Brazil’s 10% withholding tax on certain dividend payments has so far generated minimal revenue, reigniting concerns about the government’s ability to finance a planned expansion of income tax exemptions for lower-income households in 2026, according to unpublished tax figures seen by Reuters.
Under the reform enacted this year, companies paying dividends to individuals face a 10% withholding tax on distributions above 50,000 reais - and the same rate applies to all dividend remittances sent overseas. The tax was one of the central elements of a broader package designed to make changes to Brazil’s income tax structure while remaining fiscally neutral.
But collections through January and February fell well short of the administration’s estimates. Brazil’s federal tax revenue service reported that the levy on domestic dividend payments brought in 121.7 million reais during those two months, while the tax on dividends remitted abroad added 35.2 million reais.
Both numbers represent less than 1% of the totals the government had expected to raise for the full year of 2026 when it was crafting the income tax reform. At that time, officials projected 23.8 billion reais in revenue from the domestic withholding tax and 6.2 billion reais from remittances abroad - a combined forecast of 30 billion reais that was intended to offset roughly 28 billion reais in lost revenue stemming from the planned expansion of the monthly income tax exemption to those earning up to 5,000 reais.
Two government officials, speaking on condition of anonymity, described the early receipts as disappointingly low. In public commentary, former tax chief Marcos Cintra suggested there may be an explanation for the short-term weakness, saying many companies accelerated dividend distributions last year in order to avoid the new levy. "Results are likely to fall short of projections for the entire year," he added.
The revenue service defended its projection, emphasizing the uneven timing of dividend payments and arguing that it is premature to draw conclusions from just two months of data. The agency reiterated its combined forecast of 30 billion reais from the dividend taxes, which was intended to balance the estimated 28 billion reais impact of widening the income tax exemption.
Another element of the reform - a minimum tax for high earners introduced with progressive rates up to 10% on annual income above 600,000 reais - will not produce revenue in 2026. That measure will only be collected through tax filings in 2027 based on income earned in 2026. As a result, the government will need to rely solely on the dividend withholding tax to offset the fiscal cost of expanding exemptions in 2026.
The small amount of revenue reported so far from taxing dividends paid abroad stands in contrast with central bank data showing substantial remittances during the same period. Central bank figures indicate $4.8 billion in dividends - roughly 25 billion reais based on foreign exchange contracts confirming those payments - were sent overseas in January and February. Those central bank totals exclude reinvested profits, which remain in Brazil, and do not specify the nature of proceeds recorded in the contracts, which could include dividends or interest on equity (JCP).
The tax authority noted it is natural to observe dividend payments both domestically and abroad without withholding in the early months of the regime, because dividends linked to results from 2025 or earlier are not subject to the tax even if distributed in 2026. While the central bank data show funds leaving the country in January and February, the agency said it is not possible to determine how much of that total relates to profits generated from January onward.
Large companies, the revenue service added, also tend to distribute dividends once or twice a year rather than on a monthly schedule, which can create significant variability in collections. "For these reasons, using only revenue data from January and February, it is impossible to assess whether collections from dividend distributions are falling short of expectations," the agency said.
The picture that emerges from the available data is one of timing and uncertainty. Early receipts from the dividend withholding tax are far below the administration's annual projections, but officials and the tax authority caution that dividend flows are lumpy and that last year's accelerated distributions could depress collection in the initial months after the change in tax law.
($1 = 4.9925 reais)