Lula Signs Law Raising Income Tax Exemption to R$5,000 From 2026

Overview

• The new law fully exempts monthly incomes up to R$5,000 and grants automatic discounts for earnings up to R$7,350, which the government says will ease or eliminate payments for roughly 15–16 million people.
• Rules take effect on 1 January 2026 and will be reflected in 2027 filings for the 2026 tax year.
• To offset revenue, the measure sets a progressive minimum additional tax reaching 10% for annual incomes above R$600,000 and reinstates a 10% tax on large dividend distributions, including remittances abroad.
• Dividend taxation follows a transition: profits calculated in 2025 and paid out through 2028 remain exempt, while from 2026 monthly distributions above R$50,000 face 10% withholding; the government says states and municipalities will be compensated via FPE/FPM.
• Fiscal outcomes are contested, with the Finance Ministry asserting neutrality versus estimates of net losses from the Independent Fiscal Institution (~R$1 billion a year) and the Senate’s budget office (~R$4 billion), and the sanction ceremony highlighted strains as the heads of both chambers did not attend.