Brazil is one of the few countries that does not tax dividends. However, this may be about to change as a tax reform bill presented by the government on 18 March 2025 would introduce a 10% withholding tax on dividends remitted overseas in order to offset expected tax revenue shortfalls from other provisions in the bill. In particular, the revenue from the dividend withholding tax would be used to pay for an increase in the personal income tax exemption threshold for low income Brazilians that would apply to taxpayers with monthly income equal to or lower than BRL 5,000 per month (currently BRL 2,824). Around 10 million Brazilians are expected to benefit from the change to the exemption threshold and if approved, it is expected to result in a reduction of tax collected of BRL 25.84 billion.
In addition to a new withholding tax on dividends, the government plans to introduce a minimum tax on high income individuals to pay for the expanded income tax exemption on low income taxpayers. “High income individuals” for these purposes would include individuals who earn more than BRL 50,000 per month (BRL 600,000 per year). According to the government, such individuals currently pay an effective income tax of 2.54% and 141,000 individuals would be subject to the new minimum taxation at a minimum ETR of 10%.
Dividend distributions in Brazil have been exempt from tax since 1996, which has been important in the country’s ability to attract foreign investment. Unfortunately, it appears that these halcyon days are numbered.
The most relevant measure in the bill for foreign investors—both individuals and corporations—is the introduction of a 10% withholding income tax on dividends paid by Brazilian residents to nonresident shareholders. A tax credit would be available for such investors on the positive difference between the adjusted effective tax rate (ETR) and the nominal tax rate (generally 34%) to be applied on dividends paid. A request for the tax credit must be made within 360 days from the end of each fiscal year.
The adjusted ETR means the ETR of the company plus 10% (the withholding tax rate), i.e., if the ETR of a company is 28%, the adjusted ETR will be 38% (28% + 10%). In this example, the tax credit would be equivalent to 4% (38% - 34%) and the remaining 6% would be the effective withholding income tax paid by the investor, which would be a cost when not recoverable abroad.
If the ETR is equal to the nominal tax rate, the withholding tax paid would be offset against the tax credit and would be a cash flow issue with no tax impact to the global ETR. However, this is not the situation in most cases as each company has temporary differences that impact the ETR.
The taxation of dividend distributions would also impact companies taxed in Brazil under the presumed profit method, as the ETR for a service company taxed under this regime is around 11%. In this case, as the difference (adjusted ETR minus nominal rate) will be negative, no tax credit would be available for the foreign investor.
Brazil has recently undergone a VAT reform, implementation of new transfer pricing rules and Pillar Two rules, and now is embarking on fundamental changes to dividend taxation (and the taxation of high income individuals).
The recent bill must be approved by both houses in Congress and would apply as from 1 January 2026 if enacted in 2025. The new 10% withholding tax on dividends would affect both domestic and foreign companies operating in Brazil, which have benefited from exempt treatment for almost 30 years.
Hugo Amano
BDO in Brazil
In addition to a new withholding tax on dividends, the government plans to introduce a minimum tax on high income individuals to pay for the expanded income tax exemption on low income taxpayers. “High income individuals” for these purposes would include individuals who earn more than BRL 50,000 per month (BRL 600,000 per year). According to the government, such individuals currently pay an effective income tax of 2.54% and 141,000 individuals would be subject to the new minimum taxation at a minimum ETR of 10%.
Dividend distributions in Brazil have been exempt from tax since 1996, which has been important in the country’s ability to attract foreign investment. Unfortunately, it appears that these halcyon days are numbered.
The most relevant measure in the bill for foreign investors—both individuals and corporations—is the introduction of a 10% withholding income tax on dividends paid by Brazilian residents to nonresident shareholders. A tax credit would be available for such investors on the positive difference between the adjusted effective tax rate (ETR) and the nominal tax rate (generally 34%) to be applied on dividends paid. A request for the tax credit must be made within 360 days from the end of each fiscal year.
The adjusted ETR means the ETR of the company plus 10% (the withholding tax rate), i.e., if the ETR of a company is 28%, the adjusted ETR will be 38% (28% + 10%). In this example, the tax credit would be equivalent to 4% (38% - 34%) and the remaining 6% would be the effective withholding income tax paid by the investor, which would be a cost when not recoverable abroad.
If the ETR is equal to the nominal tax rate, the withholding tax paid would be offset against the tax credit and would be a cash flow issue with no tax impact to the global ETR. However, this is not the situation in most cases as each company has temporary differences that impact the ETR.
The taxation of dividend distributions would also impact companies taxed in Brazil under the presumed profit method, as the ETR for a service company taxed under this regime is around 11%. In this case, as the difference (adjusted ETR minus nominal rate) will be negative, no tax credit would be available for the foreign investor.
BDO Insight
Brazil has recently undergone a VAT reform, implementation of new transfer pricing rules and Pillar Two rules, and now is embarking on fundamental changes to dividend taxation (and the taxation of high income individuals).The recent bill must be approved by both houses in Congress and would apply as from 1 January 2026 if enacted in 2025. The new 10% withholding tax on dividends would affect both domestic and foreign companies operating in Brazil, which have benefited from exempt treatment for almost 30 years.
Hugo Amano
BDO in Brazil