The year of 2023 was marked by many changes, or tentative of changes, on the Brazilian tax system. The advance of the Indirect Tax Reform in the Congress, with a strong support of the current Federal Executive branch, can be highlighted as one of the main achievements.
Currently, the Indirect Tax Reform has been approved by the Federal Senate and the Deputies Chamber is analyzing the changes carried out by the upper house. The expectation is that we have the legislative process ended and the following promulgation until 2023. The timetable is tight, but the perspectives are on this direction.
If approved, the Brazilian indirect tax system will suffer relevant changes, five taxes will be extinct (ICMS, ISS, PIS, Cofins and IPI) and a Dual VAT plus an excise tax will be put in place following a transition period. Furthermore, as planned on the transition period, all the complementary laws regulating the new indirect tax system will need to be presented during 2024, so the next year will bring tons of news on this matter (for more information about the Indirect Tax Reform, please access our previous text).
However, the Indirect Tax Reform is not the only topic to be followed closely in the next year. In 2024, there is also a high chance of an Income Tax Reform, already called by some as the “second stage of Brazilian Tax Reform”, which will probably bring taxation of dividend income back and reduce the CIT rate (approx. 34%). Unfortunately, the reduction of the CIT compared to the return of dividend taxation will probably not be proportional, so an increase of the total income tax burden over the corporate income can be expected.
Although reserved for 2024, during 2023 the Executive branch proposed bills already changing the income tax system. One of the addressed matters was the extinction of the interest on net equity (Juros sobre Capital Próprio or JCP), currently deductible from the CIT and levied at a withholding income tax rate of 15%, which can generate an economy of approx. 19% (CIT 34% – WHT 15%). The bill did not advance on the Congress, but the Executive branch have declared that this is one more topic that will compose the Income Tax Reform next year.
Still, about other relevant matters related to the Brazilian income taxation addressed during 2023, it is possible to highlight the bill approved on November 29, providing the automatic withholding income tax (come-quotas) over exclusive investment funds established in the form of closed condominiums and CFC rules for Brazilian tax resident individuals who controls offshores companies in tax haven.
Therefore, we already have major changes in the Brazilian tax system for 2024, and there are others that are equally relevant and that we can certainly expect. It is going to be an important year for companies, both Brazilian and foreign with branches in Brazil, or even those planning to start investing in Brazil, follow these changes in order to prepare and adapt their strategic planning.