Income Taxation in Brazil

The Brazilian taxation system is notoriously complex, comprising federal, state and municipal taxes. The number of taxes and governmental levies is extensive – there are actually over 80 different tax types. In this article, we will cover the main aspects of corporate profit taxation. We do not intend to exhaust the subject here, but rather to provide an overview, which should be deepened from a specific case study.

To learn more about the subject, keep reading.

Regulatory complexity

The corporate income tax rate for Brazilian legal entities is 15%, with a surcharge of 10% being applicable for taxable income exceeding R$240,000 per year. The so-called IRPJ (acronym for Corporate Income Tax in Portuguese) is also accompanied by the Social Contribution on Net Income, or CSLL, which is generally due at a rate of 9%.

IRPJ and CSLL are levied on corporate income and may be calculated under two main systems. The first is the real profits system, in which IRPJ and CSLL are computed on adjusted net income. The second is the deemed profit system, whereby IRPJ and CSLL are levied on a percentage of gross revenues that varies in accordance with the activities carried out by the legal entity.

Tax losses can be carried forward indefinitely, as long as the offset does not exceed 30% of taxable income in any period – and also as long as the company has a business plan that indicates the expectation of future profits from its operations. If not, the balance must be reversed.

It is also important to note that the taxation of income can be calculated based on the result of the 12-month fiscal year, and also on the quarterly result. This option is usually advantageous only in very specific situations, usually related to tax loss offsetting.

Tax reforms

Although the government and the Congress are currently attempting to simplify and streamline taxation in Brazil, an extensive body of tax regulations remains in force.

On June 25 2021, the Brazilian federal government sent to congress a new tax reform proposal focusing on income tax. The proposed bill brings important changes related to corporate income tax. Among those, IRPJ rates are likely to be gradually reduced, from 15% to 5% in 2022 and to 2.5% in 2023. According to the proposal, the 10% surcharge will be kept as it is today.

Initially, corporate dividends would be subject to withholding tax at a flat 20% rate. More recently, congressmen have pointed out that this specific point is no longer being considered, after some considerable backlash from public opinion. It remains to be seen what other changes will be proposed to offset the projected loss of revenue.

Since income taxation is a private attribution to the federal sphere, as provided for in the Brazilian Federal Constitution of 1988, there is no state taxation of income. State taxation is restricted to added value, in the form of ICMS – an acronym for Tax on Circulation of Goods and Services, a type of tax which we will talk about in the future here on the blog.

Finally, in the case of companies that fail to keep proper accounting records, there is the possibility of profit arbitration. The Arbitrated Profit corresponds to an income tax calculation used by the tax authority or by the taxpayer. This happens when the legal entity fails to comply with ancillary obligations determined by the Presumed Profit or Actual, such as the non-presentation of documents or, even, due to tax fraud.

A Gescon

To stay informed about the Brazilian tax system, keep following Gescon. We have the knowledge and vast experience in doing business in Brazil, and we can support you in every step of this process.

Therefore, when choosing your BPO in Brazil, choose to rely on the expertise of the Gescon team of specialists.