Over the past few months, the Brazilian government has been increasing several taxes in order to restore the Country's finances. These measures have impacted considerably the tax burden in Brazil. Find below the main highlights on the changes made:
Capital Gains Tax – Individuals: Tax rates applicable on capital gains obtained by Brazilian individuals will be increased from 15% to up to 30% from January 1, 2016 (provided Provisional Presidential Decree 692/2015 is passed into law in 2015). Foreign investors – except when established in tax havens– may also be affected by the tax increase in several situations. The new capital gain tax brackets will be the following: (i) up to BRL 1,000,000.00 – 15%; (ii) BRL 1,000,000.01 to BRL 5,000,000.00 – 20%; (iii) BRL 5,000,000.01 to BRL 20,000,000.00 – 25%; and (iv) from BRL 20,000,000.01 – 30%.
Corporate Taxes – Interest on Equity: The rate for withholding income tax on interest on equity due by Brazilian legal entities to shareholders will increase from 15% to 18% from January 1, 2016 (provided Provisional Presidential Decree 694/2015 is passed into Law in 2015). Also, the deduction limit for the legal entity paying the interest has also been narrowed down to (i) a fixed annual deduction of 5% percent, or (ii) the current pro rata variation of the long-term interest rate (TJLP) – whichever is lower.
Private Equity and Stock Investment Funds – Dividends: From September 9th, 2015, the income tax exemption applicable to dividends distributed by companies whose securities are held in a fund's portfolio directly to the fund's unitholders was revoked. Such dividends are now part of the fund's gains/losses, and the fund manager is responsible for withholding the income tax levied on such distribution, at rates ranging from 15% to 22.5%.
Social Contribution – Financial Institutions: From September 1st, 2015, the tax rate of social contribution levied on financial institutions' net profits (CSLL) was increased from 15% to 20% by Act 13.169/2015 (derived from conversion of Provisional Presidential Decree 675/2015).
State VAT – Software: From January 1st, 2016, the sale of off-the-shelf software in the State of São Paulo will be subject to VAT (ICMS) at a 18% rate. Until the end of 2015, the tax basis assessed was expressly restricted by Decree 51.619/2007 to twice the value of the software's physical support; which, in practical terms, exempted off-the-shelf software acquired via download from ICMS.
R&D – Tax Incentives: Legal entities incurring expenses in relation to R&D activities eligible for tax deduction under Act 11.196/2005 will have the benefit suspended for 2016 (provided Provisional Presidential Decree 694/2015 is passed into Law in 2015).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.