The Tax Reform under discussion in the National Congress proposes significant changes to the rules for Individual Income Tax (IRPF), affecting both high-income employees and business owners and investors.
According to the government, these measures aim to promote fiscal justice and expand the exemption threshold, but they also bring repercussions that require careful analysis, especially for legal entities, investors, and professionals who receive income from dividend distribution.
Below are five key points of attention that deserve highlighting within the proposed income tax framework of the Tax Reform:
1. Expansion of the Exemption Threshold and Effects on Financial Planning: The increase of the exemption threshold to up to BR$5,000 per month is seen as an important step towards reducing the tax burden on lower-income workers. However, those who earn above this threshold may experience significant impacts, as the proposed progressivity could result in a higher effective tax burden on higher incomes. This measure requires those currently in the upper-middle and high-income brackets to review their financial planning.
2. Concentrated Rates for Higher Salaries and the Absence of a Super-Bracket: The proposal does not create a much higher tax rate or a specific bracket for what the media has labeled as “super-rich,” adjusting the top end of the table without sharp differentiation between millionaires and highly qualified professionals. As a result, business owners, investors, seasoned executives, and some public sector categories may end up paying similar rates, resulting in a model that may not effectively achieve the fiscal fairness advocated by the reform.
3. End or Restriction of Traditional Deductions: Another relevant aspect is the possible end (or severe restriction) of deductions currently allowed under the IRPF, especially those related to education, health, and dependents. Many families who rely on these deductions will feel a greater tax burden, making annual budget adjustments more challenging. It will be essential to observe transitional rules and any gradual limits for adaptation.
4. Taxation on Dividends and Profits: One of the points with the greatest impact for entrepreneurs and investors is the return of taxation on dividends and profit sharing, which are currently exempt in most cases. Under the proposal, dividends could be taxed at rates of up to 20%, directly affecting company partners, family holdings, qualified investors, and independent professionals who use corporate structures for tax optimization. This measure requires an evaluation of corporate reorganizations and may lead to changes in how resources are withdrawn from companies, altering the tax planning dynamics of many businesses and high-net-worth investors.
5. New Rules for Financial Investments and Variable Income: The changes also cover financial investments, especially exclusive funds, variable income portfolios, and fixed-income instruments. The text proposes adjustments to rules for exemption, IR incidence, and loss compensation, increasing the complexity of individual tax filings and affecting asset allocation strategies. High-volume investors will need to analyze the impact of the new rules on the performance of their investments.
The proposed changes in income tax, especially the resumption of dividend taxation, may profoundly reshape the tax planning of high-net-worth individuals, business owners, and investors. Despite advances in relief for lower-income brackets, the proposal demands increased attention and strategic adjustments from those in higher earning tiers. Ongoing analysis of legislative discussions and adjustments in tax strategies will be fundamental in this new context.
