The Ministry of Economy presented last friday (25) a proposal of tax reform, including certain rules regarding the taxation of individuals, legal entities and financial investments. We highlight above the main points of the Bill of Law presented to the Chamber of Deputies:

1. Corporate taxation

 

Dividends

 

  • Taxation of dividends at 20% rate, as general rule. 30% rate imposed to beneficiaries that are resident or domiciled in low tax jurisdictions (“LTJ”) or subject to privileged tax regime (“PTR”).
  • Creation of a credit mechanism for avoiding tax cascading.
  • New hypothesis of the application of Disguised Distribution of Profit (“DDL”) rules.
  • Profits and dividends distributed to small business are exempt up to BRL 20 k each month.

 

Corporate Income Tax (“IRPJ”)

 

  • Reduction of the corporate rate from 15% to 12.5% in 2022 and to 10% as of 2023.
  • Maintenance of the additional IRPJ rate of 10% applicable to profits exceeding BRL 20 K each month.
  • Social Contribution on Net Profits (“CSLL”) 9% rate which is also imposed on profits would not be changed. Thus, the corporate rate would be reduced from 34% to 29% as of 2023.
  • End of the annual regime for the assessment of the real profits, maintaining only the quarterly regime. In this regime, it will be possible to offset 100% of the net operational losses (“NOLs”) from one quarter in the following three quarters.
  • Obligation to access IRPJ and CSLL under the real profit regime for the following business activities: (i) credit securitization; (ii) more than 50% of the revenues are derived from remuneration of royalties or management, rent or buy and sale of own real estate properties; or (iii) exploitation of property rights, copyrights, picture rights, trademarks or voice rights. This new rule would not be applicable to companies that distribute, license or assign the right of using software and real estate development.
  • Entities opting for the presumed profit regime would no longer be waived from bookkeeping.
  • IRPJ and CSLL taxable basis would be equated.

 

Interest on Net Equity (“JCP”)

 

  • JCP would no longer be deductible in the assessment of IRPJ and CSLL under the real profit regime.

 

Goodwill

 

  • End of the regime that allows the deductibility of the goodwill for tax purposes for acquisitions occurred after 12/31/2021 and merger and spin-off events occurred after 12/31/2022.

 

Acquisition of additional investment in controlled company

 

  • New rule that allows the recognition of the value exceeding the net equity value in the accounting value of the investment. Imposition of restrictions similar to the ones attributed to the goodwill.

 

Deductibility of intangible assets

 

  • Establishment of the minimum term of 20 years, which is not applicable to the cases with the term is determined by the legislation or the agreement (these ones prevail over the 20-year term, regardless of the fact they are higher or lower).

 

Foreign exchange variations of investments held abroad

 

  • Foreign exchange gains and losses underlying foreign investments will not be considered as part of the cost of acquisition for the purpose of assessment of capital gains or losses upon disposition.

 

Share-payment

 

  • Restriction to the deductibility of payments based on shares which have officers and managers as beneficiaries.

 

Capital reductions of Brazilian companies and capital increases made in legal entities and other legal entities held abroad

 

  • Obligation to adopt market parameters in said transactions and taxation of the respective capital gain.

 

Special participation company (“SCP”)

 

  • SCP would be obliged to adopt the same taxation regime of the ostensive partner.

 

Indirect disposition taxation

 

  • Creation of rules imposing income tax on the capital gains assessed in indirect sales of a Brazilian equity investment.

 

2. Transactions in the financial and capital markets

 

Investments in securities

 

  • Extinction of the Income Tax regressive rates, which are applicable to fixed income or variable rate transactions. Creation of a fixed Income Tax rate of 15% applicable regardless of the transaction term or kind of operation (including day trade and negotiation of investment fund quotas in the stock exchange).
  • End of the Withholding Income Tax (“IRRF”) imposed at the sale of shares at 0.005% rate (general rule) or 1% rate (day trade transactions).

 

Investment in open-end investment funds

 

  • Extinction of the WHT anticipation of May (the so-called “come-cotas”). Creation of a fixed rate of 15% imposed in November or in the date of redemption, if it occurs before November.
  • In relation to the Mutual Funds which invest in the entry market and comply with certain governance rules set forth by Section 18 of Law no. 13.043/2014, the rule exempting individual investors would only be applicable up to 12/31/2023 and as of 01/01/2024, the rules of open-end funds would be the ones applicable.

 

Investment in close-end investment funds

 

  • Introduction of the same treatment of open-end funds: 15% rate, imposed as WHT anticipations – “come-cotas” in November or upon income distributions, amortization or redemption of quotas, if these events occurred before November.

 

Investment in Real Estate Funds (“FII”)

 

  • End of the exemption applicable to individuals in relation to FII quotas negotiated in the stock exchange.
  • Reduction from 20% to 15% of the Income Tax rate imposed on income distributions, amortization and disposition of quotas.

 

3. Individual’s taxation

 

Readjustment of the progressive Income Tax table

 

  • The proposal includes the increase of the exemption range of up to BRL 1.9 k to up to BRL 2.5 k and the readjustment of the taxation ranges:

Income ranges (now)

Income ranges (proposal)

Rate

Up to BRL 1,903.98

Up to BRL 2,500.00

0%

BRL 1,903.99 - BRL 2,826.65

BRL 2,500.01 - BRL 3,200.00

7,5%

BRL 2,826.66 - BRL 3,751.05

BRL 3,200.01 - BRL 4,250.00

15%

BRL 3,751.06 - BRL 4,664.68

BRL 4,250.01 - BRL 5,300.00

22,5%

Exceeding BRL 4,664.68

Exceeding BRL 5,300.01

27,5%

 

Restriction of the deduction of expenses by means of the simplified regime

 

  • The simplified regime applicable for deductions would be available only to the individuals that receive up to BRL 40 k each year. The deduction of expenses under the “complete tax return” would be maintained.

 

Anti-deferral rules

 

  • Automatic taxation of the profits accrued by legal entities located in LTJ or benefiting from PTRs controlled by Brazilian individuals.

 

Savings account

 

  • Maintenance of the exemption of the income derived by individuals.

 

Revaluation of real estate properties

 

Possibility of updating the acquisition cost of the real estate properties located in Brazil, with the taxation of the respective capital gain at a 5% rate.

 

Restriction of the deduction of expenses by means of the simplified regime

 

  • The simplified regime applicable for deductions would be available only to the individuals that receive up to BRL 40 k each year. The deduction of expenses under the “complete tax return” would be maintained.

 

Anti-deferral rules

 

  • Automatic taxation of the profits accrued by legal entities located in LTJ or benefiting from PTRs controlled by Brazilian individuals.

 

Savings account

 

  • Maintenance of the exemption of the income derived by individuals.

 

Revaluation of real estate properties

 

  • Possibility of updating the acquisition cost of the real estate properties located in Brazil, with the taxation of the respective capital gain at a 5% rate.