Bill No. 1,087/2025: A Turning Point in Brazil’s Taxation of Dividends
Bill No. 1,087/2025 marks a historic shift in how Brazil taxes profits and dividends, with direct implications for both tax residents in Brazil and those living abroad—particularly in the United States. For the first time since Law No. 9,249/1995, dividends remitted abroad will be subject to withholding tax, while a minimum tax on global income is introduced for individuals residing in Brazil. The bill was approved by the Brazilian House of Representatives on October 1, 2025, and now moves to the Senate for consideration, followed by presidential sanction.
The bill provides that dividends paid abroad—whether to individuals or legal entities—will be taxed at a 10% withholding rate, with few exceptions: foreign governments that grant reciprocity to Brazil, sovereign wealth funds, and pension entities. Dividends related to profits earned up to the end of 2025 will remain exempt if their distribution is approved by December 31, 2025.
For individuals residing in Brazil, the structure differs. A 10% monthly withholding will apply when a single company pays more than R$50,000 in dividends per month. However, this amount will be creditable in the taxpayer’s annual return. Upon final adjustment, the minimum tax will apply only to total annual income exceeding R$600,000, increasing progressively from 0% to 10%, meaning that many middle-income taxpayers will face an effective rate below 10%, even after withholdings during the year.
This framework creates significant differences depending on tax residency. For those who remain Brazilian tax residents with total income close to or below the R$600,000 threshold, it may be more advantageous to remain under Brazilian law, since the effective burden on dividends may be lower than the fixed 10% rate. For those who change their residency and file a “Final Departure” declaration with the Brazilian tax authority, the rule is straightforward: dividends paid from Brazil are always subject to 10% withholding tax. In the United States, such income is classified as foreign-source income, generally eligible for a foreign tax credit under IRC §904. Depending on the taxpayer’s income composition and credit limitations, the Brazilian tax may be offset in the U.S., effectively neutralizing the additional burden.
Tax planning becomes even more complex when the check-the-box election is used for Brazilian entities. In these cases, a Brazilian company may be treated in the U.S. as a disregarded entity or a partnership. This classification can allow corporate-level Brazilian taxes—such as IRPJ and CSLL—to be credited in the United States. However, it does not eliminate the 10% withholding tax on dividend distributions to nonresidents, since Brazil taxes the transaction at the moment of remittance. This creates a potential timing mismatch between the moment of taxation in Brazil and income recognition in the U.S., which may hinder or even invalidate the use of foreign tax credits.
Another sensitive issue is the interaction of the new regime with Section 245A of the U.S. Internal Revenue Code, which provides for the Dividend Received Deduction (DRD). This rule allows U.S. corporations holding at least 10% ownership in a foreign company to fully deduct dividends received, making them tax-exempt in the U.S. The trade-off, however, is that no foreign tax credits can be used for such dividends, since the income itself is deductible.
Under the previous regime—when no Brazilian withholding tax applied—this structure was extremely efficient: dividends could flow from Brazil to a U.S. C-Corp without tax cost. Now, with the imposition of a 10% Brazilian withholding tax and the inability to credit that tax in the U.S. due to the DRD, this percentage becomes a net, unrecoverable cost, reducing the attractiveness of structures based on U.S. C-Corps. The same logic affects the so-called “flip” structures, very common among Brazilian startups. In such cases, the Brazilian operation is controlled by a holding company, usually incorporated in Delaware or the Cayman Islands, and shareholders—often Brazilian—hold shares in that foreign entity. Under Law No. 14,754/2023, profits earned by Brazilian subsidiaries and distributed to these holdings are exempt in Brazil, provided they relate to operations conducted in the country, thereby avoiding double taxation for Brazilian shareholders.
However, the new bill introduces an additional layer of cost: dividends paid by a Brazilian company to a foreign holding will now be subject to 10% withholding tax, apparently without any credit offset at the shareholder level, as no subsequent tax would exist against which to claim the credit. In practice, this represents a net 10% increase in the tax burden of such structures, undermining their efficiency.
Taken together, these changes reveal a clear direction: Brazil is aligning itself with OECD international standards, which no longer accept unrestricted dividend exemptions. For residents in Brazil with annual income up to R$600,000, there may even be a relative improvement, since the minimum tax could result in a lower effective rate than the 10% applied to nonresidents. For individuals residing in the United States, the 10% withholding tax will often be creditable, though subject to U.S. credit limitations. For U.S. corporations using the Section 245A DRD and for flip structures, however, the bill could lead to a net increase in tax cost and potential loss of competitiveness.
In summary, Bill No. 1,087/2025 profoundly reshapes the tax planning landscape for individuals and companies operating between Brazil and the United States. It eliminates Brazil’s historical dividend exemption advantage, reduces the appeal of U.S. C-Corp-based structures, and challenges the efficiency of flip models, while maintaining some flexibility for individuals who remain Brazilian residents within mid-range income brackets. Each case will require detailed analysis, but the trend is clear: the reform places Brazil back on the global tax map and demands a strategic review of existing cross-border structures.
| 
No comments:
Post a Comment