Brazil to tax overseas profits, high incomes to offset bigger tax exemption

According to central bank data, in 2024, total profits and dividends sent abroad from Brazil amounted to $69.7 billion, compared to inflows in the same category of $24.1 billion.

Brasilia: Brazil's government will propose a 10 per cent tax on corporate profits and dividends sent abroad to help offset revenue lost from an expanded tax exemption for individuals with lower incomes, two sources with knowledge of the matter said on Monday.

The measure would deal a blow to multinationals with subsidiaries in Brazil, which now benefit from exemptions on remittances under a 1995 corporate income tax law that the government is looking to amend.

The Finance Ministry did not immediately respond to requests for comment.

The presidential palace said it has scheduled a presentation of the tax reform proposal for Tuesday at 11:30 a.m. in Brasilia (1430 GMT).

In 2024, total profits and dividends sent abroad from Brazil amounted to $69.7 billion, compared to inflows in the same category of $24.1 billion, according to central bank data.

President Luiz Inacio da Silva's government has insisted that its commitment to expand the income tax exemption for individuals - one of the leftist leader's key moves to halt his sliding popularity - would be offset fiscally.

However, the details of the exemption and the offset remained unclear, fueling investor concerns about its impact on public finances in a country grappling with rising debt and mandatory expenditures.

The government estimates that its proposal to expand an income tax exemption to benefit individuals earning up to 5,000 reais monthly will have a fiscal impact of 25.84 billion reais ($4.54 billion) in 2026, 27.72 billion reais in 2027, and 29.68 billion reais in 2028, added the sources.

Currently, individuals earning up to 2,824 reais per month are exempt from income tax.

Taxing the wealthy

The sources told Reuters the taxation on corporate profits and dividends sent abroad will complement a previously announced minimum effective tax rate on individuals earning more than 600,000 reais per year. Those rates would gradually increase to 10% for those making over 1.2 million reais annually, said the sources.

In November, the government had proposed a sliding rate topping out at income of 1 million reais.

According to one of the sources, the proposal includes a 10 per cent withholding tax on the total amount of profits and dividends distributed above 50,000 reais per month from a legal entity to a single individual beginning in January 2026.

This monthly tax will act as an advance, with taxpayers able to seek refunds for any excess payments when they calculate their annual tax liability under the new minimum tax system for the wealthy.

Starting in 2027, based on earnings from 2026, taxpayers will pay this minimum tax on total annual income exceeding 600,000 reais. This amount will encompass all income, including those subjects to exclusive or final taxation, as well as exempt income.

Capital gains from transactions on the stock exchange or in over-the-counter markets must be included. Exceptions apply to other types of capital gains, as well as amounts received as inheritance or gifts in advance for heirs.

($1 = 5.6870 reais)