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Brazil’s Tax Reform: what every business needs to know

Where things stand in 2026

2026 is the test year. CBS and IBS legally exist and must be shown on invoices at symbolic rates of 0.9% and 0.1%, but under article 348 of Complementary Law 214/2025 businesses are excused from actually paying them provided the reporting obligations are met. PIS, COFINS, IPI, ICMS and ISS all remain fully payable. The real financial change starts in 2027.

Brazil is replacing five consumption taxes with a dual VAT over a seven-year transition. This guide explains what changes, when each step lands and what foreign-owned businesses should be doing now.

Deffenti Lawyers · Resource

New to the Brazilian tax system? Start with the full guide.

Our Brazil Tax Guide covers the system as it operates today: corporate income tax, the current indirect taxes being replaced, withholding taxes, employment taxes and the obligations that apply to foreign investors throughout the transition.

Brazil Tax Guide

The most significant change to Brazilian taxation in a generation, phased in between 2026 and 2033.

Constitutional Amendment 132/2023 rewrote the constitutional basis for taxing consumption in Brazil, replacing PIS, COFINS, IPI, ICMS and ISS with a dual value added tax: the federal Contribution on Goods and Services (Contribuição sobre Bens e Serviços, CBS) and the shared state and municipal Tax on Goods and Services (Imposto sobre Bens e Serviços, IBS), alongside a Selective Tax (Imposto Seletivo) on goods harmful to health or the environment. Complementary Law 214/2025 is the general law that gives all three their operative rules.

A second regulatory law, originating in PLP 108/2024 and sanctioned in January 2026, completed the institutional architecture: it created the IBS Management Committee (Comitê Gestor do IBS, CGIBS) on a permanent footing, set the rules for IBS administrative disputes and revenue distribution among states and municipalities and amended parts of Complementary Law 214/2025. The reform’s direction is a genuinely creditable, destination-based, broadly uniform VAT, which is closer to how most of the world taxes consumption and a substantial departure from the Brazilian system foreign investors have had to navigate until now.

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Key Considerations

What changes, and what it means for your business

The reform is easy to describe and hard to implement. These are the features that matter most to businesses operating in or selling into Brazil.

Five taxes become three

PIS and COFINS (federal contributions on revenue), IPI (federal excise on manufactured goods), ICMS (state tax on goods and some services) and ISS (municipal tax on services) are replaced by CBS at federal level, IBS at state and municipal level and a Selective Tax on specific harmful goods. The combined standard CBS and IBS rate is expected to sit in the region of 26% to 28%, which is high by international standards but is a headline rate on a much cleaner base.

The reason the reform exists

Full, immediate crediting is the real prize

The current system denies credits in countless situations, so tax sticks at each stage and cascades into final prices. Under the new model, tax paid on business inputs is creditable in principle across the board, including goods and services previously blocked. For capital-intensive and service-heavy businesses this is the single most consequential change, and it can shift the economics of an investment decision.

Destination, not origin

IBS is due to the state and municipality where the goods or services are consumed, rather than where they are produced. This dismantles the guerra fiscal, the long-running competition between states offering ICMS incentives to attract investment, and it changes the calculus of where to locate a plant or distribution centre in Brazil.

2026: the test year

CBS and IBS entered legal existence on 1 January 2026 at symbolic rates of 0.9% and 0.1%. Article 348 of Complementary Law 214/2025 excuses payment for events occurring during 2026 where the taxpayer complies with the reporting obligations, and the joint CGIBS and Federal Revenue communication confirmed the year is informational only. The second regulatory law added a 60-day window to correct errors without penalty once one is identified.

2027: the first real change

PIS and COFINS are extinguished and CBS applies at its full rate. IPI rates go to zero for most products, preserved only as necessary to protect the Manaus Free Trade Zone’s competitive position. The Selective Tax begins. For most businesses this, not 2026, is the year the tax cost and the cash-flow profile actually move.

2029 to 2032: the ICMS and ISS phase-down

ICMS and ISS are reduced progressively while IBS scales up over four years, with the two systems running in parallel. Businesses will operate under both regimes simultaneously for that period, which is the most operationally demanding phase of the entire transition. Full implementation arrives in 2033.

