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  • 9 August 2021

House of Representatives approves bill of law of the Income Tax Reform



  • The provision that allowed the distribution of interest on net equity (JCP) was revoked;
  • Dividends will be subject to withholding income tax (“WHT”), but a lower rate of 15% has been approved (even if paid to tax haven jurisdictions);
  • WHT will not apply over dividends distributed to (i) controlling shareholders; (ii) investors with a minimum shareholding interest of 10% and which register the investment according to the equity pick-up method; and (iii) investment funds (the special 5.88% WHT was not included in the approved version);
  • CIT base rate was reduced from 15% (+10%) to 8% (+10%), while further reduction (of 1%) of the social contribution on net equity is foreseen contingent to the repeal of certain tax benefits, leading to a combined rate of 26% (from the current 34%);
  • Changes in the taxation of quotaholders of investment funds:
    • Closed-end funds will now be subject to annually advance WHT payments (and also to an extraordinary taxation of accumulated earnings at a 6% or 15%, depending on the collection date elected by the taxpayer);
    • New rules regarding taxation of FIPs, FIAs and FIDCs.
  • FIPs owned by a single 4,373 non-resident investor will now be exempt from WHT upon amortization/redemption of quotas (repeal of the dilution test), provided the investor is not resident in a tax haven jurisdiction.


Between 29 June and 01 July 2021 we published a series of Newsletters (https://lefosse.com/newsletters/) on  Bill No. 2337/2021 (“PL”), which proposes relevant amendments to the Corporate Income Tax (“IRPJ“), the Social Contribution on Net Profit (“CSLL“), the Income Tax levied on financial and capital markets transactions, and the Individual Income Tax (“IRPF”) legislation.


On 2 September 2021, the House of Representatives approved (base text plus highlights) the PL. The PL will now be sent to the Senate, where the expectation is that it should follow the normal voting procedure, without an emergency regime. The wording of the PL has undergone several changes since its presentation by the Federal Government on 25 June 2021. It is not possible to anticipate whether the Senate will also propose changes to the PL, which would imply in the proposal being returned to the House of Representatives for approval before being forwarded to presidential sanction.


In this Newsletter, we present below the main points approved by the House of Representatives.


Corporate income taxation and dividend distribution to shareholders


Reduction of IRPJ and CSLL rates


  • IRPJ: Reduction of the IRPJ rate from 15% to 8%. The additional IRPJ rate of 10% applicable to profits exceeding BRL 20,000 per month would remain the same.


  • CSLL: Reduction of the general CSLL rate from 9% to 8% is foreseen contingent to the repeal of certain PIS and COFINS tax benefits destined to specific economic sectors. The CSLL rate to banks and entities equated to financial institutions would also benefit from the 1% reduction.


  • Combined rate: Combined general rate of 27% (IRPJ 18% + CSLL 9%), which may be further reduced to 26% (IRPJ 18% e CSLL 8%), if the condition mentioned above is fulfilled.


Changes to the actual profit regime (lucro real)


  • Taxable base of IRPJ and CSLL:


  1. IRPJ and CSLL taxable basis would be equated. Certain expenses which are non-deductible from the IRPJ basis would become non-deductible also from the CSLL basis;
  2. repeal of the provision that allowed the distribution of interest on net equity (“JCP”), eliminating the possibility to remunerate the shareholder according to this mechanism (the original Bill had proposed only the restriction of the tax deductibility of JCP);
  3. establishment of a minimum 10-year term to deduct the amortization of intangible assets provided that their life is not limited by a term established in law or in an agreement;
  4. The PL maintains the tax deduction for IRPJ and CSLL purposes of costs and expenses related to the rendering of services by employees and other providing similar services whose remuneration is implemented by means of share-based payments.

