Brazil is preparing a major shift in how it taxes dividends distributed to non-residents. Under Bill No. 1,087/2025 (PL 1,087/2025) — approved by the Chamber of Deputies and currently under Senate review — dividends and profits sent abroad will be subject to a 10% withholding tax (IRRF) starting in 2026.

For decades, Brazil exempted foreign investors from paying taxes on dividends, making the country a competitive destination for capital inflows. The new law aims to align Brazil with global tax standards and close loopholes in cross-border profit distributions.

1. What the new law (PL 1,087/2025) establishes

If approved by the Senate and signed into law, PL 1,087/2025 will:

• Impose a 10% withholding tax (IRRF) on dividends and profits distributed to non-resident companies or individuals.
• Maintain a transitional exemption for profits generated until December 31, 2025, provided that distribution is approved within the same year.
• Introduce a maximum combined tax burden (Corporate Income Tax + Social Contribution + Withholding):
  • 34% for general companies
  • 40% for insurers and financial institutions
  • 45% for banks
• Exempt distributions to foreign governments, sovereign wealth funds, and international pension entities.
• Respect existing Double Taxation Treaties (DTTs) — which typically limit withholding rates to between 10% and 15%, depending on the country.

In short: Brazil’s dividend exemption is ending, and a 10% dividend withholding tax will become the new normal for cross-border profit remittances.

2. Why this matters to foreign companies

For multinational groups and investors, the new rules change the way cash flows from Brazil are managed.

A. Lower net returns on cross-border dividends

A subsidiary in Brazil distributing USD 1 million in profits will now face a 10% tax at source — meaning the foreign parent company receives USD 900 k (before any local tax credits).

B. Importance of Double Taxation Treaties (DTTs)

DTTs with countries like Japan, France, Portugal, Sweden, and the U.K. may reduce the effective rate to 10–15%.
However, to apply treaty benefits, the recipient must prove beneficial ownership and economic substance (not a shell or pass-through entity).

C. Holding companies under scrutiny

Intermediate holdings in jurisdictions such as Luxembourg, Ireland, or the Cayman Islands will face closer review. The Brazilian Tax Authority is likely to challenge entities without employees, physical presence, or operational activities.

D. The 2025 “cut-off window”

Profits earned until 2025 and distributed before December 31, 2025 remain tax-free. Multinationals should plan distributions early to secure this exemption before 2026.

E. Global competitiveness

Even with a 10% withholding rate, Brazil remains moderate compared to other markets:

• U.S.: up to 30% (withholding on dividends)
• Germany: 26.375%
• Canada: 25% (before treaties)
  Yet, the change is significant for foreign investors used to full exemption.

3. Common questions from foreign investors

4. Practical example

Let’s consider a U.S. parent company (USCo) owning a Brazilian subsidiary (BRCo).

In the U.S., USCo may claim a foreign tax credit for the 66,000 BRL paid in Brazil, subject to IRS rules and limitations.

5. Key steps for foreign companies right now

1. Map out all Brazilian subsidiaries or investments generating dividends or profits.
2. Run simulations comparing pre- and post-PL 1,087/2025 net returns.
3. Review applicable DTTs to confirm treaty eligibility and beneficial ownership documentation.
4. Approve 2025 profit distributions early (before December 31, 2025) to benefit from the temporary exemption.
5. Reassess shareholder agreements and dividend policies — include gross-up clauses if needed.
6. Check substance compliance for any offshore entities (employees, office, management).
7. Monitor Senate proceedings and future regulations from the Brazilian Revenue Service (RFB).
8. Compare Brazil’s total effective tax burden with other markets to adjust investment strategies accordingly.

6. Why this matters for global tax planning

The Brazil Dividend Tax Reform 2025 marks a major alignment with OECD standards and global transparency initiatives.
Foreign companies should not see it as a barrier but as a signal of maturity and predictability in Brazil’s fiscal policy.

Still, failing to adapt early may increase effective tax burden and delay repatriation of profits. Proactive planning — including treaty analysis, credit optimization, and timing of dividend payments — is now essential for any company with Brazilian operations.

7. Final thoughts

The introduction of a 10% withholding tax on dividends sent abroad reshapes the landscape for foreign investors in Brazil.
What was once a zero-tax environment for cross-border dividends now requires careful analysis of tax treaties, entity substance, and timing.

Multinationals that act before 2026 — distributing profits within the grace period and updating their corporate structures — will minimize risk and protect returns.

In the new era of Brazilian dividend taxation, information and preparation are the real competitive advantages.

About CLM Controller

CLM Controller Accounting and Consulting is a Brazil-based firm with over 40 years of expertise in accounting outsourcing, tax consulting, and international advisory for foreign companies in Brazil.

Our team helps multinationals structure local operations, optimize tax efficiency, and stay compliant with Brazil’s rapidly evolving regulatory environment.