Brazilian Federal Court Strikes Down 10% Withholding Tax on Dividends
In an important decision, the 9th Federal Civil Court of São Paulo ruled against the 10% withholding income tax (IRRF) on profits and dividends distributed by the petitioning company, holding that, given the circumstances of the case, the levy was unconstitutional.
According to the judge, the taxation system established by Law No. 15,270/2025, which imposes a 10% IRRF on distributions of profits or dividends made by a single legal entity to a single individual resident in Brazil exceeding BRL 50,000.00 in the same month, violates the constitutional principles of ability to pay and income tax progressivity.
Below is a brief overview of the main arguments the judge relied on to support her position.
Violation of the constitutional principle of ability to pay
Under the Brazilian Federal Constitution, income tax must be graduated according to the taxpayer's ability to pay. However, applying a flat 10% rate to the entire amount distributed, rather than only to the portion exceeding the BRL 50,000.00 statutory threshold, appears to breach this principle, as it disregards the taxpayer's actual economic situation when determining the appropriate tax burden.
Therefore, under the logic of Law No. 15,270/2025, nothing prevents a well-established businessperson from bearing a lighter tax burden than a small entrepreneur. For example, a businessperson who distributes ten monthly installments of BRL 40,000.00 from their company to themselves over the year could pay less than an entrepreneur who distributed only BRL 55,000.00 within a single month that same year. This assumes, of course, that the first businessperson does not fall under the progressive table of the new minimum individual income tax (IRPFM).
In short, the current framework for taxing profits and dividends does not assess the taxpayer's overall wealth when determining the applicable tax. It is therefore entirely possible, and highly likely, that (i) taxpayers with similar wealth profiles are taxed differently, or (ii) taxpayers with different wealth profiles are taxed similarly. In both scenarios, the disproportionality is evident.
Violation of the constitutional principle of progressivity
Progressivity is another principle equally dear to tax fairness. Broadly speaking, it requires that increases in the tax due be proportional to increases in the tax base. Law No. 15,270/2025 appears to have neglected this dynamic.
To illustrate the violation of progressivity, the judge used the example of a hypothetical distribution of BRL 50,001.00. Because this amount exceeds the statutory threshold, it triggers the 10% IRRF, resulting in a tax of BRL 5,000.10. In other words, a mere BRL 1.00 increase in distributed income is enough to raise the tax due by more than BRL 5,000.00. In the judge's view, this amounts to discontinuous and disproportionate tax treatment.
Although it is an isolated ruling, the decision sets an important precedent in tax litigation. It offers a solid line of argument for taxpayers who feel particularly burdened by the taxation introduced by Law No. 15,270/2025. In the meanwhile, we wait to see whether similar disputes will multiply, or whether the tax and judicial authorities, motivated by a significant legal controversy, will take an official position on the matter.
Lorusso & Partners remains at your disposal to assist with tax litigation, as well as to design tailored tax, wealth, and estate planning strategies.
