On March 18, the Brazilian Federal Government presented Bill No. 1,087/2025, which aims to tax profits and dividends and amend the income tax rules. If approved, the new rules will come into force from 2026.
Main changes for Brazilian tax residents
The Bill exempts monthly revenues up to R$5,000 from Individuals Income Tax (“IIT”). For income above R$ 5,000 and up to R$7,000 a progressive discount on the IIT due will be applied.
The current IIT rates, which range progressively from 7.5% to 27.5%, and the existing deductions on the assessment of IIT will not be affected. The deductions will be applied after the application of the progressive rates on the monthly revenues, ensuring a total exemption on revenues up to R$ 5,000 and partial discounts on revenues up to R$7,000.
Minimum Personal Income Tax (IRPFM) for individuals with earnings above R$600,000 per year
Since the implementation of Bill No. 1,087/2025 will reduce federal revenue, it was also proposed that Brazilian tax residents receiving a total income exceeding R$600,000 per year (equivalent to R$50,000 per month) will be subject to IRPFM at a maximum rate of 10%.
The IRPFM rates will be progressive for incomes between R$600,000 and R$1.2 million, according to the formula provided by Bill No. 1,087/2025 (IRPFM rate % = [(total income / 60,000)] - 10). Hence, in practice, the 10% rate will be applied to income exceeding R$1.2 million per year.
For the analysis of the application of IRPFM, the total income includes all income received by the individual in the calendar year, including income taxed exclusively or definitively and those exempt or subject to zero or reduced rates, salary, rent income, and dividends, deducting the following amounts: (i) capital gains, except net gains in the capital market; (ii) accumulated income received; and (iii) donations in anticipation of inheritance.
Assessment of IRPFM Taxable Basis
The taxable basis of IRPFM will be calculated based on the formula provided by Bill No. 1,087/2025, which establishes that the total income is the total defined according to the topic above, deducting the following: (a) income from savings accounts; (b) indemnities received, except for lost profits; (c) exempt income from retirement benefits or diseases, according to Brazilian legislation; and (d) income from exempt or zero-rated securities (e.g., LCA, LCI, CRI, CRA, FII, and FIAGRO), except income from shares and other equity interests.
Taxation of dividends
Profits or dividends paid to shareholders, which are currently exempt from taxation, will be taxed according to the following rules:
- Tax residents in Brazil: distribution of profits or dividends above R$50,000 will be subject to Withholding Income Tax (“WHT”) at a rate of 10%. No deductions are allowed.
- Tax residents abroad: the credit, delivery, employment or remittance of profits or dividends will be subject to WHT at a rate of 10%. There is no specific rule applicable to residents in jurisdictions with favorable taxation (LTJ) or benefiting from privileged tax regimes (PTR). There is no exemption range and no deductions are allowed.
Measures to reduce the total tax burden
To minimize the effects of dividend or profit taxation, Bill No. 1,087/2025 establishes that if the effective tax rate on profits or dividends by Corporate Income Tax (“CIT”) and the effective rate of IRPFM exceed the tax rate of the legal entity (34% for non-financial legal entities and 40% or 45% for insurance companies financial institutions), an IRPFM reduction will be granted to Brazilian tax residents, and a tax credit may be granted to non-residents
Machado Meyer's Tax and Estate and Succession Planning team is available to answer any questions on the topics.
