Brazil is in the process of replacing several long-standing consumption taxes with a new dual value-added tax (VAT) system. The framework was established primarily through Constitutional Amendment No. 132/2023 and Complementary Law No. 214/2025, with the transition running from 2026 to 2033.
If you are entering Brazil over the next few years, your business will need to be prepared for changes in tax calculation, invoicing and reporting while the new system is being implemented. In this article, we discuss:
- What is Brazil’s dual VAT?
- When does Brazil’s dual VAT take effect?
- Why does Brazil’s dual VAT matter for companies entering the market?
- Related compliance considerations
- How we support companies establishing and operating in Brazil
- Frequently asked questions
What is Brazil’s dual VAT?
Brazil's new system is described as a dual VAT because taxation will be divided between two closely aligned taxes operating at different levels of government:
- Contribuição sobre Bens e Serviços (CBS): Federal VAT. The test rate is 0.9% in 2026.
- Imposto sobre Bens e Serviços (IBS): VAT administered at state and municipal level. The test rate is 0.1% in 2026.
Which Brazilian taxes will the CBS and IBS replace?
The CBS and IBS will gradually replace four of Brazil's existing consumption taxes: PIS, Cofins, ICMS and ISS.
| Current Bazilian tax | Full name | Government level | Replaced by |
|---|---|---|---|
| PIS |
Programa de Integração Social
(Social Integration Programme)
|
Federal | CBS |
| Cofins | Contribuição para o Financiamento da Seguridade Social (Contribution for the Financing of Social Security) |
Federal | CBS |
| ICMS |
Imposto sobre Operações relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação
(Tax on the Circulation of Goods and on Interstate and Intermunicipal Transportation and Communication Services)
|
State | IBS |
| ISS | Imposto sobre Serviços de Qualquer Natureza (Tax on Services of Any Nature) |
Municipal | IBS |
Why has Brazil adopted a dual VAT model?
Taxation has traditionally been one of the more complex parts of doing business here, with different taxes applying at federal, state and municipal levels. The reform is intended to reduce some of that complexity over time.
The CBS will bring together the main federal consumption taxes, while the IBS will consolidate the main state and municipal taxes. This can help move Brazil towards a more standard VAT model without removing the distinction between the various levels of government.
The CBS and IBS framework also includes reduced rates and specific regimes for certain goods and services, so the treatment will depend on your sector and activities. The position may also vary depending on the tax regime of the Brazilian entity, including where a business falls within Simples Nacional.
Additionally, the wider reform changes the treatment of Imposto sobre Produtos Industrializados (IPI – Tax on Industrialised Products). From 2027, IPI rates will generally be reduced to zero, subject to specific rules intended to preserve the treatment of products manufactured in the Manaus Free Trade Zone.
Separately, the reform introduces the Imposto Seletivo (IS – Selective Tax). This sits outside the CBS and IBS and applies to specified goods and services considered harmful to health or the environment. Depending on your sector and the products you sell or import, IS may also need to be considered.
When does Brazil’s dual VAT take effect?
| Period | What changes? | What businesses should do |
|---|---|---|
| 2026 | Test year for CBS and IBS. Test rates are 0.9% for CBS and 0.1% for IBS, with specific rules relieving compliant taxpayers from collection during the testing phase. |
Prepare enterprise resource planning (ERP), accounting and invoicing systems for CBS and IBS. |
| 2027-2028 | PIS and Cofins will be discontinued as CBS becomes fully effective. The transition towards IBS will continue. | Review pricing, contracts, tax codes, credit treatment and product classifications under the new rules. |
| 2029-2032 | IBS will be phased in progressively while ICMS and ISS are reduced over this period. | Be prepared to operate both the old and new systems and regularly review pricing, credits, invoicing and state and municipal tax positions as the transition progresses. |
| From 2033 | The new model will become fully effective, with ICMS and ISS discontinued. | Operate fully under the CBS and IBS framework. Make sure legacy processes built around the previous taxes have been retired. |
Why does Brazil’s dual VAT matter for companies entering the market?
One of the main considerations is that Brazil is going through a multi-year transition.
PIS and Cofins will be phased out earlier, while ICMS and ISS will remain in the system for longer and be gradually replaced by IBS between 2029 and 2032.
For an established business in Brazil, this may require adjustments to long-standing systems and processes. But if you’re entering the market now, you can factor the transition into how the business is set up from the beginning.
1. Market-entry considerations
Before establishing your business in Brazil, you will need to be clear about what the entity will do. For example, will it import and distribute products, provide services locally or manufacture in Brazil?
If your Brazilian entity will import goods or services, the treatment of those transactions should also be factored into your VAT modelling. The reform does not necessarily change which entity type you should establish, but it can affect the economics and operational requirements of the structure you choose.
Likewise, if you are a Brazilian company looking to expand overseas, you will likely need to consider how the reform could affect your cross-border transactions.
2. Customer and supply-chain location
Customer and supply-chain location will also need to be considered differently under the new VAT framework.
One of the core principles of the new VAT model is the destination principle, under which taxation is directed towards where consumption takes place rather than where the supplier is located.
