Brazil’s Proposed 2025 Dividend Tax Reform: Implications for Individuals and Holding Companies
Brazil’s government has proposed significant changes to its dividend taxation framework as part of the 2025 tax reform. The proposed measures affect both resident and non-resident individuals and holding companies.
On March 18, the Executive Branch submitted Bill No. 1,087/25 to the Legislative Branch, proposing amendments to individual income tax legislation.
Key Proposals in the 2025 Tax Reform
- Withholding Tax on Dividends Paid to Residents and Non-Residents
Currently, dividends paid by Brazilian companies to both residents and non-residents are exempt from tax in Brazil. The proposed reform introduces a 10% withholding tax on dividends paid to non-resident shareholders, effective from January 1, 2026 and a minimum tax of 10% for residents.
Non-Resident Holding Companies
Holding companies with subsidiaries in Brazil should be aware of the following implications:
- Withholding Tax on Dividends: The introduction of a 10% withholding on dividends paid to non-resident shareholders may affect the repatriation of profits. However, the availability of a tax credit mechanism could mitigate the impact, depending on the effective tax rate of the distributing company.
- Tax Credit Mechanism: The proposed tax credit allows non-resident shareholders to offset the withholding if the combined effective tax rate and withholding exceed Brazil’s nominal corporate Income Tax (IRPJ) and the Social Contribution on Net Profit (CSLL), which is 45% for banks, 40% for insurance companies and other financial institutions, and 34% for most types of other entities.
Strategic Planning: Holding companies may need to reassess their dividend distribution strategies and consider the potential tax implications of the proposed changes. Consulting with a tax professionals that is acquainted to all the jurisdictions involved will be crucial to navigate the new tax landscape effectively.
Non-resident holding companies receiving dividends from Brazilian subsidiaries should consider the potential tax credit mechanism. They need to assess whether their effective tax rates, combined with the 10% withholding tax, exceed Brazil’s nominal corporate tax rate to qualify for the credit in Brazil. To claim this credit in Brazil, a request must be filed within 360 days from the end of each tax year.
- Minimum Tax on High-Income Brazilian Individuals
On the other hand, if the bill passes as is, the mechanism will be different for residents and a minimum tax (not a withholding) will apply to residents with total income above BRL 600,000. These measures aim to offset the revenue loss from increased exemptions for low-income Brazilians.
To finance the expanded exemptions for low-income individuals, the reform proposes a Minimum Individual Income Tax (IRPFM) targeting high earners. Individuals with annual total income exceeding BRL 600,000 (approximately USD 105,000) would be subject to a minimum effective tax rate of 10%. It is important to remember that Brazil also recently passed another law that forces taxpayers to include, under certain circumstances, income earned abroad even if not distributed.
- Taxation of Dividends from Companies with Below-Average Tax Rates
The reform also targets dividends paid by companies with effective tax rates significantly below the Brazilian average. The government aims to tax shareholders receiving dividends from such companies to ensure tax equity.
Timeline and Legislative Process
- The proposed tax reforms are outlined in Bill No. 1,087/25, presented to Congress on March 18, 2025. If approved, the new tax measures are expected to take effect on January 1, 2026. The legislative process may involve amendments, and the final provisions could differ from the initial proposal.
Next Steps for Stakeholders
- Review Dividend Structures: Holding companies should evaluate their dividend distribution strategies in light of the new withholding tax and potential tax credits.
- Assess Effective Tax Rates: Both resident and non-resident companies should assess their effective tax rates to understand the implications of the proposed reforms.
- Monitor Legislative Developments: Stakeholders should stay informed about the progress of the tax reform in Congress and any amendments that may affect the proposed measures.
Conclusion
Brazil’s 2025 proposed tax reform represents a significant shift in the taxation of dividends. While the introduction of a withholding tax on dividends paid to non-residents and a minimum tax on high-income individuals may increase the tax burden for some, the accompanying measures, such as the tax credit mechanism, seek to mitigate these effects. Holding companies and individual investors should closely monitor the progress of the reform and consult with a tax advisor that is acquainted with the tax system in Brazil and in the other jurisdictions involved, to understand the full implications of these proposed changes.