Nonetheless, the PL intends to amend Article 33 of Law 12,973 in order to provide that:

  • The tax deduction would be applicable for the entity receiving services, since the related costs and expenses are regarded as deductible according to tax legislation;
  • Officers and administrators would be considered as employees for the purposes of this rule; and
  • The entity receiving services could choose to deduct for tax purposes the same amount subject to the taxation of social security contributions.
  1. increase of the deductibility limit from 4% to 7,5% of the corporate income tax due in relation to (i) amount paid under the Worker’s Alimentation Program (Programa de Alimentação do Trabalhador – “PAT), and (ii) contributions to eligible cultural projects;
  2. increase of the deductibility limit from 1% to 1.87% of the corporate income tax due in relation to (i) donations to Children and Youth Funds (Fundos da Criança e do Adolescente), (ii) funds invested in the production or sponsoring of Brazilian audio-visual works, provided certain conditions are met, (iii) donations to sports projects, (iv) donations to the Funds for the Elderly (Fundos para o Idoso); and (v) donations to the National Program of Support to Oncology (Programa Nacional de Apoio à Atenção Oncológica – “PRONON”) and to the National Program to Support Healthcare for People with Special Needs (Programa Nacional de Apoio à Atenção da Saúde da Pessoa com Deficiência – “PRONAS/PCD”).


  • Quarterly regime mandatory for IRPJ and CSLL: Abolishment of the annual regime (with monthly anticipations) as of 2022. Possibility to offset 100% of the tax losses carryforward (“TLCF”) from one quarter in the following three quarters without applying the 30% limitation.


  • Mandatory actual profit regime for additional business activity: The actual profit regime would become mandatory for legal entities engaged in the business of credit securitization.


  • Change in the rules to avoid the disguised distribution of profits (“DDL”): :


  1. suppression of the adverb “notoriously” from the wording of the law section related to DDL cases of sale or purchase of assets and rights for a value below or above market value, respectively;
  2. introduction of new hypotheses of application of DDL rules, among which: (i) interest payment in excess of market value, (ii) debt forgiveness, (iii) license, assignment and creation of rights, (iv) expenses which are deemed as unnecessary to the business of the legal entity (e.g., personnel expenses of the shareholders);
  3. further to the non-deductibility of the respective amount for IRPJ and CSLL purposes, the characterization of DDL would trigger the WHT taxation on the dividends disguisedly distributed, being such amount deemed as net of the withholding tax due (“gross-up” mechanism”);
  4. introduction of specific requirements for preparing the appraisal report supporting the market value of the good or right transacted between related parties;
  5. enlargement of the concept of “related party” for purposes of application of DDL rules by including agents, as well as trusts of any kind that qualify as founders of beneficiaries; and
  6. expansion of the scope of DDL rules by including legal entities subject to a regime other than the actual profit regime (e.g. presumed profit system).


Distributions to shareholders


  • General tax rule: Dividends paid or credited by Brazilian legal entities would be subject to the levy of Withholding Income Tax (“WHT”) at a rate of 15% (taxation exclusively at source) – the original Bill had proposed the taxation of dividends at a 20% WHT rate. A controversial (and arguably unconstitutional) aspect is that the Bill proposes to indistinctively tax profits and dividends paid as of 01.01.2022, which would also include profits and dividends accrued in years prior to its conversion into law.


  • Scope of WHT taxation: The rule above would encompass the dividends paid or credits to the following beneficiaries:


  1. Brazilian resident individuals: The WHT would be considered as final income tax payment.
  2. Brazilian domiciled legal entities: The WHT collected on payments to a legal entity may be offset by such entity with the WHT due on its own future payments of dividends.
  3. Non-Brazilian residents: The WHT would be considered as final income tax payment. The WHT rate of 15% would apply regardless of whether the beneficiary is located in a low tax jurisdiction or benefiting from a privileged tax regime (“Low/Nill Tax Jurisdictions”) – the original Bill had proposed an increased WHT rate of 30% in this scenario. Possible limitation of WHT rate based on double tax treaties signed by Brazil (depending on the place of residence of the beneficiary and the corresponding tax treaty).


