Brazil: Tax reform proposals

Overview of certain tax reform proposals

Overview of certain tax reform proposals

The executive branch on 25 June 2021 sent to Congress a bill proposing significant changes in the tax law. Among the proposals are measures that would be relevant with regard to mergers and acquisitions (M&As) and concerning cross-border transactions.

Congress is expected to consider the bill as a part of the legislature process, and changes could be made to the proposed measures during this legislative process.

The following provides an overview of certain tax reform proposals.

Corporate income tax

The bill includes measures that would affect the determination of corporate income tax.

  • Tax rate: The current rate of 34% would be reduced to 31.5% in 2022, and to 29% from 2023 and onwards.
  • Taxable income computation: Corporate income tax would be computed on a quarterly basis. The option for yearly computation with monthly estimates would no longer be available.
  • NOLs: As a result of the mandatory quarterly computation, a new net operating loss (NOL) use rule would be introduced to allow the use of NOLs in the subsequent three quarters instead of the existing cap of 30% (that is, 30% of the entity’s taxable income).

Profit distributions


  • Dividends would no longer be tax exempt, but would be subject to a withholding tax at a rate of 20% (30% if the beneficiary of the dividend payments is located in a tax haven jurisdiction or is subject to a “privileged tax regime”).
  • Treaty provisions would be carefully assessed due to different rates, possible relief, and possible “tax sparing” clauses. Brazil has not signed the multilateral instrument (MLI) but the concept of “ultimate beneficial owner” (UBO) would need to be considered as would the “principal purpose test” given that it has been already included in certain income tax treaties and could eventually be included in all treaties.

Interest on net equity

  • Interest paid to shareholders based on the invested entity’s net equity—a means for profit distribution—would no longer be deductible. Thus, it would be necessary to reassess the debt / equity strategy adopted to fund a Brazilian subsidiary. A higher debt-to-equity ratio could be a trend, though other debt-related variables would need to be considered (such as thin-capitalization rules, transfer pricing rules, and withholding income tax on interest).

Holding companies

  • The 20% w/h income tax would apply when the invested entity distributes dividends to other holding companies or other foreign investment vehicles in Brazil.

DDL rule

  • There would be a type of domestic transfer pricing rule intended to curb tax driven reallocation of profits among companies in Brazil that are deemed to be related parties (since there is no tax consolidation in Brazil). The bill would strengthen this rule with implications concerning corporate income tax and withholding tax on dividends. This could affect operations in Brazil that make use of several legal entities.

Capital gains – non-residents

Indirect transfer of shares: The bill would introduce rules on indirect transfer of shares if:

  • The business in Brazil represents at least 50% of the fair value of the overall business sold abroad and if at least 10% of it is to be sold; or
  • The business in Brazil has a total fair value of at least US $100 million and the offshore transaction involves at least 10% of the overall business sold abroad.
  • Under these measures, the seller, or legal representative would have to notify the tax authority (RFB) about the sale and disclose details. The buyer would be liable for withholding the applicable capital gain tax (ranging from 15% to 22.5%). The buyer’s legal representatives, as well as those of seller, and the entity in Brazil being sold would be jointly liable.

KPMG observation

This measure is expected to have a significant impact on acquisitions of or investments in Brazil-based entities (including those in the digital economy) that ultimately aim for an initial public offering (IPO) abroad (for instance on the Nasdaq) since, currently, such IPOs tend to be beyond the reach of Brazil’s capital gain rules. This proposed new rule could affect many global transactions given that the size of the overall business in Brazil tends to be substantial. 

Exit tax

Individuals or legal entities that are residents of Brazil would be subject to a type of “exit tax.” If such residents contribute assets to legal entities abroad, they would do so based on the fair market value of the contributed asset. The difference between the transferred asset’s fair value and its tax basis would be treated as a capital gain and taxed as such.

The payment of the capital gain tax could be made in 60 monthly installments, and payment would be anticipated if certain liquidity events, as stated in the proposed legislation, take place.

KPMG observation

This new rule would be relevant for companies in Brazil (as well as their founders and investors) in trying to attract institutional investors or venture capital investors and aiming for IPOs abroad.

