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Brazilian Income Tax Reform and the Revaluation of Inbound Investment Structures — Orbitax Expert Corner


Tax reform agendas are not new in the Brazilian political environment. Several attempts — some broader and some narrower in scope — were made in the past decades to amend our overly complex system, aiming at reducing litigation derived therefrom, seeking greater alignment to international standards and increasing the competitiveness of Latin America’s largest economy. Such agenda is one of the plans of the current Administration that, in the past two years, focused on discussions regarding the long-awaited indirect tax overhaul.

More recently, on 25 June 2021, the Brazilian Federal Government unveiled a second phase of its wider tax reform agenda by presenting to the Congress a bill proposing the modification of several key elements of the Brazilian income tax legislation (PL n. 2,337/20211 ). The inconsistent and shortsighted content of the proposal faced the immediate opposition of several prominent tax specialists, lawmakers and business leaders. Nonetheless, without a proper maturation and thorough discussions, PL n. 2,337/2021 was rashly approved by the House of Representatives, on 02 September 20212. The bill was then sent to the Senate and it is currently under its appreciation.  

The existing technical controversies and the political setting surrounding the income tax reform — particularly in these final months preceding an electoral year — intensify the debates involving PL n. 2,337/2021, which may lead to different (and still uncertain) outcomes — including full rejection or significant changes to several proposals3.

In any event, as it currently stands, the bill contains a number of provisions that can significantly impact multinational structures and reorganizations. Therefore, due consideration for their potential effects and careful planning are highly recommendable in view of the modifications to the income tax legislation should such provisions pass. In this article, we shall focus in two proposals that present direct impacts for foreign inbound investments in Brazil, notably: (i) the institution of a withholding income tax (WHT) on dividends; and (ii) the elimination of interest accrued on shareholders’ equity (i.e., the so-called “interest on net equity”).

The Income Tax Reform and the Proposed WHT on Dividends

Under the current legislation, profits realized by Brazilian resident companies are generally subject to a corporate worldwide income taxation at a 34% combined rate (CIT), which includes a corporate income tax flat rate of 15%, plus a 10% supplementary tax, and a 9% social contribution on net profits.On the other hand, dividend distributions are fully exempted from tax both at the level of the paying entity and at the level of the shareholder (cf. art. 10, of Law n. 9,249/1995).

The income tax reform plan proposes to progressively reduce the CIT rate, but also to introduce a withholding tax (WHT) on dividend distributions. The original draft bill determined that dividends paid or credited to individuals and legal entities, whether resident in the country or not, would be subject to a 20% WHT. Moreover, the original bill provided that the applicable WHT rate would be increased to 30% where the beneficiary of the dividends is resident or domiciled in either a favorable tax jurisdiction (blacklisted jurisdictions under the Brazilian regulations) or subject to a privileged tax regime (gray listed regimes under the Brazilian regulations). However, the original draft bill was amended during the House of Representatives’ legislative process and the approved version reduced the WHT rate to 15%. Finally, the after-tax profits of local branches of foreign companies would be deemed automatically distributed as of the end of each taxable period and subject to the referred WHT imposition (i.e., similar to a deemed branch remittance tax).

Dividends Taxation in Multinational Structures

Most double tax conventions (DTCs) signed by Brazil establish a general 15% limitation on the exercise of the source State’s jurisdiction to tax dividends distributed by local companies to residents of the other contracting State4.

Several DTCs provide for a reduced WHT rates where the beneficiary holds a substantial interest in the paying company (varying from 25% to 10%)5, while some of them also subject such lower rates to a specified minimum holding period (e.g., 365-days)6. Moreover, certain DTCs — such as those with France, Luxembourg, Japan, Italy, Austria, South Korea, Ecuador, the Philippines, Hungary and the Netherlands — contain tax sparing provisions, generally ranging from 20% to 25%.

As anticipated, since Law n. 9,249/1995 entered into force, Brazil does not impose any tax on dividend distributions by domestic entities. As a result, referred DTCs’ provisions that limit the taxation of the source State have been of lesser importance for inbound equity investments in the past twenty-five years. Considering, however, the proposal currently contained in PL n. 2,337/2021 of reinstituting the withholding tax on dividend payments to foreign beneficiaries, those DTC limitations may become of great relevance in the context of international tax planning.

As many Brazilian DTCs establish rates lower than the proposed statutory WHT rate of 15%, it is important to evaluate the existing structures to analyze whether the specific requirements can be met in order to benefit from the concessional rates provided for under the respective DTCs.

