% will be applicable also on dividends paid based on retained earnings from periods prior to 2022. Some exceptions on withholding income tax for dividends paid by Brazilian legal entities:
  • Which opt to Simples Nacional (optional taxation regime for companies whose gross revenue up to R$4.8 million).
  • To local individual shareholders provided that the company opts to the Lucro Presumido and with gross revenue up to R$4.8 million.
  • To entities which holds at least 10% of the voting capital of the company that is paying the dividends.
• The allowance for corporate equity (“JCP”) will no longer be tax deductible for Corporate Income Tax purposes.
• The annual option (for Corporate Income Tax calculation) 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 increases the taxes on high paid individuals and exempts millions of low-income individuals from paying income taxes. It 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.

The bill of law has already been sent to the senate in order to be appreciated, but the house is yet to put it on the agenda for voting.

There is belief that the reform is expected this year and will likely be implemented in 2022.