Brazil has enacted Law 15,270/2025, reintroducing withholding tax on dividend distributions for the first time in nearly three decades. Effective 1 January 2026, the new regime has important implications for foreign institutional investors, including pension funds and sovereign entities.
Brazil has enacted Law 15,270/2025, reintroducing withholding tax on dividend distributions for the first time in nearly three decades. Effective 1 January 2026, the new regime has important implications for foreign institutional investors, including pension funds and sovereign entities.
Below we summarize the key elements of the new rules and highlight points of particular relevance for non-resident investors.
Introduction of a 10% Withholding Tax on Dividends
Under the new law, dividends and profit distributions paid by Brazilian companies to non-resident shareholders are subject to a 10% withholding tax. This tax applies to non-deductible profit distributions and is withheld at source by the distributing company.
The reform represents a structural shift in Brazil’s corporate tax system, which has historically exempted dividends since 1996.
Exemption for qualifying pension funds and sovereign entities
The law provides a statutory exemption at source for certain categories of non-resident investors, notably:
Foreign sovereign wealth funds, as defined under Brazilian law
Foreign pension funds whose principal purpose is the administration of retirement or pension benefits, subject to statutory and regulatory requirements
Where an investor qualifies for this exemption:
No dividend withholding tax applies
The exemption is status-based and applies regardless of the effective corporate tax rate borne by the Brazilian distributing company
No credit procedure is required
Qualification will depend on meeting the statutory definitions and once issued, the applicable regulatory and documentation requirements.
ETR-Based credit where exemption does not apply
If a foreign investor including a pension fund or sovereign entity does not meet the requirements for the statutory exemption, the 10% withholding tax applies at source.
In such cases, the law provides a separate credit relief mechanism designed to prevent excessive combined taxation. Specifically, where the sum of:
Brazilian corporate income taxes (IRPJ and CSLL) borne on an effective basis, plus
the 10% dividend withholding tax
exceeds the applicable nominal Brazilian corporate income tax rate (typically 34%, and higher for certain regulated sectors), the non-resident investor may be entitled to an offsetting tax credit for the excess.
|
Brazilian Corporate ETR |
Initial WHT at Source |
Creditable Amount (Excess over 34%) |
Final Net Dividend Tax |
|
34% or higher |
10% |
10% (Full Credit) |
0% |
|
30% |
10% |
6% |
4% |
|
28% |
10% |
4% |
6% |
|
25% |
10% |
1% |
9% |
|
24% or lower |
10% |
0% (No Credit) |
10% |
This relief:
operates after withholding,
is rate-based rather than status-based, and
is subject to election and procedural requirements to be detailed in further guidance.
Transitional Rules for Pre-2026 Profits
Dividends relating to profits generated up to 31 December 2025 may remain exempt from the new withholding tax, provided that:
· Formal Approval: In accordance with civil or corporate law requirements, companies must finalize 2025 financial statements and formally approve the distribution of dividends by December 31, 2025.
Enforceability: The approved dividends must be legally enforceable (due and payable) under the terms established in the corporate resolution.
Payment Deadline: Grandfathered dividends must be effectively paid, credited, or delivered by December 31, 2028, provided they adhere to the schedule and terms originally established in the 2025 approval.
While the statute refers to approval by 31 December 2025, an interim decision by Brazil’s Supreme Federal Court has temporarily extended this deadline to 31 January 2026, subject to further judicial review.
Market guidance indicates that, where these conditions are met, approved distributions may generally be paid over subsequent years, provided they follow the original approval terms.
Context: Interest on Net Equity (JCP)
By way of background, Brazil has long permitted companies to remunerate equity through interest on net equity (JCP) a deductible form of equity return subject to 15% withholding tax. Proposals had been made to increase the rate to 20%, effective January 1, 2026, but we have found no evidence that these proposals made it through.
While structurally distinct from dividends and subject to statutory limitations, JCP has historically functioned as a mechanism to tax equity returns while reducing corporate-level tax exposure. The newly introduced dividend withholding tax applies to non-deductible profit distributions and therefore represents a distinct and additional layer within Brazil’s equity return framework.
Practical Considerations for Institutional Investors
For foreign pension funds and sovereign entities, the reform establishes a clear hierarchy of outcomes:
Statutory exemption: no withholding tax at source
ETR-based credit or refund: relief available post-withholding if combined taxation exceeds nominal corporate rates
Treaty relief, where applicable (e.g. some treaties have specific exemptions for pension funds that may apply if the statutory exemption doesn’t)
As a result, qualification analysis remains critical, while effective tax rate modeling continues to be relevant where exemption status is uncertain.
Please do not hesitate to contact us if you would like to discuss how the new rules may apply to your structure or to assess eligibility for exemption or relief under the revised regime.
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