That is significant in a country the size of Brazil, where businesses may sell across multiple states and municipalities. Major commercial centres include São Paulo, Rio de Janeiro, Belo Horizonte and Curitiba.
When choosing where to set up and operate, consider where your customers and suppliers are located, as well as access to talent and logistics infrastructure. Your tax position can be assessed alongside these wider commercial considerations.
3. ERP, invoicing and compliance readiness
Managing the transition will also depend heavily on whether your systems are ready for it.
Brazil already has a highly digitalised fiscal document environment, and the reform is also bringing CBS and IBS into electronic invoicing and reporting processes. If you are selecting an ERP or accounting platform for a new Brazilian operation, it should be able to support both the current requirements and the transition to the new VAT framework.
This may involve changes to tax determination, invoice fields, product and service classifications, credit calculations and the data needed for tax reporting. It is typically easier to address those requirements during implementation than to reconfigure systems later once transaction volumes have increased.
4. Split payment
Importantly, Brazil’s new VAT system will also introduce split payment, giving the government a more direct role in collecting CBS and IBS.
Under the current model, a business generally receives the full amount from its customer and then pays the relevant taxes to the government. This gives the business temporary access to the full amount received before those taxes are settled.
Under split payment, this will change. Where the mechanism applies, the CBS and IBS portion of a customer payment will be separated during the payment process and directed towards the tax authorities, with the business receiving the remaining amount.
This is likely to change how cash flow is managed and could also affect day-to-day operations in Brazil. As split payment is introduced gradually alongside the CBS and IBS framework, you may need to adapt your cash flow planning over time.
5. VAT credits and business costs
The reform is also designed around a non-cumulative VAT model with a broader credit system. Businesses may generally be able to use eligible CBS and IBS credits arising on purchases against the corresponding tax due on taxable supplies, subject to the conditions and exceptions in the legislation.
For a foreign company preparing a Brazilian business case, the way credits are generated and used can influence pricing, margins and cash flow, so this should form part of your financial modelling before entering the market.
Related compliance considerations
Besides the transition to dual VAT, there are several other tax-related developments and compliance requirements to keep in mind when operating in Brazil:
Ongoing digitalisation of tax compliance
Brazil has been moving towards digital tax administration for many years through systems such as the Sistema Público de Escrituração Digital (SPED – Public Digital Bookkeeping System). The introduction of CBS and IBS continues that direction, with the new taxes being incorporated into Brazil’s existing digital reporting environment.
Withholding tax developments affecting foreign investors
From 1 January 2026, profits and dividends paid or remitted by a Brazilian company to a recipient outside Brazil are generally subject to 10% withholding income tax, subject to the applicable rules and transitional exceptions under Law No. 15,270/2025.
If you are establishing a Brazilian subsidiary, this means the tax analysis should extend beyond the local entity itself to how profits may eventually be returned to the overseas parent. The treatment of other cross-border payments may differ, so funding and repatriation arrangements should be considered as part of the wider structure.
How we support companies establishing and operating in Brazil
As implementation progresses, note that some aspects of the reform may still be adjusted through further legislation and government approvals.
Wherever your business is expanding, our team at Hawksford can provide the local insight and guidance to support your next steps. We can assist you with the requirements involved in establishing and operating a business in Brazil, including the tax considerations relevant to your activities.
We can also provide ongoing guidance as your business develops, helping you keep pace with regulatory changes and understand how they may affect your local compliance obligations. For more information on the setup process, please get in touch with us.
Frequently asked questions
How long will the transition period last?
Brazil’s transition to dual VAT will run from 2026 to 2033. 2026 is the initial testing year, with the new framework scheduled to be fully in place from 2033.
What should businesses review before entering Brazil during the transition period?
Before your Brazilian entity starts trading, you may want to assess how the reform could affect the way the business will operate. This includes whether your planned transaction flows and systems can support both the existing taxes and the new CBS and IBS requirements.
Should the VAT reform affect the timing of a market entry?
Not necessarily. Where there is a strong commercial case for entering Brazil, businesses do not need to delay market entry but should be prepared for the transition.
Will companies need to change their pricing models because of the VAT reform?
Potentially. Companies should review their pricing models as the new rules are introduced, although the extent of any changes will depend on their business model and transaction flows.
Does customer location matter under the new VAT framework?
Yes. The new CBS and IBS framework is based largely on the destination principle, meaning tax is generally intended to follow where consumption takes place rather than where the supplier is established. Customer location may therefore affect the tax position.
Can foreign businesses recover CBS and IBS credits?
Generally, yes, where the foreign business operates through a Brazilian entity that is subject to CBS and IBS and the relevant credit conditions are met. The treatment will depend on the nature of the purchase and the rules that apply.
Will Brazil's VAT reform affect ERP and invoicing systems?
Yes. Brazil’s VAT reform can directly affect ERP and invoicing systems because businesses need to capture and report the new CBS and IBS information correctly. Companies entering Brazil should therefore make sure their systems can support the relevant new requirements.
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