In a first-of-its-kind ruling in an individual case, a federal court set aside the mandatory flat 10% withholding income tax (IRRF) on the full amount of profits and dividends distributed when monthly payments exceed BRL 50,000.
Since January 2026, Law No. 15,270/2025 has required legal entities to withhold individual income tax (IRPF) at a rate of 10% on the entire amount of profits and dividends paid, credited, applied, or delivered to a single individual resident in Brazil when the total exceeds BRL 50,000 in a given month.
The ruling may be viewed as an application of the ability-to-pay principle and the principle of progressive income taxation. The constitutional issue centers on Article 145, paragraph 1, of the Federal Constitution, which requires taxes to reflect taxpayers’ economic capacity whenever possible. This does not, however, mean that every flat income tax rate is automatically unconstitutional.
The decision renews the debate over whether income taxation must observe these principles. The Federal Supreme Court (STF) has recognized their relevance in previous constitutional challenges, particularly where tax rules may disregard significant differences in taxpayers’ economic capacity. In this context, the federal court’s reasoning draws on broader constitutional case law, although the application of these principles to the new 10% withholding tax on profits and dividends remains subject to review by higher courts.
From this perspective, a flat tax rate may fail to adequately reflect a taxpayer’s economic capacity if it disregards relevant aspects of their circumstances. Whether this reasoning also applies to the new 10% withholding tax is precisely one of the issues that may be examined by higher courts.
The federal government argued that the 10% withholding was merely an advance payment of income tax, rather than necessarily a final tax liability. If the taxpayer’s actual tax liability were lower than the amount withheld, the difference could subsequently be recovered. The judge, however, considered that the constitutional issue arose at the time of withholding itself, because the taxpayer’s assets were reduced before their actual economic capacity was taken into account.
The ruling discussed here should therefore not be interpreted as a definitive declaration that the 10% withholding requirement is unconstitutional throughout Brazil. As reported, it is a first-instance decision subject to review by the Federal Regional Court of the 3rd Region (TRF-3).
Although the ruling presents plausible constitutional reasoning and finds support in a recent STF precedent involving another form of IRRF, that precedent should not be read as establishing that every flat income tax rate is necessarily unconstitutional. The specific question of the 10% rate remains subject to further developments in the case and, potentially, a ruling by higher courts.
Glossary
Withholding Income Tax (IRRF): Brazilian income tax collected at source by the paying entity. Depending on the applicable rules, withholding may constitute an advance payment or a final tax liability.
Individual Income Tax (IRPF): Brazil’s federal income tax on individuals, generally levied on taxable income under the rules applicable to each category of income.
Federal Constitution: Brazil’s 1988 Constitution, which establishes fundamental rights, the structure of government, and constitutional limitations on taxation, including the ability-to-pay principle.
Federal Supreme Court (STF): Brazil’s highest court for constitutional matters, responsible for interpreting the Federal Constitution and ruling on constitutional disputes.
Federal Regional Court of the 3rd Region (TRF-3): A federal appellate court with jurisdiction over the states of São Paulo and Mato Grosso do Sul, including appeals from federal trial courts within its jurisdiction.