M&A – goodwill and asset step-up

  • Goodwill—The availability for buyers / investors to use the goodwill originating from an investment in, or acquisitions of a company (share deal) would no longer be allowed. This would be available only for acquisitions / investments until 31 December 2021, and on the condition that the merger with the target is carried out before 31 December 2022.
  • Asset step-up—As a result of share deals and following some requirements, Brazil legislation allows an “asset step-up” for tax purposes, provided the investing legal entity and the invested target are merged. The bill would continue to allow this treatment, but the rules would be more stringent. For instance:
    • In the case of intangibles, a tax deduction (on a straight-line basis) would be allowed over 20 years (mandatorily on a straight-line basis), whereas currently, the amortization period follows the forecasted useful life of the intangible (which, in many cases, is shorter than 20 years). This rule would not apply to concessions (or any other intangible whose useful life is contractually or legally defined), in which case the duration of the concession would be adopted.
    • In case of tangibles (fixed assets), the amount of the step-up would no longer correspond to when the acquisition took place, but to the remainder amount at the time of the merger of both the investing entity and the target. Thus, in case the required merger demands some time to be fully implemented, a portion of asset step-up would be forfeited.

In-kind capital return

In-kind capital returns (i.e., with assets) to investors (including foreign investors) are often a means through which tax-free reorganizations can be implemented in Brazil. The proposed legislation would stop this treatment (the use of book value) and would require that any such capital return would be carried out based on the returned asset’s fair value. The difference between the returned asset’s fair value and its book value / tax basis would be treated as a capital gain by the entity returning the capital.

Accordingly, the interposition of any additional layer of legal entities (such as holding companies), unless absolutely necessary, would need to be carefully assessed, since it may result in difficulties in any future reorganization that could be necessary, for instance, for a liquidity event.

FIP – PE and VC funds, and other institutional investors

  • Investment entity versus regular legal entity—FIPs (Fundos de Investimento em Participações) would only enjoy beneficial tax treatment if they are qualified as “investment entities”, as per Security Commission (CVM) rules, which are very similar to the overall concept of “investment entity” under IFRS. FIPs that do not fall under this concept would be treated as a regular legal entity and taxed accordingly. The proper implementation of a FIP structure, thus, would require a careful assessment of whether or not (or how) a FIP would be qualified as an investment entity.
  • FIP portfolio, tax rules aligned with CVM rules—The tax rules would be adjusted to align with CVM regulations concerning an FIP’s permitted portfolio. Thus, investments abroad, in non-convertible debentures, quotas of LTDA (limited liability companies) for instance would become possible from a tax perspective (along with the usual stocks, warrants, and convertible debentures).
  • Role of the funds general partner (GP)—The legislation aims to clarify that the presence of a GP managing foreign funds abroad that invest in a FIP would not jeopardize the tax exemption on income or capital gains distributed by FIPs to such foreign funds. In other words, the fact that a GP works as a fund manager would not be construed as a situation when the GP and the funds under its management are related parties—an interpretation that would cause distributions made by the FIP to be subject to withholding tax at a rate of 15%, instead of 0% (which, as a matter of fact, applies to investors holding less than 40% in the FIP quotas and are not located in tax havens).
  • “Pecking order” and deemed distributions—The proposed legislation would define gains earned by FIPs (defined as investment entities) due to the sale of their assets as deemed distributions to the investors in the month following the sale. Taxation (if applicable) would then be triggered—even if the proceeds are to be reinvested by the FIP into other assets. On the other hand, deemed or real distributions made by FIPs would follow a sort of “pecking order”—first, they would be deemed to be a return of capital, and only after this is exhausted, would the distributions be treated as gains and thus subject to the applicable 15% withholding tax.

Real estate and FII (real estate investment fund)

  • Presumed profit method—In certain instances, real estate businesses in Brazil operate through several real estate entities, each of which electing the presumed profit method as their tax computation method. This tax advantage might not be available under the proposal if, in the previous calendar year, the real estate company has earned more than 50% of its revenues from rental or from buying and selling real estate properties. This limitation would not apply in case of real estate development companies (Incorporações Imobiliárias).
  • FII – mandatory distribution—Under current law, FIIs must distribute their profits (calculated on a cash basis) at least twice a year. This mandatory distribution would be reduced to only once a year under the proposal.
  • FII – withholding tax rate—The profit distribution of FIIs to domestic investors is subject to tax at a rate of 20%. This rate would be reduced to 15% (which would be the same as that applicable to profit distributions to foreign investors if not located in tax haven jurisdictions).
  • FII – exemption on capital gain—The proposed legislation would repeal the exemption on income paid to individuals who are residents of Brazil by FIIs traded on the domestic stock exchange. This would affect the incentive for certain real estate entities to seek an IPO for their FII in Brazil.

Stock options

The proposed legislation attempts to limit the tax deduction of expenses associated with stock option plans to those expenses derived from plans awarded to employees only. The intention is not to allow the deduction in situations when stock option plans are awarded to others (including officers, board members, and service providers).

Read a June 2021 report prepared by the KPMG member firm in Brazil

For more information, contact a KPMG tax professional in Brazil:

Marcus Vinicius |
Ericson Amaral |
Pedro Anders |



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