BrazilTax Obligations Detailed

In Brazil, employers face several tax obligations related to payroll, social security, and income tax, with specific rates and deadlines.

Payroll Taxes

• Social Security Contributions (INSS): Employers contribute 20% of the employee's salary to INSS. Certain sectors like clothing manufacturing may have an additional 1-2% rate. Other sectors calculate INSS based on net revenue. For public sector employees, rates can go up to 22%. Starting in 2025, companies will see a gradual re-taxation of payroll, beginning at 5% and increasing annually until reaching 20% in 2028. This new regime replaces the current system where companies can choose between being taxed on gross revenue or payroll, which ranged from 1% to 4.5%. During the transition period, companies must maintain 75% of the workforce from the previous year to remain eligible for the reduced rates.
• Severance Indemnity Fund (FGTS): Employers contribute 8% of the employee's salary to FGTS.
• Other Social Security Taxes: Up to 8.8% of the employee's salary may be contributed towards other social security taxes.

Income Tax (IRRF)

• Employers withhold income tax (IRRF) from employee salaries monthly. The rates are progressive, ranging from 0% to 27.5% based on the employee's income level. Non-residents are taxed at a flat rate of 25%. An annual income up to BRL 22,848 is exempt from tax.
• Withholding and Reporting: Income tax is withheld monthly and must be submitted by the 20th of the following month, along with a monthly income tax statement (DARF). An annual income tax statement (DIRF) is also required.

Additional Considerations

• 13th-month Salary: This payment is made in two installments. The first installment, due by November 30th, is exempt from mandatory deductions. The second, due by December 20th, is subject to INSS and income tax withholding.
• Tax Residency: Brazilian tax residents are taxed on their worldwide income. Individuals who reside in Brazil for 183 days or more within a 12-month period are typically considered tax residents. Naturalized foreigners are also considered tax residents.

Note: This information is current as of February 5, 2025, and may be subject to change. Brazilian tax laws and regulations can be complex and are subject to updates, so consulting with a local tax advisor is crucial for up-to-date and specific guidance.

In Brazil, employers are responsible for withholding and remitting various taxes from employee salaries. These deductions fund social security, pension programs, and other government services. As of today, February 5, 2025, the following overview is valid, though subject to change due to legal updates.

Employer Payroll Tax Obligations

• Social Security (INSS): A key component of deductions, INSS contributions support retirement, disability, and other social security benefits. The standard rate is 20% of the employee's salary, but certain sectors have additional obligations adding 1% or 2%. However, a transitional regime is in place, gradually reintroducing payroll taxation. In 2025, the rate is 5% alongside a reduced Contribution on Gross Revenue ranging from 0.8% to 3.6%. This will progressively increase to 20% by 2028.
• Severance Indemnity Fund (FGTS): Employers contribute 8% of the employee's salary to the FGTS, a fund accessible to employees under specific circumstances like termination without just cause.
• Work Accident Insurance (RAT): The rate for RAT varies depending on the industry's risk level. It covers medical expenses and lost income due to workplace accidents.
• Social Assistance: This tax funds several social programs.
• 13th Salary: Equivalent to one month's salary, it is paid in two installments, usually in November and December.
• Vacation Bonus: Employees receive a bonus equivalent to one-third of their monthly salary when they take their vacation.
• Collective Bargaining Agreement (CBA) Contributions: Depending on the industry and CBA, employers might be required to contribute to other benefits, such as meal vouchers or life insurance.
• Income Tax (IRRF): Employers withhold income tax directly from employee salaries based on progressive tax brackets, with a planned exemption for those earning up to BRL 5,000 monthly beginning January 1, 2026. Currently, the exemption is for those earning roughly up to BRL 3,000.

Employee Deductions

• INSS: Employees also contribute to the INSS based on their salary range.
• Income Tax (IRRF): Deducted at source, the amount depends on the employee's earnings and applicable deductions, such as dependents, alimony payments, eligible education expenses, and unreimbursed medical expenses (including those incurred abroad). Contributions to private pension plans (up to 12% of gross income) and official social security are also deductible.

Important Considerations for 2025 and Beyond

• Transitional Payroll Tax Regime: The gradual return of the payroll tax requires careful monitoring as the rate increases annually until 2028. Companies must also maintain a workforce size of at least 75% of the average of the previous year to benefit from the reduced rates. Non-compliance may result in the direct application of the 20% rate.
• Income Tax Changes: The proposed income tax exemption increase to BRL 5,000, effective from January 1, 2026, will significantly impact payroll calculations.

This information provides a comprehensive overview of employee tax deductions in Brazil for 2025. It's crucial to stay informed about legislative updates and consult with legal experts for specific situations and detailed guidance.

Brazil's value-added tax (VAT) system is undergoing a significant reform, transitioning from multiple taxes to a dual VAT model. The current system involves several taxes including ICMS (state sales tax), IPI (federal excise tax), ISS (municipal services tax), PIS, and COFINS (social contributions). The reform will introduce a new dual VAT system comprising CBS (federal) and IBS (state/municipal) to replace these existing taxes. This transition is expected to complete by 2033.

