Taxation of High Incomes – Impacts on Foreign Capital – Draft Law No. 1087/25.
By Edmo Colnaghi Neves, Ph.D.
Draft Law No. 1087/25, already approved by the Chamber of Deputies and currently under consideration in the Federal Senate, if likewise approved by the latter, will substantially alter the taxation of both high- and low-income brackets in Brazil.
Draft Law has three main objectives:
- To establish an income tax exemption for individuals earning up to BRL 5,000.00 per month and to reduce the personal income tax rate (IRPF) for those earning between BRL 5,000.00 and BRL 7,000.00 per month;
- To impose a 10% tax rate on individuals earning more than BRL 1,200,000.00 per year, with progressive rates ranging from 0% to 10% for annual income between BRL 600,000.00 and BRL 1,200,000.00, and to require withholding at source for those earning more than BRL 50,000.00 in any given month; and
- To levy a 10% tax on profits and dividends remitted abroad.
There are several general and specific aspects to consider for each item; however, the focus here will be on item 2, commonly referred to as the taxation of high incomes.
In addition to the rates mentioned above, it is important to note that the tax base will consist of the sum of all amounts received during the calendar year, including those subject to definitive or exclusive taxation, as well as exempt income or income subject to a zero or reduced rate. Certain capital gains, amounts received by way of donation, advancement of inheritance, or inheritance itself, and certain amounts exclusively taxed at source under Articles 12 and 12-A of Law No. 7,713/88 may be deductible.
If the taxpayer has been subject to the 10% withholding tax in any given month during the calendar year, due to exceeding the monthly threshold of BRL 50,000.00, that amount may be offset against the total tax due in the annual income tax return. Should the withholdings exceed the total annual liability, the taxpayer will be entitled to a refund, as currently occurs.
A key issue concerns accumulated profits up to December 2025, given that the law may come into force as of January 2026. As the Draft Law is still under Senate review, it remains subject to amendments and modifications.
The Draft Law currently provides that profits whose distribution is resolved and properly documented by the shareholders’ decision before the end of 2025 may be paid out over the following three fiscal years—up to 2028—without being subject to taxation. However, this time frame could be challenged if it remains in the final text.
Some proposed amendments go further, suggesting that such profits should be exempt from taxation regardless of when they are paid or whether there is a formal resolution of distribution in 2025 by the shareholders of the paying company. Nonetheless, such proposals are unlikely to pass, as their approval would require the Draft Law to return to the Chamber of Deputies, leaving insufficient time for approval before year-end.
Under Brazilian constitutional tax principles, particularly the principle of anteriority, any law increasing taxes must be enacted in one fiscal year to take effect only in the following fiscal year, except in cases expressly provided for by the Constitution.
While awaiting the Senate’s deliberation and any potential changes, it is advisable for shareholders of companies with accumulated profits to expedite the determination and distribution of such profits, to formally approve and document such decisions in corporate records, and to make the corresponding payments. This is to mitigate exposure to the forthcoming increase in tax burden.
Finally, in light of the constitutional principle of legality, it must be emphasized that the new rules will only become enforceable once the Draft Law is duly approved by both legislative houses, sanctioned by the President of the Republic, and enacted into law.
November 2025