The Impact of Tax Reform on the Manaus Free Trade Zone: Constitutional Amendment No. 132/2023 and Supplementary Law No. 214/2025

Key Updates

General Background and Preservation of the Competitive Advantage

• Introduction of the Dual VAT system (IBS and CBS) and Article 92-B of the Transitional Constitutional Provisions Act (ADCT); and
• Regulation through Supplementary Law No. 214/2025, Decree No. 12,955/2026, and CGIBS Resolution No. 6/2026.

Treatment of the Tax on Manufactured Products (IPI)

• Residual maintenance of the IPI with a protective function; and
• Rules applicable to products whose IPI rates were below, above, or equal to 6.5% in 2023.

Tax Incentive Regime for IBS and CBS

• Suspension converted into exemption upon the importation of inputs and capital goods;
• Relief through zero-rating on domestic purchases, intra-zone transactions, and transactions between incentivized industries;
• Mechanisms for deemed IBS and CBS tax credits on sales and acquisitions; and
• Taxation of goods entering the State of Amazonas and restrictions on the use of deemed tax credits.

Introduction

General Background and the Constitutional Competitive Advantage of the Manaus Free Trade Zone (MFTZ)

Constitutional Amendment No. 132/2023 and Supplementary Law No. 214/2025 restructured consumption taxation in Brazil through the creation of the IBS and CBS, replacing PIS/Cofins, ICMS, and ISS. As a fundamental safeguard for Brazil’s Northern Region, Article 92-B of the ADCT expressly ensures the preservation of the competitive advantage of the Manaus Free Trade Zone at the same levels that existed under the taxes being phased out.

The Residual Role of the IPI

Contrary to initial expectations, the IPI was not entirely abolished. Instead, the role of the IPI [AO1.1]was preserved with a strategic function, applying to products manufactured in Brazil that directly compete with goods produced under the MFTZ incentive regime, thereby maintaining regional competitiveness in light of the changes introduced by the Tax Reform.

IBS and CBS Benefits and Mechanisms in the Manaus Free Trade Zone

To reconcile the full non-cumulative nature of the new Dual VAT system with local incentives, Supplementary Law No. 214/2025 also established an integrated set of tax relief mechanisms, including suspensions, exemptions, and zero rates, combined with the granting of substantial deemed IBS and CBS tax credits, ensuring that incentivized companies retain their economic advantages without creating distortions or losses along the supply chain.

Tax Landscape

The Historical Preservation of the Manaus Free Trade Zone

Originally established by Decree-Law No. 288/1967 with the purpose of fostering socioeconomic development and integration in the Western Amazon region, the MFTZ has always relied on tax incentives to overcome logistical challenges and its considerable distance from consumer markets throughout Brazil. During the transition to the new destination-based taxation model (Dual VAT), preserving these guarantees became one of the most sensitive and central issues in the legislative discussions surrounding the Tax Reform.

Building the New Regulatory Framework

Beyond Constitutional Amendment No. 132/2023, the enactment of Supplementary Law No. 214/2025 and its implementing regulations (Decree No. 12,955/2026 and CGIBS Resolution No. 6/2026) addressed the need for legal certainty by establishing objective criteria for eligibility, allocation of goods, and tax credit appropriation. These measures operationalize the tax transition model through 2027 and beyond, providing the foundation for taxpayers' activities under the new framework.

Impacts and Changes

IPI's Protective Function Beginning in 2027

The rate of the IPI, now used to preserve the competitive advantage of the MFTZ, will be reduced to zero as of 2027 for all products whose historical IPI rate was below 6.5% in 2023. In such cases, a 6% deemed CBS credit will be granted on incentivized sales (Article 454).

For products with an IPI rate equal to or greater than 6.5%, and for which no domestic equivalent existed in 2023, a minimum IPI rate of 6.5% will be maintained in the rest of the country, with the Executive Branch authorized to increase it by up to 30 percentage points, or alternatively grant a 6% deemed CBS credit (Article 455).

Information and Communication Technology (ICT) products must comply with the specific guidelines and requirements set forth in Brazil's Information Technology legislation (Article 454, Paragraph 2).

Imports and Domestic Acquisitions

For imports carried out by incentivized industries, the incidence of IBS and CBS is suspended at customs clearance and converted into a definitive exemption, if the imported goods are directly consumed in the production process or remain in fixed assets for at least 48 months, or until fully depreciated (Article 443).

Likewise, transactions originating outside the MFTZ involving domestically produced industrial goods sold to eligible purchasers benefit from a zero IBS and CBS rate, while maintaining the full value [AO2.1]of accumulated tax credits by the supplying company (Article 445).

Additionally, when goods benefiting from the zero rate enter the State of Amazonas and are destined for taxpayers that are not incentivized industries, such as commerce and service businesses, IBS will apply at 70% of the standard rate, while the purchaser will retain the right to claim the corresponding tax credit (Article 446).

Deemed Tax Credit System and Internal Transactions

For sales of locally manufactured products to the rest of Brazil, incentivized industries are entitled to a deemed IBS credit applied against the tax balance due, calculated at 55% for final consumer goods; 75% for capital goods; 90.25% for intermediate goods; and 100% for IT products and goods that already benefited from a 100% ICMS incentive credit as of 2023. In addition, deemed-CBS credits of either 2% or 6% may also apply (Article 450).

For transfers of intermediate goods between incentivized industries within the MFTZ, IBS and CBS are zero-rated, while the purchasing industry is entitled to a 7.5% deemed IBS credit (Articles 448 and 449).

For imports intended for in-person retail resale within the MFTZ, taxpayers may claim a 50% deemed IBS credit upon customs clearance (Article 444).

With respect to eligibility conditions and limitations, these deemed credits expire after five years and may only be used to offset IBS and CBS liabilities owed by the same taxpayer. Cash refunds and cross-compensation against other taxes are expressly prohibited (Article 452).

What Can We Conclude?

In light of the foregoing, and as further detailed in our presentation available below, the regulations implementing Brazil's Tax Reform have established a complex framework of specific rules designed to ensure the continued preservation of the Manaus Free Trade Zone's competitive advantage.

For companies operating in the Manaus Industrial Pole and their commercial partners throughout Brazil, it will be essential to conduct a detailed review of their product portfolios, including NCM classifications, Basic Production Process requirements, and historical IPI rates, as well as to maintain rigorous controls over physical inflows and comply with the requirements governing the appropriation of deemed IBS and CBS tax credits.

Our Tax team remains available to discuss this topic and assist in assessing the sector-specific impacts that these new regulations may have on our clients' businesses.

*This content was produced with the participation of law clerk Maria Eduarda Perrucci.