A 10% withholding tax on earnings and dividends paid to individuals ranging from R$ 50.000,00 to R$ 100.000,00 per month has been suspended by a recent decision of the Federal Regional Court of the 4th Region – TRF 4.
The discussion centered on the limits of withholding tax as a mechanism for prepaying taxes. The court’s ruling was intended to prevent taxpayers from prepaying, during the year, amounts greater than those that will actually be due at the end of the period.
Regarding the decision, we highlight 3 key points:
1. The law establishes a 10% withholding tax and a progressive annual tax: Law no. 15.270/2025 established a 10% withholding tax on profits and dividends paid by the same legal entity to the same individual in amounts exceeding R$ 50.000,00 per month. The same legislation created a progressive minimum annual tax rate for income between R$ 600.000,00 and R$1.2 million. Within this range, the tax rate varies from 0% to 10%. The difference between the two systems is at the heart of the discussion. The monthly withholding tax is fixed at 10%, while the annual taxation may result in a lower tax rate. In the Court’s view, this difference may result in advance payments exceeding the tax actually due.
2. Withheld tax is taken into account in the annual calculation: The legislation provides for an annual adjustment and a refund of any excess, but the decision held that this future refund does not eliminate the excess in the monthly withholding, which may compromise the taxpayer’s financial resources immediately. The excess stems from the mismatch between the two tax rates: the monthly withholding rate, fixed at 10%, and the annual rate, which increases gradually from R$ 600.000,00 (0%) to R$ 1.2 million (10%). Thus, someone who earns R$ 601.000,00 per year, for example, is only R$ 1.000,00 above the threshold and pays only R$ 100,16 in minimum annual tax (much less than the 10% withheld at source). For this reason, the ruling determined that withholding on payments between R$ 50.000,00 and R$ 100.000,00 per month should follow this projected annual percentage, rather than the full tax rate.
3. The decision is provisional and will still be reviewed by the Panel: The ruling is not final and is not binding. It is a provisional decision issued by a single judge, which will still be reviewed by the adjudicating Panel. It is important to clarify that the decision does not rule out the taxation of profits and dividends. Similarly, it does not eliminate withholding tax. What is at issue is the limit on the monthly advance payment. The rationale is based on the taxpayer’s ability to pay and the principle of equal treatment: withholding tax cannot be set at the maximum rate when the projected income does not justify it.
For taxpayers who are already subject to a 10% withholding tax on monthly income between R$ 50.000,00 and R$ 100.000,00, this opens the door to legal challenges in the courts. Once a preliminary injunction is granted, this requirement may be set aside immediately.