  • Exemptions: WHT would not apply to dividends paid or credited:


  1. to legal entities domiciled in Brazil which qualify as (a) controlling shareholder or entity under common control or (b) owner of a minimum 10% shareholding interest and which register their investment according to the equity pick-up method (método da equivalência patrimonial – “MEP”);
  2. as a result of securities corresponding to funds applied in private pension and insurance entities;
  3. to legal entities domiciled in Brazil by real estate developers which have at least 90% of their total income subject to the Special Tax Regime for Real Estate Development (Regime Especial de Tributação – “RET”);
  4. to Brazilian resident individuals in relation to dividends received from small-sized companies subject to the Simples Nacional regime or legal entity subject to the presumed profit regime which gross income has not exceeded BRL 4.8 million in the previous year (and provided that some conditions are met); and
  5. to investment funds.


  • Dividends in-kind: Goods and rights distributed as dividends in kind would be assessed under their market value (subject to taxation over the potential capital gains derived at the level of the legal entity). The goods or rights would be considered as transferred to shareholders net of WHT, and as such subject to a mandatory “gross-up” for WHT determination purposes.


  • Capital increase through existing profits or profit reserves: The capital increase through existing profits or profit reserves would not (i) be subject to WHT if, within five years prior to or after the capitalization of the existing profits or reserves, the entity has not returned capital to the shareholder; or (ii) result in any additional cost basis to the shareholder. The WHT taxation in case the capital return implemented 5 years prior to the capitalization of profits or reserves would apply only to the return implemented as of 01.01.2022.


  • Branches, agencies, and representations in Brazil of foreign legal entities: The profits accrued through Brazilian branches, agencies and representations of foreign entities would be deemed automatically available to the foreign entity at the end of the respective accrual period, being subject to WHT at a rate of 15%.


Financial and capital markets

Investment funds


The text approved by the House of Representatives maintained the main changes proposed by the Federal Government in the original text of the PL, albeit with some important modifications.


  • Taxation on investment funds portfolio: income earned by the funds’ portfolio remains fully tax exempt (including from IRRF levied in the distribution of dividends);


  • Advance WHT collection (“Comecotas”): the advance collection of WHT will now take place annually (November), maintaining the current rates of 15% or 20%, depending on the average term of the fund’s securities portfolio (long or short term);


  • Closed-end investment funds: funds that do not allow the redemption of shares during the term of the fund (closed-end) are now subject to (i) taxation of “come-cotas” and (ii) extraordinary taxation (one-off) of the earnings accrued by the fund and not yet taxed on January 2022 at a 15% rate, which could be reduced to 6% in the event of (a) payment in a single installment until May 31, 2022, or (b) in up to 24 installments with SELIC interest. Furthermore, reorganizations with these funds (spin-off, incorporation, merger or transformation) are now considered redemption events (taxable).


These changes would not apply to:


  1. Financial institutions, including insurance, pension, capitalization and exchange companies, brokerage firms, securities dealerships and  leasing companies;
  2. Real Estate Funds (“FII”) and Fund in Agro-industrial Productive Chains (“Fiagro”);
  3. Investment funds incorporated exclusively by investors resident or domiciled abroad under the rules of CMN Resolution 4,373;
  4. Private Equity Investment Funds (“FIP”) in general;
  5. Investment Funds in Shares (“FIA”), provided they meet certain requirements (FIA-Access Market will remain exempt until the end of 2023);
  6. Credit Rights Investment Funds (“FIDC”) that: (i) invest in assets related to investment projects in the infrastructure area (art. 2 of Law No. 12,431/2014) or (ii) comply with certain requirements;
  7. Market Index Investment Funds whose shares are admitted to trading on the stock exchange, provided that certain requirements are met;
  8. Investment funds and investment funds in quotas that expressly provide in their regulation for their non-extendable termination until December 31, 2022.


  • Funds subject to taxation only at the redemption of quotas at the rate of 15%:


  • FIA: For the purpose of applying this special regime, the fund’s net equity must be composed of at least 75% of shares traded on the spot market of a stock exchange or similar entity, or similar assets (according to the list presented by the PL and which may be extended by the Internal Revenue Service of Brazil).


  • FIDC: This regime would only benefit FIDCs that comply with the following requirements: (i) 75% of the equity of the fund must be comprised by credit rights and (ii) the same quota holder cannot hold, alone or cumulatively with people connected to them, more than 25% of the total of the quotas issued by the fund, or whose shares entitle them to receive income greater than 25% of the total income generated by the fund.


