Introduction
Beginning in 2026, cross-border dividend payments from Brazil may become subject to a newly enacted 10% withholding income tax (WHT). The policy rationale for this measure is far from compelling, and certain structural features are likely to generate meaningful controversy, particularly around the interaction with Brazil’s extensive network of double tax treaties, and the risk of potential retrospective effects.
This article explores these areas of concern, with particular focus on the scope and mechanics of the grandfathering regime that, under specific conditions, protects retained earnings accumulated through 2025.
It also highlights several additional issues emerging in what has already been a turbulent year in Brazilian tax policy, marked by the indirect tax reform, sweeping changes to transfer pricing rules, and the first wave of Pillar Two implementation.
Once enacted, Bill of Law No. 1,087/2025 will take effect on 1 January 2026. As drafted, the 10% WHT applies to dividends paid from that date onward, even where the underlying profits were generated in earlier years. To mitigate this de facto retroactive outcome, taxpayers will need to consider timely corporate actions to ensure that pre-2026 retained earnings are properly identified, approved, and distributed, thereby allowing those amounts to fall within the intended grandfathering protections.
Operation Modalities of the New Dividend WHT
The decision to impose WHT on outbound dividends is contentious, particularly because it fits somewhat awkwardly within the broader policy rationale of the Bill. Indeed, the main objective of the Bill was to reduce the tax burden on low-income earners while increasing the same on high-income earners (defined as those who earn monthly income of more than R$ 50,000). This is achieved through a reduction of the marginal rates for low-income earners and the introduction of a minimum income tax (IRPFM) for high-income earners. This explains why the introduced dividend WHT applies to distributions to resident individuals but not to resident legal entities. In contrast, dividend distributions to non-resident individual and corporate shareholders attract the dividend WHT.
The introduction of the dividend WHT disrupts a system that, for nearly three decades, has exempted profit distributions under Brazil’s corporate–shareholder integration model. Yet, paradoxically, the reintroduction of WHT does not signify a substantive shift in that model: in as far as domestic shareholders are concerned, Brazil continues to apply full integration, taxing corporate profits exclusively at the entity level while maintaining dividend exemption for domestic shareholders (who are resident legal entities or low-income individuals). This is achieved through a layered and somewhat convoluted IRPFM collection mechanism. Under this mechanism, first, a provisional 10% WHT is applied to dividend distributions on a monthly basis. Then, at year-end, taxpayers perform a definitive IRPFM calculation that aggregates their total income and factors-in the effective tax burden borne by the companies in which they invest. This annual reconciliation may significantly reduce the applicable IRPFM rate, which can ultimately range from 0% to 10%.
The Bill makes an attempt to level the treatment of domestic and foreign investors through an optional and conditional refund mechanism, but this attempt appears to be rather moot and may in fact prove counterproductive (see below). In this context, the WHT on dividend distributions to foreign shareholders appears primarily as a revenue-raising device rather than a measure aligned with the Bill’s underlying policy logic. Indeed, in the case of non-resident shareholders, the WHT bears no substantive connection to the IRPFM, since it does not target only non-resident high-income individual investors. Instead, it applies uniformly to all non-resident recipients of dividends - individuals and entities alike - regardless of their income level or tax profile.
Impact of Double Tax Treaties, Crediting and a (not so) Dormant Discussion on Non-Discrimination
A natural starting point is the role of Brazil’s extensive treaty network in mitigating the newly introduced 10% WHT. In practice, however, the treaties offer little relief. Most Brazilian treaties set the dividend WHT cap at 10% for qualifying direct shareholdings, meaning the domestic rate already aligns with the treaty ceiling. The only relevant deviation is the treaty with the United Arab Emirates, which provides for a 5% rate on dividends paid to government-related entities. Yet this provision is effectively moot: Brazilian domestic law already exempts dividend payments to foreign governments, sovereign wealth funds, and foreign pension funds.
A distinctive feature of the new Brazilian dividend WHT is its optional refundability for foreign investors. This design choice mirrors, in part, the mechanics of the WHT applicable to resident high-income individuals. Yet, while intended to create conceptual symmetry, the refundable nature of the tax may ultimately prove counterproductive. In many jurisdictions, a refundable withholding tax is not creditable against the investor’s domestic tax liability. As a result, the Brazilian WHT could generate unrelievable double taxation in situations where the residence country taxes foreign dividends. This concern largely explains why the refund mechanism was made optional rather than mandatory for non-resident investors.
The refund system itself operates in a manner loosely inspired by the IRPFM. It aggregates the corporate tax paid by the Brazilian distributing company with the WHT withheld at source and tests whether the combined burden reaches Brazil’s nominal corporate income tax rate (generally 34%). If, after including the WHT, this threshold is met, the foreign investor may be entitled to claim a refund of the “excess” WHT. In practice, this mechanism seeks to ensure that the overall Brazilian tax burden on distributed profits does not exceed the benchmark domestic corporate tax rate.
Another issue likely to resurface with the introduction of WHT on outbound dividends is the uneven tax burden placed on foreign investors, who will be fully subject to the 10% levy, while many domestic investors, notably corporate shareholders and low-income individuals, remain exempt.
Brazil occupies a particularly unusual position regarding non-discrimination. A long-standing constitutional interpretation treats the non-discrimination principle as having constitutional stature, which has historically led Brazilian courts to reject distinctions based solely on residence (in the few cases were this discussion was tried). Reflecting this view, Brazil maintained up to 2017 a formal reservation to the 1992 amendment of Article 24(1) of the OECD Model and negotiated treaty clauses that omit the phrase “in particular with respect to residence.” As a result, most Brazilian DTTs retain the pre-1992 formulation, potentially broadening the scope for non-discrimination challenges.
This creates a fertile environment for litigation: the limited case law to date has largely favored taxpayers, and Brazil’s procedural system makes test-case litigation relatively inexpensive.
Protective Measures to Grandfather Pre-2026 Retained Earnings
The Bill of Law contains grandfathering rules that, under certain conditions, protect retained earnings accumulated through 2025 from taxation by the WHT or the IRPFM.
A central issue for foreign investors is how to ensure that profits accumulated through 2025 remain outside the scope of the new 10% WHT when distributed in the future. The statutory grandfathering rule is conceptually simple but operationally sensitive: to avoid the tax, companies must approve the distribution of pre-2025 retained earnings by 31 December 2025. Once that approval is duly made, the dividends corresponding to those historical profits remain protected, even if they are ultimately paid after the new regime takes effect.
Importantly, the text of the law does not require that the actual payment occurs by any fixed date. The only temporal requirement is the approval of the distribution within 2025. After that, the dividends must merely become enforceable from a civil and corporate law perspective, and the payment must follow the timing and modalities originally established in the corporate resolution. This means that, depending on the corporate form (S/A, limitada, etc.), the company may approve the distribution in 2025 and schedule payment for a later date, or even leave the due date open-ended, without jeopardizing the grandfathering protection.
This creates an opportunity, and a necessity, for foreign-owned Brazilian companies to act before year-end. Failure to formally approve the distribution of accumulated earnings by 31 December 2025 will expose those profits to the 10% WHT if paid in 2026 or thereafter, producing a de facto retroactive tax effect. Conversely, timely corporate action allows taxpayers to lock in tax-free treatment for historic profits while retaining full flexibility regarding the actual payment schedule. As a result, multinational groups with significant Brazilian operations are well advised to assess their retained earnings positions and initiate the necessary corporate approvals within the 2025 calendar year.
