Brazil: Government presents the Bill of Law of the second phase of the tax reform, which relates to the Income Tax of Individuals and Legal Entities


In brief

On June 25th, the Brazilian Federal Government presented to the National Congress the second phase of the tax reform, which focuses on the Income Tax of Individuals and Legal Entities and on the Social Contribution on Net Profit.

The reporting deputy appointed by the House of Representatives on June 28 was Congressman Celso Sabino (PSDB-PA). The Bill of Law (“PL”) No. 2337/2021 will follow the ordinary rite, which means that after the approval by the House of Representatives, it will be sent to the Senate and, if there are no amendments, to promulgation by the President of the Republic. If PL 2337/2021 is approved by December 31, 2021, the Law enters into force on January 1, 2022.

The focal points of PL 2337/2021 are listed below.

More details

The main changes proposed by the Federal Government in PL 2337/2021 are:


Reduction of Corporate Income Tax rate (IRPJ)

  • Reduction of current tax rate from 15% to 12.5% in 2022 and to 10% as of 2023. The IRPJ surtax of 10% will remain in force.

Taxation of profits and dividends distributed

  • General tax rate of 20%: final taxation for individuals and non-resident investors (except for investors domiciled in low tax jurisdictions or subject to privileged tax regimes), and credit for Brazilian legal entities stockholders, which can be offset against the withholding income tax due on its own distributions (the proposal does not provide for a waiver to profits recognized until the end of 2021);
  • Increased tax rate of 30%: non-resident investors located in low tax jurisdictions or subject to a privileged tax regime;
  • Exemption applicable to dividends up to BRL 20,000.00, per month, for profits distributed by small entities and small sized companies (ME and EPP).

Scope of Disguised Distribution of Profits amplified (DDL):

  • Amplifies the scope of DDL rules in force, i.e. (i) there is no longer any reference to “notoriously”, (ii) expands the concept of related parties: trusts of any kind and (iii) includes new hypotheses, such as (a) forgiveness of debt, (b) licensing/assignment under favorable conditions; (c) acquisition, consideration of leasing, rent, etc., giving rise to taxation by the withholding income tax on the disguised profit distributed (with gross-up of the calculation basis). 

Changes to the Actual Profit Method (and CSLL tax basis)

  • Extinction of the Annual Profit Method (Lucro Real annual). Only Quarterly Profit Method will be allowed, with the possibility of offsetting tax losses in the following three quarters of the year without the 30% limitation (apparently there is no limitation for the offsetting of credits within the calendar-year);
  • Additional situations for the mandatory application of the Actual Profit Method (Lucro Real Annual):  (i) all activities related to credit securitization; (ii) real estate revenues or royalties >50%; (iii) exploitation of copyright or image rights;
  • Surplus and goodwill: aims to avoid situations where there could be double deduction of such amounts.
  • Goodwill: no tax amortization for mergers and splits carried out as from 2023;
  • Acquisition cost of investments:
    • In cases where an investor acquires additional interest in a controlled entity, the proposal provides that the goodwill registered in the company’s net equity could be considered in the book value of the investment, but creates a similar restriction to the one imposed to the goodwill, in other words, presume the realization of 1/60 by each month following the acquisition of the investment;
    • Foreign investment: provides that the exchange variation of the investments abroad shall not be considered in the acquisition cost of the investment at the moment of the determination of the capital gain or loss.
  • Intangible assets: minimum 20 year term for deductibility /amortization of intangible assets that do not have a different/specific legal or contractual term
  • Interest on Equity: nondeductible expense as from 2022
  • Share-based payment: restrict the deduction of the expense, allowing it only in relation to payments to employees
  • CSLL: aims to standardize its tax basis with the IRPJ tax basis.

Capital Reductions:

  • must be carried out, as a rule, at market value (except in case the book value is higher than the market value)

Capital contribution abroad:

  • the Bill of Law provides that the taxpayer’s assets must be evaluated at market value (applies also to transactions with nature and effects similar to the capital contribution, including transfer to trusts)

Unincorporated Special Partnership (“Sociedades em Conta de Participação”):

  • Obligation to adopt the same tax regime of the ostensible partner.

Indirect transfer of Brazilian companies’ shares. Capital gains tax:

  • Regulates the tax treatment applicable to capital gains generated in the indirect disposal of assets located in Brazil. Aims to reach the hypotheses where the market value of the disposed interest abroad derives substantially from the assets located in Brazil: (i) assets located in Brazil = > 50% of the market value of the transaction AND transfer of = > 10% of the ownership or of economic benefits of the (foreign) legal entity; or (ii) market value of the assets located in Brazil  > USD 100M AND transfer of = > 10% of ownership of economic benefits of (foreign) legal entity.

Presumed Profit Regime:

Maintenance of bookkeeping for legal entities opting for the presumed profit method will be mandatory;


Bonds or Securities:

  • End of taxation as per the regressive rates from 22.5% to 15% according to the term of the investment
  • 15% flat tax rate

Investment Funds:

  • Open-end funds: 15% flat tax rate and annual periodic taxation (“come-quotas”) only in November
  • Closed-end funds: 15% flat tax rate, introduction of annual periodic taxation (“come-quotas”) and taxation of the accrued profits on January 1st, 2022 (at 15% or 10% rate, depending on the collection date)
  • FIPs: in line with the previous proposals, introduction of two taxation regimes depending on its qualification or not as an investment entity.
  • Real estate funds: end of exemption for individuals and flat tax rate of 15%

Transactions on the stock exchange market:

  • 15% flat tax rate, including day-trade
  • Quarterly determination period (rather than the current monthly regime)
  • End of “whistleblower” (“dedo-duro”)
  • Requirements for deduction of losses in transactions carried out on the organized over-the-counter market
  • Establishes presumption for the acquisition cost of assets traded on the stock exchange (the lowest closing price in the last 60 months)


Anti-deferral rules for Brazilian individuals:

  • automatic taxation of profits generated by foreign controlled entities located or subject to low tax jurisdictions or operating under privileged tax regimes

Changes the Monthly Progressive Table (“Tabela Progressiva Mensal”):

  • increases the exemption threshold to monthly income of BRL 2,500.00;

Simplified discount in the annual IRPF ancillary obligation (“Declaração de Ajuste Anual”):

  • applies only to taxpayers with taxable earnings that do not exceed BRL 40,000.00;

Optional step-up of the tax costs of real estate properties located in Brazil:

  • Optional step-up of real estate tax costs subject to a flat 4% capital gains tax rate (applies to real estate properties located in Brazil acquired with resources of lawful origin until December 31, 2020). The Brazilian Federal tax authorities will regulate the proceedings.

Finally, several legal provisions were revoked by PL 2337/2021 and we recommend a detailed analysis, depending on the case at hand

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