Income tax reform proposals sent by the Brazilian Government to the House of Representatives.

The Brazilian Federal Revenue Service held a press conference this morning about the second phase of the tax reform, dealing with Income Tax, which was delivered this Friday (25/6) by the Minister of Economy, Paulo Guedes, and the Special Secretary of the Federal Revenue Service, José Tostes Neto, to the President of the House of Representatives, Congressman Arthur Lira (PP/AL).

As announced by the Government, its proposal is that the reform be implemented in four phases. The first part of the Tax Reform was presented to Congress on July 22, 2020, through Bill # 3,887/2020, which provides for the creation of the Social Contribution on Transactions with Goods and Services (CBS) to replace the current collection of PIS/Pasep and Cofins rates.

The second phase, delivered today to the President of the House of Representatives, contains the following main changes to the Income Tax for Individuals and Legal Entities:

1. REFORM OF THE INCOME TAX FOR INDIVIDUALS

1.1 Updating of the Individual Income Tax table, as of 2022, as follows:

Current

Ranges Rates

Up to R$ 1.903,98 0%

R$ 1.903,99 - R$ 2.826,65 7,5%

R$ 2.826,66 - R$ 3.751,05 15,0%

R$ 3.751,06 - R$ 4.664,68 22,5%

Over R$ 4.664,68 27,5%

New

Ranges Rates

Up to R$ 2.500 0%

R$ 2.500,01 - R$ 3.200 7,5%

R$ 3.200,01 - R$ 4.250 15,0%

R$ 4.250,01 - R$ 5.300 22,5%

Over R$ 5.300,01 27,5%

The increase is 31% in the exemption range.

1.2 Simplified Discount

The simplified discount was created to make it easier to fill out the income tax return at a time when it was only done on paper. It maintains the simplification for people with lower income. The measure will encourage the taxpayer to ask for a tax invoice. This is important for the country.

Today, with technological advances, it is possible to calculate the exact amount the citizen has to pay. With this, the simplified discount of 20% is restricted to those who receive up to R$ 40 thousand per year.

1.3 Updating the value of real estate

Today, in the tax return, real estate is kept at its historical value. When selling the property, the citizen needs to pay between 15% and 22.5% tax on the capital gain. It will be allowed to update the property values, with a tax of only 5% on the difference.

This will be a benefit for citizens who want to update the value of their properties, paying much less tax when selling. Deadline for adhesion and payment of the tax from January to April 2022.

1.4 Distributed Profits and Dividends

Today, they are exempt. They will be taxed at 20% as income wihholding tax. There will be an exemption for up to R$ 20 thousand per month for micro and small companies. Improvement of the rules to combat the disguised distribution of profits. The non-taxation of profits and dividends creates a distortion in the economy because it encourages transformation of employees into legal entities.

2. INCOME TAX REFORM FOR COMPANIES

2.1. reduction of the Income Tax

The general tax rate will fall in two stages: from the current 15% to:

- 12.5% in 2022; and

- 10% starting in 2023.

The additional 10% for profits above R$20 thousand per month remains. There is no mention of reducing the Social Contribution on Profits (CSLL). The total taxation of corporate profits would therefore be 29%, as opposed to the current 34% (5% reduction). Not much, if we consider that there will be taxation on the remittance of dividends at 20% at source, i.e. in 2022 the nominal taxation on profits for legal entities in Brazil would be 51.5%. In 2023 it would fall to 49%, against the current 34%.

2.2 Share-based Payments

Payments of bonuses and profit sharing to partners and officers made with company stock may not be deducted as operating expenses. Payments to employees are still deductible.

2.3 Interest on Equity

Prohibition of the possibility of deducting interest on equity capital. According to the Government, the possibility was created when it was difficult to have access to credit and companies needed to finance themselves with partners' resources.

With a much more evolved credit market and lower interest rates, it is no longer necessary to provide benefits for the entrepreneur to invest his money in his own company. The mechanism has proved ineffective in capitalizing companies and promoting investment.

2.4 Corporate Reorganizations (M&A)

New rules for the reorganization of companies and taxation of capital gains on the sale of equity holdings. It prevents the undue use of deductions on the sale of equity interests.

2.5 Indirect Capital Gain

Today, there may be an intermediary company in the sale of assets to pay less tax. Clear rules are created for determining the capital gain on indirect sales of assets in Brazil by companies abroad.

2.6 Quarterly calculation of the Corporate Income Tax.

All companies must calculate the Corporate Income Tax and Social Contribution on Net Profit on a quarterly basis. Currente, companies with annual taxation basis need to calculate and pay estimates monthly. With the new procedure, it will be allowed to offset 100% of a quarter's loss in the following three quarters. The Presumptive Profit Regime will be maintained.

2.7 Simplification

Approximation of the Corporate Income tax and Social Contribuition on Net Profits calculation bases. Today, a company needs to have two very different registers to calculate similar taxes. This is a cost for companies.

3. REFORM FOR FINANCIAL INVESTMENTS

3.1 Simplification

a) Stock Exchange Transactions

As is: Monthly calculation / Rates: 15% in spot, forward, options and futures markets; 20% Day Trade and FII shares / Offsetting of negative results: Limited between operations of the same rate.

To be: Quarterly calculation / Rates: 15% for all markets / Compensation of negative results: May occur between all operations, including day-trade and shares of funds traded on the stock exchange.

b) Fixed Income Assets (Treasury Direct, CDB, etc)

Single tax rate of 15%. Ends the current staggering according to the duration of the investment, which is currently 22.5% up to 180 days; 20% from 181 to 360 days; 17.5% from 360 to 720 days; 15% above 720 days.

According to the government, wealthier people, who can leave their money idle for a long time, cannot have more benefits because of this.

c) Open Funds

Single tax rate of 15%. Ends the staggering of 22.5% to 15% depending on the duration of the investment. End of the "come-quotas" in May, remaining the November one. Income produced until December 31, 2021 will be taxed at the rate in effect on that date.

d) Closed-end (Multimarket) Funds

Today, 22.5% to 15% on income distribution, sale, amortization or redemption of quotas. It will be a single rate of 15% and the same treatment as open funds for "comecotas". Exclusive funds (used by people with more resources) will pay the same as the others.

e) Real Estate Investment Fund (FII)

End of the exemption on income distributed to individuals in the case of FII with shares traded on the stock exchange as of 2022. Taxation of other shareholders drops from 20% to 15% on income distribution, amortization and sale of shares.

It is important to point out that the changes listed above are still in the form of a bill, which will have to be debated and approved in the two legislative houses, House of Representatives and Senate, which may alter it and propose amendments.

Source: Brazilian Federal Revenue Service

Note: This article is informative and general in nature, and does not constitute legal advice for any specific operation or business. For any additional information, please contact us through the e-mail reginaldo@rastaxlaw.adv.br.

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