Brazilian Government proposes to increase combined CIT rate, and withholding tax on INE payments

• If enacted, the bill would increase the withholding tax rate on interest on net equity (INE) payments.

• It would also increase the social contribution on net profits (CSLL) rate; the CSLL is one of the taxes that is considered part of the combined corporate income tax (CIT) in Brazil.

• Taxpayers should monitor the progress of the bill through Congress and evaluate the impact the bill's provisions could have on their operations.

On 30 August 2024, the Brazilian Government submitted to the Congress a bill (Bill No. 3,394 of 2024 (PL 3,394)) that would increase certain income taxes as part of its efforts to avoid increasing the budgetary deficit. The bill would modify the CSLL and INE rules, which would be applicable as of 1 January 2025, if approved.

CSLL

The bill would increase the current CSLL rate for banks, insurance companies, other financial institutions and other legal entities, from 1 January 2025 to 31 December 2025. The CSLL is considered one component of the Brazilian CIT. The CSLL would increase as follows:

• From 15% to 16% (a combined CIT rate of 41%) for insurance companies, securities distributors, exchange and securities brokerage firms, credit, financing and investment companies, real estate credit companies, credit card administrators, leasing companies, credit unions and saving and loan associations

• From 20% to 22% (a combined CIT rate of 47%) for banks of any kind

• From 9% to 10% for other legal entities (a combined CIT rate of 35%)

The increase in the CSLL rate would apply only to calendar year 2025, so that the current applicable rates would apply again beginning 1 January 2026.

INE

INE is a deductible mechanism to remunerate shareholders and compensate loss of value of investments due to local inflation. INE amounts credited or paid to shareholders are currently subject to 15% withholding tax (WHT) when paid or accrued. INE, however, is deductible at the combined rate for CIT purposes.

According to the proposal, the WHT rate on INE payments would increase from 15% to 20%.

INE has been the subject of numerous discussions in recent years. This new bill shows that INE remains a hot topic for the Brazilian Government. Notably, the INE calculation rules were revised in 2023 to narrow the INE base. This was achieved by excluding specific accounts from the base values used for computation, as detailed in Provisional Measure No 1,185, which was converted into Law No. 14,789 (For background, see EY Global Tax Alert, Brazilian Government changes rules related to incentives treatment, interest on net equity, and other provisions for 2024, dated 9 January 2024.)

Effective date

If enacted this year, the new rule would be effective 1 January 2025. Both chambers of the National Congress (i.e., Chamber of Deputies and Senate) still need to discuss and approve the bill in different voting rounds.

The legislative process usually takes time in Brazil, and the current wording of the bill may still be amended during the next steps of this process.

Implications

Taxpayers in Brazil should consider reviewing their operations to determine whether they need to act before year-end in light of the expected changes to Brazilian income tax legislation.

Some relevant aspects to be considered include (but are not limited to):

• Analyzing possible corporate restructurings under the current income tax regime

• Revisiting investment funds strategies and implications to future investments/divestments

• Evaluating the double tax treaty network, as well as the impact on the present and future withholding taxes on INE

• Making their payments within their current INE capacity

• Reassessing repatriation alternatives

• Analyzing other aspects that could prevent smooth implementation of the changes in a taxpayer's structure/activities