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Doing Business in Brazil: learn the pros and cons of each tax regime
Choosing the right tax arrangement is crucial for preserving business profitability
By Glória Cunha
How does one operate under the most suitable tax regime in Brazil? Upon arriving in the country, business managers wishing to tackle its ensuing economic and tax challenges often find themselves asking this same question.
Choosing the right taxation arrangement may be daunting to investors. One needs to be acquainted with tax rules related to the business activity and their corresponding turnover brackets, while having the company’s goals in mind.
For this very reason, counting on specialized support is key to taking the best decision, in line with the company's objectives and strategies.
At the end of each year, this choice can be revisited and doing so must be part of a company’s annual tax planning.
For this very reason, counting on specialized support is key to taking the best decision, in line with the company's objectives and strategies.
At the end of each year, this choice can be revisited and doing so must be part of a company’s annual tax planning.
Find out below about the characteristics and advantages offered by the most commonly used tax regimes in Brazil.
Actual Income
Known in Brazil as ‘Lucro Real’ (lit. ‘Actual Profits’), the Actual Income method applies to large businesses and is mandatory for companies with revenues exceeding BRL 78 million a year.
This tax arrangement is also compulsory for companies that:
- operate in sectors related to banking, credit unions, private insurance, securities dealership, forex brokerage, among others;
- earn profits, income or capital gains from abroad;
- engage in factoring activities;
- enjoy tax breaks or exemptions.
Under this system, the Corporate Income Tax (IRPJ) and the Social Contribution on Net Income (CSLL) are determined based on a company's actual profits, with expenses deducted from revenues.
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Deemed Taxable Income
The Deemed Taxable Income method (‘Lucro Presumido’) is recommended for companies with revenues between BRL 3.6 million and BRL 78 million a year.
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Despite being widely adopted by service companies, a case-by-case analysis should be carried out before opting for this method.
Simplified Taxation System
The Simplified Taxation System (‘Simples Nacional’) aims to be a simplified tax arrangement unique to small-sized businesses.
This arrangement applies to:
- Very small businesses (‘Microempresas’ or ’ME’) – companies with revenues of less than BRL 869,000 a year;
- Small businesses (‘Empresas de Pequeno Porte’ or ‘EPP’) – companies with annual revenues ranging from BRL 869,000 to BRL 8.7 million.
For companies that have just started their operations, the limits above are calculated pro rata in relation to the number of months between the issuance date of their Corporate Taxpayer Number (CNPJ) and the end of the corresponding calendar year – a fraction of a month shall be counted as a whole month for this purpose.
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How to choose the best tax regime
We have outlined above a few characteristics of each tax arrangement, but keep in mind that before making a choice, a thorough analysis should be made, looking at internal as well as external factors, such as the economic outlook.
Opting for a tax treatment
When setting up a business, there are numerous decisions to be taken and procedures to be decided upon, the selection of a tax regime being one of them.
Note that those wishing to make the shift to another tax treatment, must pay attention to the deadlines for submitting their requests each year:
- Opting for the Simplified Taxation System: up to the last business day of January;
- Opting for Actual Income or Deemed Taxable Income: up to the deadline for paying the first installment of the income tax and social contribution due for the year.
Tax efficiency
Domingues e Pinho Contadores specializes in tax solutions for companies. Operate with optimal tax efficiency! Talk to the DPC team: dpc@dpc.com.br.
Author: Glória Cunha, partner at Domingues e Pinho Contadores.
How DPC may help your company?
Domingues e Pinho Contadores has specialized team ready to assist your company.
Contact us by the e-mail dpc@dpc.com.br
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