Source: International Tax Review

The enacted legislation, which introduces a suite of new indirect taxes, was "highly awaited" but presents major concerns, advisers tell ITR.

The new Brazilian indirect tax legislation, signed by President Luiz Inácio Lula da Silva, represents the largest change to Brazil’s tax system since 1965, but it has raised concerns among local experts.

Complementary Law No. 214/2025 was sanctioned by Brazil’s President on January 16. It both establishes and regulates new consumption taxes in Brazil.

These taxes include the Tax on Goods and Services (IBS), the Contribution on Goods and Services (CBS), and the Selective Tax (IS).

The transition to the new system will begin on January 1, 2026.

Regulation, regulation, regulation

Allan Fallet, a tax partner at Duarte Garcia, Serra Netto e Terra in São Paulo, points out that the law was sanctioned with 17 vetoes from Brazil’s president.

The law’s original text provided that investment funds and equity funds would not be contributors to IBS and CBS, says Fallet.

However, he adds that, due to the President’s vetoes, these funds will now be subject to these taxes.

“The justification for carrying out the vetoes consisted of the supposed unconstitutionality of the vetoed legal provisions,” he says.

Fallet also highlights that, for real estate investment funds, rental income is now taxed. These funds raise money for the purchase and subsequent renting of properties.

Gabriel Caldiron Rezende, a partner in the indirect tax team at law firm Machado Associados in São Paulo, tells ITR the law’s enactment was “highly awaited”.

“[For] decades, the current ‘VATs’ in Brazil have proven themselves to be irrational, overly complicated, and litigious, thus making it burdensome to do business in Brazil,” he says.

Rezende suggests that while the law’s enactment has provided clarity for taxpayers, it has left them little time to adjust.

“Although this regulation is welcomed, the timing concerns most companies.”
“As of 2026, the IBS and CBS test rate and ancillary tax obligations will be in force, thus leaving too little time for adaptations,” he says.

Another major concern is additional “regulation”, which is mentioned more than 100 times in Complementary Law 214/2025, according to Rezende.

“It’s expected that further rules will be enacted, although it is not clear when and what exactly their content will be,” he says.

Quelling controversy

Ana Carolina Fernandes Carpinetti, a partner at law firm Pinheiro Neto Advogados in São Paulo, tells ITR the approval of Complementary Law No. 214/25 represents a major shift in Brazil’s tax system.

She notes that it has significant implications for businesses, particularly in transaction structuring and financial planning.

However, the potential for widespread legal disputes remains low, despite concerns from certain industries.

“Had the reform been enacted solely through ordinary legislation rather than a constitutional amendment, challenges in court would have been more likely.”
“However, its constitutional foundation provides greater legal certainty.”
“While some specific provisions could still face scrutiny, the reform, overall, establishes a broader and more equitable tax structure, reducing the likelihood of future litigation,” she says.

Technology will play a vital role in implementing the new tax system, Carpinetti adds. She highlights the split payment tax collection system in this regard.

The system divides payments of a commercial transaction into two parts – the amount for the seller and the corresponding tax amount automatically transferred to the government.

“This innovation aims to streamline tax collection and compliance by ensuring that tax amounts are automatically separated at the time of transaction settlement.”
“However, it also introduces new complexities for businesses, requiring them to adapt to a more automated and integrated tax compliance process,” says Carpinetti.

The creation of a wide split payment that the financial intermediary will have to apply to all electronic transfers of funds will potentially impact companies’ cash flows, says Ana Claudia Akie Utumi, founding partner of Utumi Advogados in São Paulo.

Ana Paula M Costa Baruel, a partner at Baruel Barreto Advogados in Brazil, tells ITR the signing of Complementary Law No. 214/2025 contributed towards a much-needed simplification of Brazil’s tax system.

The transition phase beginning in 2026 will be an important period for the maturation of new rules, allowing the market and companies to adapt accordingly, she also claims.

“Taxation at the destination minimizes tax wars and provides freedom to business structuring in Brazil, as companies will be able to focus more on logistical and economic aspects, with less interference from the tax aspect,” she adds.

Baruel also agrees with Carpinetti’s point about reducing controversy, asserting that the reform has the potential to reduce current litigation over the concept of inputs and credit rights.

Teething issues

Utumi tells ITR the law represents the largest change that Brazil has had in its tax system since the creation of its first tax on consumption in 1965.

While the reform may bring benefits in the long term, it will bring more work and hurdles for Brazilian companies in the short to medium term, she says.

This, she argues, is because the transition period finishes in 2032, meaning companies will have to handle both old and new systems until then.

Further, Utumi points out that the new IBS and CBS taxes are not value-added but rather non-cumulative.

In this non-cumulative system, companies will not accrue the credits immediately, but only when the supplier collects the taxes or when the buyer or the financial intermediary withholds and collects the taxes, she tells ITR.

“So, there may be a mismatch between the purchases of goods, services, and rights subject to IBS/CBS and the entitlement to register and use tax credits.”
“This mismatch may impact the cash flows of the companies,” Utumi says.

Complementary Law No. 214/2025 is undoubtedly a necessary and important development in Brazil’s tax landscape, but taxpayers must be braced for a challenging transition period.