Executive summary

Complementary Law No. 214/2025, sanctioned by President Luis Inácio Lula da Silva on 16 January 2025, establishes and regulates new consumption taxes in Brazil (Tax on Goods and Services — IBS; Contribution on Goods and Services — CBS; and Selective Tax — IS).

The new law marks a significant step toward the implementation of tax reform in the country, with the transition starting on 1 January 2026. The final text of the law was not greatly changed from the text of underlying Bill No. 68/24 (PLP), although some provisions were vetoed. (For background, see EY Global Tax Alert, Brazil approves supplementary law, taking a big step toward Brazilian tax reform, dated 30 December 2024.)

Details

The main points of the new system and the vetoes are highlighted below.

The main characteristics of the new tax model include:

• Credits conditioned on the payment of the new taxes (IBS and CBS)
• Adoption of Split Payment as a mechanism to reduce fraud and tax delinquency
• Maintenance of specific tax regimes for sectors with particular fiscal characteristics
• Differentiated regimes with reduced rates for essential goods and services
• Maintenance of the Manaus Free Trade Zone, Free Trade Areas, and Simples Nacional (i.e., tax regime for micro and small entities), as well as special customs regimes and for capital goods

Brazil's President vetoed certain sections of the bill. The main presidential vetoes address:

• Definition of nontaxpayers: Vetoed provisions excluded the incidence of IBS and CBS on investment and equity funds.
• Tax collection by the purchaser: Vetoed provision addressed the solidarity between purchaser and supplier.
• Agricultural and aquaculture inputs: Vetoed paragraphs related to the deferral of IBS and CBS on sales to purchasers without credit rights.
• Tax notifications: Vetoed the possibility of alternative notification methods in the absence of the Electronic Tax Domicile (DTE).
• Selective tax: Removed the non-incidence hypothesis on exports of goods and services.
• Manaus Free Trade Zone (ZFM): Vetoed a provision on maintaining credits in subsequent operations for imports for resale that do not meet the presumed IBS credit rules and the limiting rule of the presumed CBS credit related to the tax on industrialized products (IPI) reduction.

The next steps toward the implementation of the indirect tax reform will involve Congress's (1) considering the vetoes, which can be upheld or overturned, and (2) resuming analysis of Bill 108/24 (PLP108/24), which creates and regulates the IBS Management Committee. This committee is essential to the functioning of the new tax model and provides rules for inspection procedures, qualification and use of the ICMS Financial Benefits Compensation Fund, as well as compensation, transfer or refund of accumulated credit balances.

Additionally, the Government will need to work on the bill that will define the rates of the Selective Tax. Another relevant topic for 2025 will be income tax reform, provided for in Constitutional Amendment 132, which was approved in 2023. The Federal Executive chose not to submit the income taxation bill in 2024, choosing to focus instead on consumption tax reform, but now the discussion should be resumed.

Implications

These changes represent a substantial advance in the pursuit of a more efficient and fairer tax system in Brazil and are expected to significantly impact how companies conduct their business, making it essential to understand and correctly measure their impact.