In January 2025, the Brazilian Tax Reform reached an important milestone for its implementation. Complementary Law Nº 214/2025 (or LCP 214/2025, originated from Bill Nº 68/2024) was sanctioned by the Brazilian President, serving as the main regulatory framework for the reform. This newly sanctioned framework establishes key procedures regarding the application of Brazilian Dual-VAT (IBS and CBS) and the Excise Tax, including a transition period to allow taxpayers to progressively adapt and comply.
According to LCP 214/2025, the transition period will begin in 2026, aiming to mitigate possible financial impacts on taxpayers by introducing IBS and CBS at a test rate while the current consumption taxes (ICMS, ISS, PIS, COFINS and IPI) remain in effect. Gradually, the rates of these existing taxes will be reduced until they are fully phased out, allowing for the gradual increase of the newly implemented taxes. The main objective of this form of transition is to ensure that the overall tax burden on contributors does not increase, ideally maintaining the same aggregate consumption tax rate.
Overview of the transition period:
2026
Following the development of the IBS and CBS collection system, set to be implemented in 2025, the year 2026 will serve as a testing phase for these taxes. To facilitate this process, IBS and CBS will be included in invoices (Nota Fiscal Eletrônica – NFe) at the following tax rates:
- IBS (state tax rate): 0.1% over the total value of the taxable transaction
- CBS: 0.9% over the total value of the taxable transaction
During this period, the IBS and CBS rates may be proportionally reduced for transactions eligible for a reduced tax rate.
Exceptionally, in 2026, IBS and CBS will not be collected from companies under the “Simples Nacional” tax regime or those that fulfill ancillary obligations.
The amount collected from IBS and CBS in 2026 will be offset against the PIS and COFINS liabilities for the same tax period. If the taxpayer does not have sufficient liabilities to complete the offset, the collected amount may be credited against any other federal tax or refunded within 60 days.
2027 to 2028
Starting in 2027, CBS will be fully implemented, entirely replacing PIS and COFINS.
The IBS tax rate will remain at 0.1%, but it will now be equally divided between the state and municipal levels:
- IBS (state tax rate): 0.05% over the total value of the taxable transaction
- IBS (municipal tax rate): 0.05% over the total value of the taxable transaction
The Excise Tax (IS) will also be implemented, applying to products that are considered harmful to health and the environment.
Additionally, the current Tax on Industrialized Products (IPI) will have its rates reduced to zero for all products, except for those also manufactured in the Manaus Free Trade Zone (ZFM).
The Tax on Financial Transactions for insurance operations (IOF-Seguros) will also be discontinued.
2029 to 2033
From 2029 to 2032, ICMS and ISS tax rates will be gradually reduced by 10% per year, based on the rates in effect at the end of 2028. Simultaneously, the IBS rate will increase annually by 10% until 2033, when the remaining 60% tax rates of the ICMS and ISS will be fully phased out, and IBS will be collected at its full rate.
It is important to note that by 2033, any special tax regimes and tax incentives for ICMS and ISS will be phased out.