New Income Tax Reform Proposal: Exemption for Those Earning Up to R$ 5,000

The Federal Government has introduced a new income tax reform proposal aimed at increasing taxation on so-called “super-rich” individuals to offset the expansion of the tax exemption threshold. The proposal, outlined by the Ministry of Finance’s economic team, will be submitted to the National Congress for approval.

Key Highlights of the Proposal

1. Taxation of the “Super-Rich”
   • The measure would impose taxes on annual income exceeding R$ 600,000 (approximately R$ 50,000 per month).
   • The average effective tax rate would be 2.54%, rising to as much as 10% for those earning over R$ 1 million annually.
   • Around 141,000 individuals are expected to be affected by the new tax.
   • Those who already pay income tax above the proposed minimum thresholds will not face additional charges.
2. Taxation on Dividends and Overseas Transfers
   • The government expects to raise R$ 8.9 billion through a 10% tax on dividend transfers sent abroad.
   • A broader tax on dividends, previously discussed, was not included in this proposal.
3. Expansion of the Income Tax Exemption Threshold
   • The new proposal sets income tax exemption for monthly earnings up to R$ 5,000.
   • An estimated 10 million taxpayers would be exempt under the new rules.
   • Partial exemptions will apply to those earning between R$ 5,000 and R$ 7,000 per month.
4. Impact on Revenue and Compensation Measures
   • The government projects R$ 25 billion in revenue in 2026 from taxing high-income earners.
   • The expanded exemption threshold could result in an annual revenue loss of R$ 11.8 billion for municipalities.
   • The National Confederation of Municipalities (CNM) has emphasized the need for fiscal compensation to mitigate the impact on local revenues.

The proposal still needs to be approved by the National Congress to take effect. The government’s economic team aims to fast-track the process so the new rules can be implemented starting in 2026.