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The bill would reduce the corporate income tax rate, establish a withholding tax on dividends and strengthen the rules on the disguised distribution of profits. Taxpayers should continue to monitor the bill's progress as it moves through the Senate and determine its possible impact on their operations.

On September 1, 2021, Brazil's House of Deputies approved (398 - 77 votes) Bill 2,337, which would reduce the corporate income tax rate and establish a 15% withholding tax on dividends as part of a comprehensive reform to the Brazilian tax system. The approved version includes changes proposed by taxpayers and members of Congress to the original draft presented in June. For more information on the original draft, see Tax Alert 2021-1270.

Next, the bill will be sent to the Senate. If approved by the Senate, it goes to the President, who can then sanction or veto it, in total or partially.

If enacted, the bill would:

• Reduce the corporate income tax rate, from a combined 34% to 27% (may be reduced further to 26%, subject to certain budgetary targets being met)
• Require corporate income taxes to be calculated and paid on a quarterly basis, rather than an annual basis
• Establish a 15% withholding tax rate on dividends (currently, zero)
• Eliminate the interest on net equity (i.e., similar to a dividend payment that is deductible in Brazil)
• Require taxpayers to carry out capital reductions at fair market value (currently allowed at book value)
• Strengthen the rules on disguised distributions of profits, which would require domestic transactions between related parties to be at arm's length (additional compliance requirements)

The bill also includes provisions on indirect tax incentives, the taxation of individuals, and the treatment of investment funds.

The legislative process usually takes time in Brazil, and the current wording of the bill may still be amended in the next steps of this process. If the bill is approved before the end of October 2021, it would be effective January 1, 2022. That being the case, taxpayers should evaluate whether they need to act before year end in light of these expected changes. As part of their evaluation, they should consider waiting periods and other aspects that could prevent a smooth implementation of changes in structure/activities.

This bill is the second phase of Brazil's comprehensive tax reform. For information on the first phase, see Tax Alerts 2019-2128 and 2020-1860.

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