Although the most recent version of the bill did not repeat the aggravated WHT rate of 30%, as proposed by the original version in relation to black and gray listed jurisdictions, it is worth to point out some comments in this regard.

In principle, DTCs provisions prevail over general domestic rules. On that vein, dividends paid to non-residents should arguably be subject to the lower treaty rates instead of the general WHT rate that would be imposed should a provision, such as the one proposed under the original or new version of the bill, is passed. Nonetheless, one should not completely disregard the possibility that the Brazilian competent authorities take a contrary view with respect to beneficiaries that, despite being residents of a treaty partner and entitled to DTC benefits, are qualified as being subject to a gray-listed regimes under Brazilian domestic law (although there are opposing arguments that can be raised against that approach).

In that context it is interesting to mention that, although Brazil did not sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), it has been adopting minimum anti-abusive standards in its newly negotiated treaties, including, among others, provisions specifying that7:

   (i) DTCs do not prevent a contracting state from applying its domestic legislation aimed at countering tax evasion and avoidance;

   (ii) A benefit under the DTC shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the DTC (principal purpose test – PPT); and

   (iii) If the legislation of a contracting State contains provisions, or introduces such provisions after the signing of the DTC, in which income received from abroad/offshore by a company originating from some specific activities (e.g., (a) maritime transport; (b) banking, finance, insurance, investment or similar activities; or (c) be the head office, coordination center or similar entity that offers administrative services or other support for a group of companies that carry out their business activities mainly in third States) is not taxed in the contracting State or is taxed at a significantly lower rate (or less than 60%), than the rate applied to income of similar activities carried out in its own territory, Brazil shall not be obliged to apply any limitation imposed under the DTC on the tax upon dividend distributions or income.

Hence, the application of DTC provisions needs to be carefully examined on a case-by-case basis and it is important to follow up on how the matters discussed above will unfold, as one could expect a change in the black and gray lists or, at least, the issuance of further clarifications.

Dividends Taxation and International Tax Planning  

Analyzes on the application of lower treaty rates and a broader reevaluation of the ownership structures that currently hold the Brazilian equity investments will become crucial, as the new Brazilian WHT can represent a tax leakage (i.e., an additional burden) to multinational groups. This may be true not only from a cash-flow perspective, but also in relation to several situations where the Brazilian WHT cannot be effectively used as a foreign tax credit (FTC) in the country of residence of the recipient.

Although Brazilian DTCs generally grant an ordinary credit for the tax withheld at source, it is far from uncommon for residence states — e.g., by virtue of domestic participation exemption rules or international provisions8 — not to impose taxation on dividends, provided certain criteria are met (e.g., minimum participation threshold, holding period, etc.). In this scenario, the dividend-receiving entity would not be able to claim the applicable FTC relating to the WHT imposed in Brazil (or granted under the relevant treaty’s tax sparing provisions), translating, therefore, in a further cost to the structure.

Additionally, even in relation to structures where the beneficiary of the dividends may be subject to taxation in the residence State over such amounts, there may be cases where there is no effective cash disbursements in such jurisdiction — for instance, due to the use of other credits or loss positions. Also in this scenario, the imposition of the Brazilian WHT is likely to represent a new cost to the group.

The examples described above demonstrate the importance of prior planning in order to assure an efficient cross-border flow to multinational structures.

The Brazilian “Interest on New Equity”

The Brazilian interest on new equity (INE) was adopted as an alternative instrument to remunerate shareholders investing in domestic entities and was introduced by Law n. 9.249/1995 within the context of the end of the balance sheet monetary correction, taking into consideration the fact that such measure would have significant implications on the debt-financing bias. In sum, referred bias stems from the different tax treatment to which debt and equity remunerations are subject to — debt remuneration in the form of interest is deductible for CIT purposes, while equity remuneration in the form of dividends is not.

Hence, according to the Explanatory Memorandum of the Brazilian Minister of Finance (EM n. 325/MF) that supported the bill that was later converted into Law n. 9,249/95, the INE regime is intended to “equalize the tax treatment of different types of capital income” in order to “provoke an increase in productive applications in Brazilian companies, enabling them to increase the level of investment, without indebtedness, with advantages in terms of job creation and the sustained growth of the economy”9. In other words, such regime aimed at encouraging the capitalization of Brazilian entities by means of equity investments instead of debt.

