Besides the large and challenging reform on consumption tax, Brazil is debating the long-expected taxation of dividends as the first stage of an income tax reform through Legislative Proposal 1,087/25. The proposal has passed one of the two approval stages in the National Congress and is expected to be fully approved before year end.
Brazil is one of the few countries in the world that still exempts dividends. This proposal signals an intention to align Brazilian legislation with OECD standards, an aim recently exposed by the implementation of relevant changes to transfer pricing legislation[1] and laws and regulations concerning Pillar Two[2].
However, the proposed taxation of dividends appears to cover a wide range of taxpayers, as it applies to all resident individuals receiving dividends exceeding BRL 600,000 per year. The proposal also covers dividends paid to foreign investors, thus affecting individuals with corporate investments in Brazil.
Avoiding Double Taxation
As proposed, and in order to avoid double taxation, the proposal establishes that the corporate income tax effectively paid by the company distributing the dividends should be considered in the tax base of the individual income tax levied on those dividends. Therefore, a reduction factor should apply to ensure that the overall income taxation does not exceed 34%, which is the current nominal rate for corporate income tax.
Progressive Rates and Withholding
Moreover, the taxation of dividends should be levied at progressive rates up to 10% on amounts between BRL 600,000 and BRL 1,200,000 per year. For annual dividend income exceeding the BRL 1,200,000 threshold, the applicable and final rate should be 10%.
Nevertheless, a payment should occur at source when the monthly dividend payments from the same company exceed BRL 50,000. This anticipates a taxation of 10% that may be adjusted annually to the applicable progressive rate, according to the total annual dividend income of the beneficiary. Under this payment-in-advance model, the resident taxpayer anticipates 10% at source but may receive a refund of the difference to the applicable lower rate annually if the total annual dividend income does not exceed the BRL 1,200,000 threshold.
Treatment of Foreign Investors
Regarding foreign investors, the proposal establishes a definitive 10% rate at source. This raises a fair discussion involving the non-discrimination principle, since foreign investors may receive different treatment from nationals—especially if the foreign investor is a resident of a country that has a tax treaty with Brazil.
In general, for foreign investors—regardless of their residency—the proposal foresees only an optional tax credit applicable when the combined dividend and corporate income tax rates exceed the nominal tax rate fixed by domestic legislation for corporate income tax (mostly 34%).
Conclusion
After more than 20 years of discussing the taxation of dividends as a move to align Brazilian legislation with OECD standards, the Government now seems engaged in approving Legislative Proposal 1,087/25 to gain enforcement next year, primarily due to its need to increase collection revenue. Since the approval in the first house of Congress occurred unanimously, taxpayers should not expect changes to the draft bill forwarded to the Senate. This means they have only few weeks to adjust and prepare for the coming taxation, including in respect of accumulated and not distributed profits.
[1] Law 14,596/23 and IRS Normative Instruction 2,161/23
[2] Law 15,079/24 and IRS Normative Instruction 2,228/24