Split payment

Complementary Law 214/2025 provides for collection at financial settlement, so that tax is separated from the payment and remitted directly when the customer pays. The Ministry of Finance published the split payment manual and technical specification in June 2026, marking the start of preparation. This is a structural change to working capital and to the treasury function, not merely a compliance detail.

Action required in 2026

Existing ICMS incentives and the compensation fund

Businesses holding onerous ICMS benefits granted for a fixed term can seek compensation from a dedicated fund for the value lost as those benefits are unwound. Article 384 of Complementary Law 214/2025 governs the mechanism, and habilitation requests opened through the government’s electronic portal from January 2026. Missing the window, or failing to document the benefit properly, is a live risk in 2026.

Reduced rates, exemptions and cashback

The reform is not a single flat rate. A reduced rate of 60% of the standard applies to sectors including health, education, public transport and certain foods; the national basic food basket is zero rated; professional services regulated by a professional body receive a 30% reduction; and a cashback mechanism refunds tax to low-income households. The second regulatory law widened zero rating for medicines used in defined lines of care, including oncology.

Specific regimes for particular sectors

Financial services, insurance, real estate, cooperatives, fuels, hotels, restaurants, tourism and government procurement operate under bespoke regimes rather than the standard rules. If your business sits in one of these, the general description of the reform will mislead you, and the specific chapter of Complementary Law 214/2025 is the operative text.

New governance, and a new arena for disputes

The CGIBS issues the single IBS regulation, collects and distributes the tax and decides IBS administrative disputes, while CBS remains with the Federal Revenue. A Harmonisation Forum and Harmonisation Committee exist to keep the interpretation of the twin taxes aligned. This replaces the fragmentation of 27 state and thousands of municipal regimes, but creates new questions about the Committee’s powers and the validity of its normative acts.

Imports and exports

Exports are exempt with the right to retain credits, which is a significant improvement for exporters who currently accumulate unusable ICMS and PIS/COFINS balances. Imports are taxed on the same terms as domestic supplies, so the reform levels the treatment between imported and locally produced goods, and importers should re-model landed cost accordingly.

What foreign-owned businesses should do now

Model the effect of full crediting on your Brazilian margin, map which of your inputs currently generate no credit, review any ICMS benefit that will be unwound and secure its habilitation, assess whether a specific regime applies to your sector and check that your ERP can produce compliant documents showing CBS and IBS. Contracts running past 2027 should address who bears a change in tax burden.

Watch what has not settled

Rates will be fixed by later legislation and calibrated against a reference rate; further regulations, technical notes and CGIBS acts continue to issue; and litigation over the new system’s boundaries has barely begun. Any plan built on the reform should be revisited at least annually until 2033, and positions taken now should be documented well enough to defend later.

The above is an overview of a reform that runs to hundreds of articles and continues to be regulated. Sector-specific rules frequently displace the general position, so the treatment of a particular business should be assessed against the applicable chapter rather than the headline description.

Worth knowing: 2026 is not a year off

Because nothing is payable in 2026, it is tempting to treat the test year as a deferral. It is the opposite: it is the only period in which systems can be tested against real transactions without financial consequence, and it is the window for habilitating ICMS benefit compensation under article 384. Businesses that use it well arrive at 2027 with working invoicing and a documented position; those that do not meet the first year of real CBS liability with untested systems. See the Ministry of Finance reform portal and the second regulatory law (PLP 108/2024), sanctioned in January 2026 for the current state of regulation.

The Transition Timeline

2026

Test year

Informational only

CBS at 0.9% and IBS at 0.1% shown on documents, payment excused under article 348 where reporting obligations are met. ICMS benefit compensation habilitation opens.

2027 to 2028

CBS goes live

First real cost change

PIS and COFINS extinguished, CBS at full rate, IPI reduced to zero outside the Manaus Free Trade Zone and the Selective Tax begins.

2029 to 2033

IBS phase-in

Dual operation, then completion

ICMS and ISS reduced progressively as IBS scales up across four years, with both systems running in parallel until full implementation in 2033.

Get Started

Preparing your Brazilian operation for the transition?

We advise foreign-owned businesses on what the reform changes for their specific sector and structure, on preserving ICMS benefit compensation rights and on contract and pricing terms that survive 2027. Reach out to discuss your position.

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