  • Market Index Investment Funds with shares traded on the stock exchange or organized over-the-counter market, constituted as regulated by the Brazilian Securities and Exchange Commission, which have at least 95% of their equity invested in assets that make up the reference index and have the market index recognized by the CVM. The PL has some exceptions to the rule.


  • FIP: The distinction introduced by the original PL between FIPs considered investment entities under CVM rules and FIPs not considered investment entities (“FIP Proprietary”) was maintained.


  • FIPs qualified as investment entities: In general, they shall remain subject to the current taxation rule. However, the PL introduced an important change that effectively blocks the use of these vehicles for the deferral of taxation earned on capital gains from the sale of assets. This is because the sale of assets by FIPs is now considered a taxable event of income distribution. See next item for the special regime applicable to certain non-resident investors.


  • FIP Proprietary: FIPs that do not qualify as an investment entity, shall be taxed as if it were a Brazilian corporation (with extraordinary taxation of untaxed earnings until January 1, 2022, at the rate of 15% or 6%, depending on the payment term).


  • Taxation of non-residents subject to the special tax regime (4,373 investors):


  • The PL only makes it clear that the new rules applicable to FIA, FIDC and the Market Index Investment Funds are not applicable to 4,373 investors, although there has been no formal repeal of the provisions guaranteeing these investors a special taxation regime.


  • An important change celebrated by the market relates to the zero WHT rate for investments made by non-residents in FIPs. The PL excluded the so-called “dilution test requirement”, allowing non-taxation to be applied to investors holding more than 40% of FIP shares, provided they are not located in low-tax jurisdictions.


  • Taxation of different classes of shares: In cases where the investment fund’s regulation provides for the existence of different classes of shares, with different rights and obligations and equity segregated for each class, the tax regime shall apply according to their classification, under the tax legislation in force.


Net gains arising from transactions carried out on the stock market, commodities, futures market and on organized over-the-counter markets


  • Net gains on any type of investment are now taxed at a single rate of 15%, also allowing losses on variable income investments to be offset by gains without restriction on the type of investment. Exception: the sale of FII and Fiagro shares, which remain subject to 20% taxation.


  • There are also important changes regarding the calculation of net gains earned on transactions carried out on stock, commodities and futures exchanges, and on organized over-the-counter markets.


Subjects left out of the Bill


Certain subjects that were provided for in the original version of the PL were not approved by the House of Representatives:


  • Brazilian Reorganizations: The entire section that dealt with the new rules for M&A transactions and corporate reorganizations, including those related to the change in fair-value and goodwill taxation rules;


  • International reorganizations: Rules related to the contribution of assets in structures abroad and capital gains earned by non-residents in indirect sales of Brazilian assets were also not approved;


  • Unification of rates between fixed income and variable income investments;


  • Specific rules related to real estate holdings and FIIs;


  • Anti-deferral rule to Brazilian resident individuals: Profits arising from controlled entities located in Low/Nill Tax Jurisdictions would be deemed as made available to the controlling individual resident in Brazil at the date of the respective balance sheet of the entity, triggering the levy of the Individual Income Tax.


  • Taxation on dividends distributed to investment funds: WHT at a special 5.88% rate would be imposed on distributions to investment funds.


Our Tax and Wealth-Planning experts are available to further discuss this topic or any other relevant tax matter.


Ana Carolina Utimati

Partner, Tax


Tel.: (+55) 11 3024 6425


Gustavo Paes

Partner, Tax


Tel.: (+55) 11 3024 6198

Andrea Caliento

Partner, Wealth-Planning


Tel.: (+55) 11 3024 6123


Jayme Freitas

Partner, Tax


Tel.: (+55) 21 3263 5902

Breno Sarpi

Partner, Tax


Tel.: (+55) 11 3024 6175


Marcos de Carvalho

Partner, Tax


Tel.: (+55) 11 3024 6342

Bruno Carramaschi

Partner, Tax


Tel.: (+55) 11 3024 6250


Ricardo Bolan

Partner, Tax


Tel.: (+55) 11 3024 6359


Gustavo Haddad

Partner, Tax


Tel.: (+55) 11 3024 6312




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