BRAZIL: An Introduction to Corporate/M&A

Introduction

The Brazilian market is at a complex inflection point, marked by both macroeconomic headwinds and strong investor optimism.

Current economic forecasts for 2026 suggest modest GDP growth of 1.5% and persistent inflation near 4.5%, amid a volatile presidential election year.

Despite these challenges, the M&A outlook is positive. A recent KPMG report shows 57% of executives expect an increased appetite for deals through 2026, signalling that Brazil remains a key target for investors. The country’s wealth of natural resources, its role as an agricultural powerhouse, and its historically neutral geopolitical stance underpin this strategic importance.

A significant shift in monetary policy is expected to unlock investment potential. Market consensus projects a reduction in the Selic benchmark interest rate to 12.25% by the end of 2026. A lower cost of capital will make acquisition financing more accessible and could support higher valuations by reducing discount rates in financial models.

While the current climate requires vigilance, a clear window of opportunity is opening, fuelled by sustained investor interest and the prospect of more favourable financing conditions.

Beyond macroeconomic trends, the most profound force set to reshape Brazil’s M&A landscape is the impending Tax Reform, effective January 2026. This overhaul represents a fundamental shift away from one of the world’s most notoriously complex tax systems toward a framework modelled on a modern value-added tax. This is not a mere compliance update; it is a strategic recalibration that will redefine asset values, reshape corporate structures, and create a new playbook for deal-making.

New Legislation: The Shift to a Dual VAT Framework

The centrepiece of the reform is the consolidation of five existing consumption taxes into a dual VAT system as follows:

• the Contribution on Goods and Services (CBS) – a federal-level tax that replaces PIS, COFINS, and IPI; and
• the Tax on Goods and Services (IBS) – a subnational tax administered by a federative council, which will be jointly managed by states and municipalities and without and which will not have direct federal government participation in its governance, and which will replace the state-level ICMS and municipal-level ISS.

While the goal is simplification, the power of this new legislation lies in two core operating principles that will directly affect every company’s balance sheet and operational model.

The principle of full non-cumulativity

Unlike the previous system, where generating and utilising tax credits was a fragmented and often litigious process, the new framework allows companies to obtain a full credit for all IBS/CBS paid on the acquisition of goods and services. This is a game-changer for capital-intensive industries and businesses with long supply chains, as it eliminates the cascading tax effect that previously inflated costs.

The shift to a destination-based taxation model

Tax will now be levied where goods or services are consumed, rather than produced. This change effectively ends the decades-long “fiscal war” among Brazilian states, which competed to attract investment by offering aggressive ICMS incentives. As these incentives are phased out, the strategy for locating factories and distribution centres will pivot from tax optimisation toward logistical efficiency and proximity to consumer markets. The combined standard IBS/CBS rate is projected to be around 27.5%, making the ability to generate credits highly valuable.

Potential Hurdles and How to Overcome Them

The transition to this new reality presents significant hurdles for clients engaged in M&A. However, each challenge brings with it an opportunity for strategic advisory and value creation.

The most immediate impact will be on corporate valuations. The new tax burden will fundamentally alter projected cash flows, demanding that financial models be rebuilt from the ground up.

The service sector, a vibrant part of Brazil’s economy, faces the most acute pressure. Companies in technology, consulting, and marketing, which previously benefited from a low single-digit ISS rate and had limited ability to generate tax credits, will now be subject to the full VAT rate. Consequently, margins will be compressed, reducing EBITDA and lowering valuations, unless they are able to effectively pass on the costs to consumers, justifying the increase with the new possibility of full credit take-up, which was generally not allowed under the old system.

Due diligence must therefore evolve. It can no longer be a retrospective review of historical tax compliance. It must become a forward-looking impact analysis, modelling the target company’s post-reform financial health. Sophisticated tax modelling will be essential to accurately forecast the target’s ability to generate credits and assess its new effective tax rate. This analysis will become a cornerstone of price negotiation.

The tax reform also impacts deal-structuring logic. The classic choice between a share deal and an asset deal will be governed by a new set of tax calculations. While a share deal itself is not subject to IBS/CBS, the underlying value of the company being sold is directly affected by the reform. In an asset deal, the sale of assets will generally be taxed, creating a direct cost for the seller.

The decision will require a new strategic equation. In an asset deal, the buyer will now receive a full tax credit on the value of the acquired assets. The central question becomes does the net present value of the buyer’s future tax credit outweigh the seller’s immediate tax burden? This calculation will drive deal structuring, potentially making asset deals more attractive in scenarios where the buyer is a large, credit-generating entity.

The reform will be implemented gradually, from 2026 to 2033, with the old and new systems coexisting for a few years. This temporary dual system may bring some uncertainty with it and even some compliance risk. Responsibilities and/or contingencies may arise from either system, especially since the final VAT rate has not yet been confirmed.

Transactional certainty must be built contractually. Sale and purchase agreements will need to incorporate innovative clauses to mitigate these risks. This includes “tax rate fluctuation clauses” that adjust purchase prices or earn-out calculations based on the final, to-be-confirmed IBS/CBS rate, as well as robust indemnification provisions that clearly allocate responsibility for liabilities arising during the transitional phase.

Finally, the reform introduces income tax on corporate dividends, a change with two critical consequences. Firstly, it impacts long-standing wealth and succession planning strategies by reducing the efficiency of holding company structures, forcing a strategic re-evaluation of their role. Secondly, the reform will fundamentally affect M&A valuations: acquirers must now factor this new tax into their financial models, reducing the projected net cash flows from target companies and impacting their valuation. However, this impact may be less pronounced for foreign acquirers, who can often claim tax credits in their home jurisdictions for the dividend taxes paid in Brazil. This nonetheless introduces a new and critical variable into deal pricing and negotiations.

The Brazilian Tax Reform is more than legislation; it is a seismic event that redraws the country’s economic map. For companies, the hurdles of valuation shock, structural complexity and transitional uncertainty are significant. However, for the well-advised, these challenges are also signals of opportunity: to acquire assets at re-evaluated prices, to advise on strategic pre-M&A reorganisations, and to structure deals that ingeniously leverage the mechanics of the new tax system.