Brazil 2026: Consumption Tax Reform Goes Live in Test Mode, New Income Tax Rules, Foreign Investment Remains Accessible

Brazil has entered the operational phase of its consumption tax reform. Throughout 2026, businesses are running the new IBS (Tax on Goods and Services) and CBS (Contribution on Goods and Services) in test mode. From 2027, CBS replaces PIS and Cofins and IPI rates are reduced to zero, except for products whose manufacturing is incentivised in the Manaus Free Trade Zone. ICMS and ISS are then phased out: their rates fall progressively between 2029 and 2032, and IBS replaces them entirely in 2033.

For 2026, IBS and CBS apply at test rates of 0.1% and 0.9%. Taxpayers that comply with the new ancillary obligations are dispensed from actually paying these amounts, which are reported for information only; PIS and Cofins remain fully due. Where the obligations are not met, the test-rate amounts become payable and may then be offset against PIS/Cofins or other federal taxes.

Since 3 August 2026, companies under the regular tax regime have been required to include IBS and CBS information in their electronic invoices (NF-e, NFC-e, CT-e and related documents). Service invoices (NFS-e) follow from 1 October and 1 December 2026, and Simples Nacional taxpayers from 1 January 2027. In early August, the Federal Revenue Service and the IBS Management Committee relaxed the validation rules so that documents are no longer rejected solely because these fields are missing, while making clear that this is a postponement of enforcement, not a suspension: the fields remain mandatory. No penalties are being applied during the current adaptation period, but the message for businesses is unchanged: ERP, invoicing and tax-reporting systems must be adapted well ahead of 2027.

Personal income tax and dividends

Law No. 15,270/2025 took effect in January 2026.

Individuals with monthly taxable income of up to BRL 5,000 benefit from a reduction that brings their income tax to zero. Between BRL 5,000.01 and BRL 7,350 the reduction tapers off; above BRL 7,350 the ordinary progressive table applies.

At the other end of the scale, Brazil introduced a minimum income tax for high earners. Individuals with annual income above BRL 600,000 fall within the new regime, with a minimum effective rate that rises progressively and reaches 10% at BRL 1.2 million. The base includes income that is otherwise exempt, such as dividends, subject to the exclusions and deductions provided by law. The regime applies to 2026 income and will first be settled in the 2027 return.

The same law ended the long-standing dividend exemption in two cases. Dividends paid by a company to a Brazilian-resident individual in excess of BRL 50,000 per month (per paying company) are subject to 10% withholding tax on the full amount, creditable against the minimum tax. Profits and dividends paid abroad are subject to 10% withholding tax regardless of amount, with limited exemptions for foreign governments (on a reciprocity basis), sovereign wealth funds and foreign pension funds; a credit mechanism applies where the combined corporate and dividend tax burden exceeds the statutory thresholds. Profits earned up to 2025 whose distribution was approved by 31 December 2025 remain exempt, provided payment occurs by 2028 on the approved terms.

The 2026 filing season, covering 2025 income, still ran under the previous rules. It brought four refund batches (end of May, June, July and August), new fields for social name and self-declared race/colour, and priority for taxpayers who use the pre-filled return and/or choose Pix for their refund.

Foreign investment remains accessible

Foreign individuals and legal entities may invest directly in Brazilian companies and hold any level of participation, subject to registration, tax, foreign exchange and regulatory requirements, and to sector-specific restrictions. Investors should now factor the 10% withholding tax on dividends paid abroad into their return models and check whether a tax treaty or the credit mechanism improves the position.

Foreign direct investment must be registered with the Central Bank through the SCE-IED system. Periodic reporting then depends on size. Every five years the Central Bank runs a census of foreign capital: the 2026 census used 31 December 2025 as its reference date, was due between 1 January and 31 March 2026, and covered Brazilian companies with non-resident shareholders and total assets of at least BRL 100,000. In census years, no separate annual declaration is due. Companies that missed the deadline should regularise their position, as late or missing filings attract fines and can block new registrations.

In other years, companies with foreign direct investment and total assets of at least BRL 100 million at 31 December must file an annual declaration by 31 March. Companies with total assets of BRL 300 million or more also file quarterly declarations, census years included.

For international businesses, this makes the right corporate structure, Central Bank registrations and ongoing reporting essential from day one of an investment.

Through Doing Business International (DBI) and our partner in Brazil, Laerte Castro Alves (HCLB Advogados), we help international clients to:

• adapt invoicing and reporting systems to the IBS/CBS transition;
• review personal, corporate and dividend tax exposure under Brazil's new rules;
• structure foreign-owned Brazilian companies and handle Central Bank registration and reporting;
• manage incorporation, legal and tax matters when entering Brazil.

Brazil's 2026 framework presents both opportunity and complexity. The transition to IBS and CBS, new income-tax and dividend rules, and Central Bank reporting obligations require investors and operating businesses to align tax, invoicing, corporate governance and foreign-investment compliance from the outset. Businesses that prepare early will be better positioned to manage the transition, protect cash flow and use Brazil as a platform for long-term regional growth.