There are unanswered questions as to how foreign investors could reclaim money via tax credits, advisers suggested

Fonte: ITR

A 10% withholding tax on profits and dividends sent overseas proposed by Brazil’s government has sparked concern among local experts, with one suggesting that the

constitutionality of the measure is questionable.

There are also unanswered questions as to how foreign investors could reclaim money via tax credits, advisers warned.

Earlier in March, Brazil’s federal government introduced Bill No. 1087/2025.

Among the changes proposed by the bill is the introduction of a 10% withholding tax on profits or dividends paid, credited, delivered, employed, or remitted abroad.

The tax would apply whether the profits are sent to individuals or to legal entities.

According to a presentation released by the Brazilian government, the measure would increase revenues by BRL 8.9 billion ($1.57 billion) a year.

Dividend remittances are at present exempt from income tax in Brazil.

The new rule would apply the 10% tax irrespective of the investor's residence or any applicable tax treaty.

Credit conundrum

To mitigate the impact of the new measure, the bill introduces a credit mechanism, says Ana Carpinetti, a tax partner at law firm Pinheiro Neto Advogados in São Paulo.

The federal government may grant a credit to the non-resident shareholder, calculated on the amount of dividends remitted.

But for this to happen, the combined corporate income tax and social contribution on net profits and the new 10% withholding tax must exceed standard corporate tax rates.

These are 34% for most companies, 40% for regulated financial institutions, and 45% for banks.

However, Carpinetti also tells ITR the proposal lacks critical detail.

“It does not explain how the credit would be recovered, whether through a cash refund or as a credit against future withholding.

“It also does not clarify which authority would manage the process, or even whether the recovery would occur in Brazil or in the investor’s jurisdiction.

“Although the bill allows a 360-day window after the close of the fiscal year for claiming the credit, the absence of procedures or definitions renders this deadline largely impractical,” she says.

This legal and procedural ambiguity creates substantial uncertainty for foreign investors, according to Carpinetti.

While the tax is collected at source in a straightforward manner, the credit mechanism remains speculative, dependent on a series of opaque calculations and disclosures, she argues.

“In practice, the tax functions as a quasi-compulsory loan from the investor to the Brazilian government, one that may or may not be repaid.

“Structurally, this raises concerns about the constitutionality of the measure.

“Under Brazilian law, a compulsory loan must be established through a complementary law, not an ordinary one, as is the case here.”

In addition, Carpinetti claims the measure could harm Brazil’s investment climate.

The complexity and potential for double taxation may deter foreign capital and reduce the value of publicly traded Brazilian companies, she says.

“Investors, particularly institutional ones, require legal certainty and predictable returns – both of which are undermined by the current proposal,” Carpinetti adds.

Ultimately, a withholding tax on outbound dividends may be justifiable as part of a coherent and comprehensive income tax reform, she reflects.

“But in isolation, and without clear operational rules, it risks adding further distortion and legal risk to an already complex system.

“A more effective approach would prioritise transparency, simplicity, and legal stability, rather than fragmenting the tax regime for short-term policy goals.”

Treaty shopping

Stephanie Makin, an international taxation partner at Machado Associados in São Paulo, says it’s likely to be challenging for foreign shareholders to obtain or use a tax credit in Brazil.

A possibly better alternative would be to transfer the burden of withholding the tax on the dividends distributed to foreign shareholders to the Brazilian legal entity at compatible rates, according to Makin.

This would be done so as not exceed the combined effective corporate income tax and social contribution on net profits rates of 34% which applies to legal entities, she argues.

The new withholding tax rate may also impact Brazil’s competitiveness, Makin tells ITR.

She also claims it’s “very rare” for double tax treaties signed by Brazil to establish a withholding tax rate lower than 10% on dividends.

“As a practical result, we do not foresee an increase in treaty shopping efforts in terms of investing in Brazil,” she says.

Allan Fallet, a tax partner at Duarte Garcia, Serra Netto e Terra in São Paulo, tells ITR that a “critical concern” arises when it comes to the recovery of the withholding tax levied on profits and dividends paid to non-residents.

With this new framework and the creation of an extremely complex mechanism for tax credit recovery, foreign capital inflows into Brazil are discouraged, he argues.

This leads to a decrease in the valuation of Brazilian companies, especially publicly traded companies, thereby further reducing Brazil’s international competitiveness, according to Fallet.

Ana Claudia Akie Utumi, founding partner of Utumi Advogados, agrees there’s no clarity on how foreign shareholders will receive the tax refund.

She adds that it’s unlikely that a company will have, based on its accounting profits, a tax burden equivalent to the nominal rate.

This, according to Utumi, is because the corporate income taxes are calculated on accounting profits, adjusted by additions and exclusions determined by law.

“So, any reduction of the actual tax burden when calculating such burden on accounting profits...will be borne by individual and foreign shareholders, upon the levy of the 10% withholding tax,” she says.

The bill’s compensatory mechanism has raised questions and criticism, agree Matheus Cunha and Thais Shingai of Mannrich e Vasconcelos Advogados in São Paulo.

They add: “Initially, it was expected that the taxation of profits and dividends would be accompanied by a reduction in corporate income tax, thereby creating a cohesive model of taxation between investor and company to avoid double taxation of the same income.

“However, [the withholding tax proposal] may reduce the attractiveness of foreign investment in Brazil, particularly given the limited number of tax treaties Brazil has to avoid double taxation of income.”

Also, the measure could affect not only investors but large corporations that rely on foreign capital to expand their operations and create jobs in the country, or corporations that send profits to their foreign-based companies, according to Cunha and Shingai.

While Brazil’s efforts to raise tax revenues are understandable, it’s clear that this latest measure requires much refinement before it can be impactful.

It is also imperative for Brazil that foreign investors are not put off by what local advisers identify as an opaque tax credit mechanism.