Current VAT System (being phased out)

Currently, there's no registration threshold for VAT in Brazil. Any business supplying goods or services subject to IPI, ICMS, ISS, PIS, or COFINS must register, regardless of turnover. Registration for ICMS is required in each state and ISS in each city where a business operates. Returns for these taxes are generally filed monthly, with specific deadlines dependent on the type of business activities.

• ICMS (State Sales Tax): Rates range from 17% to 19% depending on the state. For example, it is 17% in states like Acre and Alagoas, 18% in Amazonas and Bahia, and 19% in Rio de Janeiro. Interstate transactions have varying rates based on the destination state.
• IPI (Federal Excise Tax): Applied to industrialized goods with rates from 0% to 330%, averaging around 10%, based on the product classification.
• ISS (Municipal Services Tax): Rates typically range from 2% to 5%, varying by municipality.
• PIS/COFINS (Social Contributions): Standard rates are 1.65% (PIS) and 7.6% (COFINS) under the non-cumulative regime. For imported goods, these are 2.10% and 9.65% respectively, with variations for specific products.

New Dual VAT System (being implemented)

The new system introduces two VAT taxes:

• CBS (Contribution on Goods and Services - Federal): Expected to start at 0.9% in 2026, gradually increasing until the full implementation of the new system.
• IBS (Goods and Services Tax - State/Municipal): Expected to start at 0.1% in 2026, also gradually increasing.

The combined CBS and IBS rates are anticipated to be around 28% upon full implementation, though this is subject to change based on government revenue needs. Essential foods are expected to have a 0% VAT rate, while certain services and products will have reduced rates. A cashback system is proposed for low-income consumers to receive VAT refunds. The transition will begin in 2026, with PIS and COFINS replaced in 2027, and ICMS and ISS phased out from 2029 onwards.

Invoicing and Compliance

E-invoicing is mandatory for B2B and B2G transactions in Brazil. Various types exist, such as NF-e (electronic invoice), NFS-e (electronic service invoice), and NFC-e (electronic consumer invoice). Invoices must include specific details like CNPJ number, addresses, product information, tax details, and a digital signature. They need to be in XML format and validated by tax authorities before issuance. Non-compliance can lead to penalties ranging from 1% to 150% of the tax due. The current Nota Fiscal e-invoicing system is being updated to accommodate the new VAT system.

Further Information

This information is current as of February 5, 2025, and the implementation timelines and rates are subject to change as the government finalizes the reform details. It is recommended to consult official government resources and tax professionals for the latest and most accurate information.

Brazil offers a range of tax incentives for businesses, focusing on investment, regional development, and specific sectors. As of February 5, 2025, these incentives are subject to change based on new legislation and regulations.

Investment Incentives

• Investment Project Incentives: Taxpayers can recover a portion of income tax and PIS/COFINS based on investments in approved projects, potentially gaining total or partial income tax exemption. Law 14,789/23, effective January 2024, modified the application of this relief. Additional benefits include exemptions from duties and social contributions on imported equipment for certain projects, accelerated depreciation on domestically produced equipment, and access to low-cost financing.

• R&D Incentives: Companies investing in research and development can reduce income tax by up to 50%. This applies to in-house R&D expenses (basic and applied research and experimental development), with restrictions on incentives for outsourced activities except under specific circumstances outlined in Law 11.196/05 (for small and medium companies, individuals, universities, or research institutes in Brazil). Claims can be made any time within five years.

Regional Development Incentives

• Special Economic Zones (SEZs): Zones like the Manaus Free Trade Zone (ZFM) offer tax benefits like exemptions and reduced tariffs to attract foreign investment. Several other SEZs exist across Brazil.

• Regional Programs: Incentives are available for businesses in less-developed regions, especially the North and Northeast, such as the Amazon Development Program (SUDAM), Northeast Development Program (PRODETUR), and Northern Development Program (FNO). These programs offer varying incentives including exemptions from IPI, IOF, and income tax, as well as subsidized credit lines.

• State and Local Incentives: Several incentives are available at the state and local levels and vary widely, often focusing on specific activities or regions. Information can be obtained from the respective state or municipal authorities.

Sector-Specific Incentives

• Low-Carbon Hydrogen: The Special Incentive Regime for Low-Carbon Hydrogen Production (Rehidro), established by Law No. 14,948/2024 (effective January 1, 2025, for five years), extends benefits of the Special Incentive Regime for Infrastructure Projects (REIDI) to hydrogen projects. This includes reduced PIS/COFINS on domestic and imported machinery, equipment, materials, and services. Businesses involved in the production, handling, or sale of low-carbon hydrogen, as well as those providing renewable energy or biofuels for hydrogen production, are eligible.

Other Tax Considerations

• Global Minimum Tax: From 2025 onwards, multinational companies with a global annual turnover exceeding EUR 750 million will face an additional social contribution on net profits (CSLL), aligning with the OECD's global minimum tax of 15%.

• Tax Benefits Declaration: The Declaration of Tax Benefits (DIRBI) requires companies to report a growing number of utilized fiscal incentives and benefits across all government levels.

It's important to consult with tax professionals for up-to-date information tailored to specific situations, given the evolving nature of tax regulations.