Against the backdrop of Brazil’s Consumption Tax Reform, RFB Ordinance No. 635/2025 represents a significant step in regulating the transition from ICMS to IBS. The Ordinance governs the qualification procedure for companies holding conditional ICMS tax benefits and seeking access to the Compensation Fund for Tax or Financial-Tax Benefits, a mechanism created to mitigate the economic impacts arising from the gradual phase-out of state tax incentives as IBS is implemented.
The Compensation Fund was established to preserve legal certainty for taxpayers based on tax benefits granted by the states and the Federal District for a fixed term and subject to specific obligations.
Financial compensation will be available from 2029 to 2032, following the gradual reduction of ICMS rates and their replacement with IBS.
As an initial step, the Ordinance establishes qualification criteria, requiring:
- submission of supporting documentation
- confirmation of the regularity of the tax benefit
- evidence of the obligations undertaken
- evidence of the economic impact borne by companies as a result of the future reduction of tax incentives
Only previously qualified taxpayers may file claims for financial compensation with the Brazilian Federal Revenue Service.
Main Aspects of RFB Ordinance No. 635/2025
Aspect | Description |
Purpose | Regulation of the qualification of holders of conditional ICMS tax benefits for the Compensation Fund linked to the transition to IBS |
Eligible Benefits | Tax benefits granted for a fixed term and subject to specific consideration by the taxpayer |
Legal Basis | Article 12 of Constitutional Amendment No. 132/2023 and Articles 384 to 390 of Complementary Law No. 214/2025 |
Applicants | Individuals or legal entities holding conditional ICMS tax benefits |
Qualification Period | From 1 January 2026 to 31 December 2028 |
Required Documentation | Evidence of the granting act, benefit validity, obligations undertaken, and economic impact |
Financial Compensation | Expected for the period from 2029 to 2032, following the gradual reduction of ICMS |
One of the regulation’s key requirements is demonstrating that the tax benefit was duly granted by 31 May 2023 and remains in force throughout the tax transition period. Another relevant requirement is the submission of a separate application for each type of tax benefit utilized.
Practical Impacts for Companies
Aspects | Practical impacts |
State Tax Benefits | Need for a detailed review of incentives currently being used |
Tax Planning | Reassessment of the economic viability of incentivized structures |
Documentation Compliance | Organization of granting acts, state records, and supporting documentation |
Tax Oversight | Authority of the Brazilian Federal Revenue Service to review, qualify, and validate the information provided |
Adaptation Timeline | Need for advance preparation before the effective start of the transition between 2029 and 2032 |
Accordingly, more than an administrative formality, the qualification procedure is an essential step to preserve the economic and financial balance of investments made based on incentivized tax regimes, requiring planning, robust documentation, and appropriate tax governance by companies.
Glossary:
RFB Ordinance No. 635/2025: An administrative rule issued by the Brazilian Federal Revenue Service regulating the qualification procedure for the Compensation Fund.
ICMS: A Brazilian state VAT-style tax on sales of goods, interstate and intermunicipal transportation, and communication services.
Consumption Tax Reform: Brazil’s reform of taxes levied on consumption, including the transition from ICMS and other taxes to IBS and CBS.
IBS: The Tax on Goods and Services, a new subnational value-added tax created under Brazil’s Consumption Tax Reform.
Conditional ICMS tax benefits: ICMS tax benefits granted for a fixed term and subject to specific obligations or conditions.
Qualification procedure: The administrative process through which taxpayers must demonstrate that they meet the requirements to access the Compensation Fund.
Tax benefit regularity: Confirmation that the tax benefit was validly granted and remains legally effective.
Compensation Fund for Tax or Financial-Tax Benefits: A fund created to compensate certain taxpayers for the gradual phase-out of qualifying ICMS tax incentives.
Incentivized tax regimes: Tax regimes that provide benefits or incentives to eligible taxpayers, often subject to specific conditions
Tax benefit utilized: A tax benefit actually used or enjoyed by the taxpayer.