In general terms, the INE regime consists in allowing companies that comply with certain requirements to elect paying a remuneration to their shareholders calculated by applying the daily pro rata variation of the government’s long-term interest rate (TJLP) on their adjusted net equity and treat such payments as deductible expenses for CIT purposes. In a cross-border structure, where a Brazilian entity pays INE to a foreign beneficiary, there is no specific restriction to the deductibility to apply, so that the Brazilian paying entity is be able to consider the INE in computing its tax basis. Additionally, in that context, INE payments are classified as interest payments and subject to definitive taxation at source, with the Brazilian paying entity responsible to withhold a 15% income tax (INE payments to black-listed jurisdictions are subject to an aggravated 25% WHT rate).

As INE payments are not derived from a debt claim, but rather from an equity interest in the Brazilian paying company, it is possible that certain countries, where the recipient is located, treat such payments as dividend distributions (instead of interest), triggering, therefore, a potential mismatch of the tax outcome in both jurisdictions10.

The Proposal to Eliminate the Brazilian INE

Discussions involving the elimination of the Brazilian INE are not new. More than seven years ago, for instance, the recommendations proposed by Action 2 of the BEPS initiative to tackle mismatches arising from hybrid financial instruments was brought up as an argument in the analysis that were being conducted by Brazilian competent authorities on the matter11. Under the current income tax reform proposal, the argument being raised to support the elimination of the INE deductibility is that, after analyzing Brazilian companies’ financial statements, the Administration understands that indebtedness continues to be the most attractive form of financing, contrary to the idea that INE would increase the appeal to equity investments instead of financial market investments12.

The Brazilian INE is a relevant tax policy instrument, but there are several aspects of the current regime that pose significant hurdles on the decision of a company (or group of companies) on whether or not to make use of such expedient — as it is limited to profitable entities, as it may not be efficient depending on how the corporate chain is organized within the group13, etc. These comments intend to highlight the fact that there is space to further enhance the INE mechanism in order to increase its abilities in mitigating the debt bias and incentivizing companies with different structures to make use of such instrument, instead of relying on higher indebtedness levels. We believe that discussions in that sense seem more productive and more sensitive than a proposal to completely eliminate any allowance-type mechanism — especially in the current scenario of uncertainty and economic crisis unleashed by the COVID-19 outbreak.

In this context, it is interesting to mention that the European Commission announced on 18 May 2021 an initiative to address such bias14 under the so-called “Debt-Equity Bias Reduction Allowance – DEBRA”15. Precisely as one of the effects stemming from the pandemic crisis, it was noticed that the current pro-debt bias of tax rules could lead to high waves of insolvency, with negative effects for Europe as a whole; thus, it is considered necessary to encourage equity investment for a fast and sound recovery. The policy options currently being discussed under DEBRA are: (i) disallowing the deductibility of interest payments, or (ii) creating an allowance for equity by enabling the tax deductibility of notional interest for equity. According to the Inception Impact Assessment released by the European Commission: “based on the impact assessment of a past proposal that shared the same objectives, the expected economic benefits of introducing an equity allowance are overall positive and should lead to moderate increases in investment, employment and growth. The findings further suggest that disallowing tax deduction of interest on debt is efficient in eliminating the debt bias but has negative effects on growth and employment due to depressed investment”16. Thus, it seems that an allowance for corporate equity would be preferable.

As can be noted, while the European Commission is discussing the adoption of a mechanism similar to the Brazilian INE, the income tax reform proposes the extinction of INE and the return to a more pro-debt system in Brazil.

In any event, if the proposed income tax reform is passed, deductibility of INE will no longer be available to Brazilian companies. As a consequence, the financing strategy of multinational groups and, more particularly, the funding of Brazilian investments must be duly reviewed. With proper consideration for the specificities of each structure, the capitalization/leverage ratios of each entity shall be reassessed in order to evaluate the allocation (or reallocation) of third-party financing within the group and the convenience of intercompany loans, taking into account expenses deductibility requirements, applicable WHT on interest payments, thin-capitalization rules and transfer pricing legislation.


Flávia Cavalcanti

Tax Partner at Tauil & Chequer in association with Mayer Brown. PhD in Tax Law from São Paulo University (USP) and LLM in International Tax Law from NYU. Director of the Brazilian Association of Financial Law (ABDF) and Co-Chair of the Brazilian section of the Women of IFA Network. Post-Graduate Professor at Fundação Getulio Vargas (FGV) and Mackenzie.

Karolina Rosen

Tax Associate at Ulhôa Canto, Rezende e Guerra Advogados (Brazil). Bachelor’s degree in Law at Rio de Janeiro State University (UERJ).


