Provisional Measure No. 1,303/2025: Reform of Taxation on Financial Investments – End of the Progressive Regime and New Uniform Withholding Tax Rate

Provisional Measure No. 1,303/2025 introduces a structural overhaul of the income tax regime applicable to earnings from financial investments held by individuals, entities under the Simples Nacional regime, and non-resident investors. The changes will be implemented gradually and are expected to directly affect tax planning strategies and the net returns on investments starting in 2026.

1. Abolition of the Progressive Regime and Adoption of a Flat 17.5% Withholding Tax

Currently, earnings from financial investments are taxed under a regressive rate schedule ranging from 22.5% to 15%, depending on the holding period. Beginning January 1, 2026, the MP abolishes this system, replacing it with a flat rate of:

• 17.5% Withholding Income Tax (IRRF) on all income from domestic financial investments held by individuals and Simples Nacional taxpayers.

Investments initiated prior to January 1, 2026, will continue under the current regime until maturity, ensuring legal certainty and contractual stability.

2. Withholding at Source and Annual Adjustment

The new rate will be withheld at source by financial institutions. However:

• The taxpayer remains subject to annual reconciliation in the Individual Income Tax Return (IRPF) in cases such as:
  • Accumulated income;
  • Loss compensation;
  • Tax due differing from the amount withheld.

3. Loss Compensation: Expansion with New Restrictions

The MP allows individuals and Simples Nacional entities to offset investment losses against gains from different types of financial assets—an important improvement. However:

• Compensation is limited to five years from the quarter in which the loss was recognized.
• Offsetting is prohibited when the same asset is sold and repurchased within 30 days, to prevent artificial loss generation (wash sales).

Loss compensation rules prior to 2026 remain governed by current law, with no express temporal limit.

4. Tax Base: IOF Deductibility to Prevent Double Taxation

• The taxable base for the 17.5% IRRF may be reduced by the amount of IOF (Tax on Financial Operations) paid on the investment.
• This requires traceability of the IOF amount withheld, introducing new control and reporting obligations for financial platforms, institutions, and investors.

5. Non-Resident Investors: Uniform Taxation with Specific Exceptions

• As a general rule, non-resident investors will also be taxed at 17.5% on earnings from financial investments.
• Exemption is maintained for capital gains from stock exchange transactions.
• Residents of tax havens will be subject to 25% IRRF.

6. Virtual Assets (Cryptoassets)

• Capital gains from cryptoassets will be subject to definitive 17.5% taxation, with quarterly assessment.
• Losses may be offset for up to 5 subsequent quarters.
• Legal entities taxed under the actual profit regime (lucro real) must include results in their IRPJ and CSLL tax bases, without the possibility of deducting losses.

7. Special Treatment for Financial Institutions

• Banks, insurance companies, broker-dealers, stock exchanges, and entities listed in Article 7 of the MP:
  • Are not subject to withholding;
  • Their investment income is included directly in the IRPJ/CSLL tax base.
• Investment funds will continue under current rules, except as expressly modified.

8. Taxation of Tax-Incentivized Bonds

A 5% IRRF rate will apply to:

• LCI, LCA, CRI, CRA, and incentivized debentures issued from 2026 onwards.
• This rate applies only to individuals and Simples Nacional entities, which previously enjoyed full exemption.

Issuers are encouraged to advance bond offerings before December 31, 2025, to preserve the 0% tax rate for individuals.

9. Interest on Net Equity (Juros sobre Capital Próprio – JCP)

• The IRRF rate on JCP increases from 15% to 20%.
• This change will directly affect corporate profit distribution policies and shareholder remuneration strategies.

Conclusions and Practical Recommendations

The new rules significantly reshape the taxation of investments in Brazil, with implications for both individual investors and the capital markets. Key takeaways include:

• Simplified and more predictable tax treatment;
• Decreased attractiveness of tax-incentivized instruments and JCP;
• Need for financial institutions to adjust systems to the new IR model and IOF tracking requirements;
• Potentially lower net returns on short-term investments, which previously benefited from declining rates.

Recommended Actions:

1. Review and adjust investment portfolios during 2025;
2. Simulate the financial impact of the new 17.5% rate on future earnings;
3. Take advantage of incentivized issuances before December 31, 2025;
4. Conduct succession and corporate planning in light of the new JCP taxation regime.