New Income Tax Law Expands Exemption, Creates IRPFM with Progressive Rates, and Reintroduces Tax on Profits and Dividends After 25 Years

Approved by the National Congress on Wednesday (5), the Income Tax reform introduces significant changes in the taxation of individuals and legal entities in Brazil. The proposal, which now awaits presidential sanction, updates the tax bracket, creates a new progressive tax model, and reinstates taxation on dividends — profits distributed by companies to partners and shareholders, which have been tax-exempt for over 25 years.
The new rules will take effect starting January 1, 2026.

1. Higher Exemption Threshold and New Minimum Income Tax
The main change for individual taxpayers is the increase in the exemption threshold. Individuals with a monthly income of up to R$ 5,000 will be exempt from paying income tax. According to the government, this change should benefit millions of Brazilians who currently pay the tax.
For those earning between R$ 5,000 and R$ 7,000, there will be a gradual reduction in the tax rate, easing the tax burden on the middle class.
Another new feature is the creation of the Minimum Personal Income Tax (IRPFM) — an additional and progressive tax with rates ranging from 1% to 10%. This tax will apply to taxpayers with annual income above R$ 600,000, aiming to balance the tax burden across different income levels.

2. Dividends Taxed Again
The reform also marks the return of dividend taxation, which was abolished in 1995. Individuals receiving more than R$ 50,000 per month in profits or dividends will be subject to a 10% withholding tax.
Additionally, profits sent abroad — regardless of amount — will also be taxed at a 10% rate.

3. Impacts and Challenges for Taxpayers and Companies
According to tax attorney Eduardo Galvão, a partner at Granito Boneli Advogados, the new model aims to promote tax justice but may lead to uncertainty in practical application. The expert explains that the IRPFM creates a hybrid type of taxation, mixing features of taxes paid by both companies and individuals, which could create legal uncertainty and even the risk of double taxation.
He also warns of a potential increase in tax assessments for “Disguised Distribution of Profits” (DDL) — when companies offer benefits to partners without market justification, a practice that the Federal Revenue may interpret as an attempt to evade taxes.

Galvão emphasizes that it will be essential for companies and business owners to review their tax planning to avoid penalties and ensure compliance with the new rules.

4. Cap on Combined Tax Burden
The reform also establishes a ceiling: the combined effective tax rate of a legal entity and the IRPFM cannot exceed 34%. This measure aims to prevent excessive overall taxation on companies and their partners.
The text also includes a transition rule for profits accumulated until December 31, 2025, which may be distributed tax-free until 2028, provided they are approved by the end of this year.

5. When the New Rules Take Effect
After approval by Congress, the proposal moves on to the Executive Branch for sanction. If signed into law, the new income tax legislation will come into effect on January 1, 2026, and the changes will apply to the 2027 tax returns, which refer to the 2026 tax year.