Tax Law Highlights | The Reduction of Tax Incentives under Complementary Law No. 224

Key Developments

Brazil’s Complementary Law No. 224/2025 (“LC 224/2025”) introduced a linear reduction of tax, financial and credit incentives and special regimes at the federal level, as well as criteria for their granting and extension.

The reductions provided in LC 224/2025 primarily affect tax incentives related to the Social Integration Program Contribution (PIS/PASEP), the Social Security Financing Contribution (COFINS), Corporate Income Tax (IRPJ), Social Contribution on Net Profit (CSLL), Import Tax (II), Tax on Industrialized Products (IPI) and employer social security contributions.

Regulatory Framework

The discussion regarding the reduction of tax incentives is grounded in Constitutional Amendment No. 109/2021 (“EC 109/2021”), which established mechanisms aimed at controlling mandatory expenditures and tax expenditures in the context of fiscal adjustment. Among the guidelines set forth by EC 109/2021 is the possibility of reviewing and gradually reducing tax benefits, in line with fiscal responsibility policies and a more rational approach to existing tax exemptions.

In this context, LC 224/2025 was enacted to control tax expenditures and assess their economic effectiveness. Subsequently, additional regulations were issued to implement its provisions, namely:

• Decree No. 12,808/2025;
• Ministry of Finance Ordinance No. 3,278/2025; and
• Federal Revenue Service Normative Instructions Nos. 2,305/2025 and 2,306/2026.

Considering that LC 224/2025 was published on December 26, 2025, its effects apply as follows:

• From January 1, 2026, for IRPJ and II; and
• From April 1, 2026, for PIS, COFINS, CSLL and IPI.

In addition, LC 224/2025 established a specific mechanism for implementing the reduction, based on a standard taxation system used as a benchmark for calculating such reductions.

The so-called standard taxation system refers to the identification of the ordinary tax regime applicable to a given transaction or activity. Based on this benchmark, the law sets forth rules according to the nature of the tax benefit, as follows:

• Exemptions and zero rates: Subject to taxation equivalent to 10% of the standard tax rate;
• Reduced rates: Recalculated based on a formula combining 90% of the reduced rate with 10% of the full rate;
• Reductions in the tax base: Limited to 90% of the originally applicable reduction; and
• Deemed credits: Restricted to 90% of the previously allowed amount.

The implementation of the new framework is expected to give rise to several relevant legal discussions, particularly regarding the reduction of incentives granted for a fixed term and subject to specific conditions, potentially affecting the legitimate expectations of taxpayers who undertook investment commitments or other obligations as a condition for benefiting from such incentives. This is because LC 224/2025 excludes from the scope of the linear reduction only those granted benefits subject to burdensome conditions, interpreted exclusively as investments set forth in projects approved by the Federal Executive Branch by December 31, 2025.

Key Takeaways

LC 224/2025 introduces a structural change in how the Brazilian legal framework addresses federal tax expenditures. Although grounded in constitutional provisions, the manner in which the linear reduction has been implemented suggests potential controversy and the likelihood of judicial challenges.

In this context, the analysis of LC 224/2025 requires careful attention not only to its statutory provisions, but also to the evolution of case law, which will play a central role in defining the effective limits of this new policy on the reduction of tax incentives.

This content was prepared with the collaboration of law clerks Luiza Nordi and Lara Aguilar.

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