1Original draft bill. Available at:

2The approved version includes some modifications to the original executive proposal and is available at:

3As reported by some Brazilian specialized media channels, the rapporteur of PL n. 2,337/2021, Senator Angelo Coronel, announced that it is unlikely that the proposal will be voted by the Senate until the end of this year. Senator Angelo Coronel has criticized several provisions of the draft approved by the House of Representatives, including the ones referring to the taxation of dividends and elimination of the interest on net equity; he intends to listen to representatives of different business segments, and study the economic repercussions of the reform, before releasing his report and has anticipated that amendments will likely be made.

4There are exceptions. For instance, DTCs with Luxembourg, Sweden, Philippines and Denmark establish a general 25% WHT limitation, while the DTCs with Japan and Finland provides for only one all-encompassing lower limit of 12,5% and 10%, respectively.  

5  Here, there are also certain exceptions. DTCs with Sweden, Philippines, UAE and Switzerland, for example, establish lower rates not based on the level of interest held by the resident person in the paying company, but in the nature of such beneficiary (e.g., whether the recipient is a legal entity, or whether it is a pension fund, or whether is a government body).

6 See, for instance, DTCs with Argentina, Switzerland, Portugal and Singapore (pending promulgation by the Federal Government).

7 See, for example: (a) DTC with Switzerland (Article 27 and item 17 of the Protocol); (b) DTC with UAE (Article 29 and item 11 of the Protocol); (c) DTC with Argentina (Article 27); (d) DTC with Singapore (Article 28 and item 11 of the Protocol – pending promulgation by the Federal Government). Specifically in relation to item “iii”, similar provisions have already been included in treaties with Peru, Russia, Venezuela and South Africa.

8 For instance, the treaties with India and Spain prevent the residence State from imposing taxation where the dividends can be taxed by the source State under the DTC (the treaty with Switzerland provides for the possibility of a partial exemption of dividends from Brazilian subsidiaries). Treaties with Italy, Luxembourg, Ecuador, Austria and Canada exempt dividends from tax in the resident state, provided the beneficiary holds a substantial participation in the distributing entity (the treaties with France and Belgium provide for a partial exemption of 95%).

9 Explanatory Memorandum of the Ministry of Finance of Law n.  9, 249/1995. Available at

10 As an example, the qualification of the INE as dividends was adopted by Spain in decisions rendered by Audiencia Nacional in Recurso 232/2011, Recurso 463/2012, Recurso 282/2012.  Please note that DTCs signed by Brazil after 2000 tend to contain a specific provision (commonly in the attached Protocols) clarifying that the INE should be interpreted for treaty purposes as an item of income covered by the concept of interest. The wording of such specific provision varies from treaty to treaty, but it generally asserts that the INE shall be covered by Article 11 (Interest) of the treaty.

11 Please note, however, that it is our understanding that Brazilian INE should not be impacted by BEPS Action 2, due to several tax policy aspects that are outside the scope of this present article (on the matter, please see CAVALCANTI, Flavia; BRIGAGAO, Gustavo. Neutralizing Hybrid Financial Instruments – Selected Tax Policy Issues. Rio de Janeiro, 2017).  

12 Cf. Explanatory Memorandum of Ministry of Economy of PL 2,337/2021. Available at:  

13 E.g., due to the cumulative effects of social contributions imposed on such income and accumulation of tax losses by holding companies.

14 In a historical note, it is interesting to mention that the long-existing debt-equity conundrum has always generated significant debates on approaches to equalize the opportunity cost of debt and equity. For instance, the so-called comprehensive business tax system (CBIT), under which the preferential debt treatment would be abolished by eliminating interest deductibility, was discussed by the US Treasury Department at the beginning of the nineties (see US Department of the Treasury. Report on Integration of the Individual and Corporate Tax Systems – Taxing Business Income Once (1992). p. 39 et seq.). A diametrically opposite approach was advanced by the Institute for Fiscal Studies, also in the early nineties under the so-called allowance for corporate equity (ACE), which would result in a system of exclusive taxation of economic rent (see Equity for Companies: A Corporation Tax for the 1990s – Report of The IFS Capital Taxes Group Chaired by Malcolm Gammie. Institute for Fiscal Studies - IFS, 1991. p. 19 et seq.) — note that the theoretical foundations of such approach dates back to the previous decade, as per BOADWAY, Robin. BRUCE, Neil. A General Proposition on the Design of a Neutral Business Tax. In: Journal of Public Economics, Vol. 24, 1984. p. 231-239.

15 Cf. Communication from the Commission to the European Parliament and the Council: Business Taxation for the 21st Century. Brussels, 18.5.2021. Available at:

16 Inception impact assessment - Ares(2021)3879996. European Commission. Available at: