Brazil: Dividend withholding tax and refund mechanism for foreign investors

Brazil’s Congress has approved changes to the taxation of profit distributions made to nonresident investors (referred to hereafter as the “Tax Bill”). For the first time since 1996, a withholding tax (WHT) will apply to dividends paid or credited by Brazilian companies to foreign shareholders.

Simultaneously, Brazil introduced a refund system (Art. 10-A) intended to protect foreign investors from excessive overall Brazilian taxation when the combination of corporate income taxes and dividend withholding surpasses the country’s nominal composite tax rate.

These changes represent a substantial shift in Brazil’s inbound tax framework and require careful planning before year-end 2025.

The Tax Bill has been sent for its execution by the president. However, further changes are possible due to discussions within Congress.

This report provides a summary of the key measures.

New 10% WHT on dividends paid to nonresidents (Art. 10, §4º)

• Beginning with profits generated from 2026 onward, dividends paid, credited, delivered, or remitted to nonresident shareholders will be subject to a 10% WHT.
• Exceptions (full exemption): Foreign governments (subject to reciprocity); sovereign wealth funds; and pension funds and similar retirement benefit entities (per regulation)

Transitional rule: Exemption for profits until 2025

• Dividends relating to profits generated until December 2025 remain exempt from tax, provided that:
  • The distribution is approved by December 31, 2025; and
  • Payment occurs in accordance with the terms approved (payment may occur after 2025, including via instruments such as a note).
    • There have been informal discussions among tax practitioners as to whether payment should also occur in 2025, but this is apparently the outcome of a confusing structure adopted by the Tax Bill.
• The approval must be carefully crafted in accordance with commercial law and internal governance (articles of association or by-laws).

Refund mechanism for nonresidents (Art. 10-A)

• To prevent excessive Brazilian tax burdens, the legislation offers a refund to foreign investors when the Brazilian company’s effective tax rate (ETR) on profits, plus the 10% WHT on dividends, exceeds the combined nominal corporate tax rate (usually 34%—except in the financial sector where statutory rates are equal to 40% or 45%).
• If this threshold is exceeded, the foreign shareholder may opt to receive a refund calculated as:

Refund = Dividend Amount × [ (ETR + 10%) – Nominal Composite Rate]

• Key elements:
  • ETR is defined under Art. 16-B of Law 9.250/95 (a statutory formula, not the accounting ETR). Thus, the proper assessment of this ETR is also fundamental.
  • Refund requests must be submitted within 360 days following each fiscal year.
  • Procedures and documentation will be established in upcoming regulations by the Ministry of Finance and the tax authority (RFB).

Practical implications for multinationals

Year-end 2025 planning window

• Brazilian subsidiaries may consider:
  • Segregating profits accumulated until 2025.
  • Approving, as necessary under law, their distribution by December 31, 2025.
  • Defining payment terms (e.g., cash, promissory note, installments, etc.) that comply with civil and commercial law requirements and with the terms and conditions approved in the corporate resolution.
  • Keeping supporting documentation for future audit defense.

Impact on future cash repatriation strategies

• Dividend repatriation will incur 10% WHT, subject to treaty relief.
• Groups could reassess:
  • Holding structures
  • Tax-optimized repatriation strategies
  • Use of interest on net equity
  • Capital structures (i.e., debt vs. equity ratios)

Interaction with the credit/refund mechanism

• Foreign investors may need to evaluate:
  • Whether the Brazilian subsidiary’s statutory ETR will exceed 24% (since 24% ETR + 10% WHT = 34% threshold)
  • Forecasts of taxable income vs. book income
  • Sector-specific disallowances (e.g., financial expenses, provisions, regulatory adjustments)
• Groups with ETR over 24% could anticipate refund claims and incorporate this mechanism into financial models and capital planning.

Contact us

For more information, contact a KPMG tax professional:

Ericson Amaral | eamaral@kpmg.com.br

Monica Del Rio | monicadelrio@kpmg.com

Giorgio Massari Figari | gmassarifigari@kpmg.com