Brazil’s Congress has taken a decisive step toward reshaping the country’s tax landscape, as lawmakers approved a high-profile initiative to exempt millions of middle-class citizens from paying income tax. The reform, championed by President Luiz Inácio Lula da Silva, seeks to ease the financial burden on average Brazilians while increasing taxes on the wealthiest—a move that has sparked both celebration and controversy across the nation.
On October 1, 2025, the House of Representatives passed Bill No. 1087/25, a legislative proposal that raises the monthly income threshold for tax exemption from 3,000 reais (about EUR 480) to 5,000 reais (roughly EUR 800), according to reporting by BFMTV. This change means individuals earning up to that amount will no longer pay federal income tax, up from the previous cutoff. The government estimates that, if fully enacted, the measure will relieve approximately 16 million Brazilians of their tax obligations by 2026.
But what about the resulting gap in public finances? Lawmakers addressed this by introducing a compensatory tax targeting high earners. Under the bill, anyone making more than 50,000 reais per month (about EUR 7,995) or 600,000 reais per year will see their tax rate quadruple—from the current average of 2.5% to a minimum of 10%. This progressive approach is designed to shift the tax burden upward, with the expectation that those most able to contribute will help offset the revenue lost from exempting the middle class.
For context, around 140,000 Brazilians fall into this high-income bracket. The new rates will be phased in gradually, but the intent is clear: the government wants to create a more equitable tax system that supports those struggling with rising costs while asking more from the country’s wealthiest residents.
The House’s approval followed intense debate and a flurry of proposed amendments—99 in total. In the end, only three were accepted, reflecting the legislature’s commitment to the bill’s original structure. Among the agreed changes: profits and dividends related to results recorded up to the 2025 tax year will remain exempt from income tax, provided the distribution is approved by December 31, 2025, and payment is made between 2026 and 2028. Additionally, income from Infrastructure Private Equity Investment Funds (FIP-IE) is excluded from the minimum tax, and quarterly federal transfers will compensate states and municipalities for any revenue losses, with the possibility of reducing the Goods and Services Contribution (CBS) rate as well.
There was also a brief moment of confusion regarding whether the exemption brackets would be indexed to inflation via the Broad National Consumer Price Index (IPCA). According to the legislative summary, a second draft temporarily included this provision, but the rapporteur ultimately described it as a clerical error and removed it before the final vote.
Notably, the bill preserves graduated income tax rates up to 7,350 reais per month, and introduces a minimum 10% tax on profits and dividends above the 50,000 reais monthly threshold. For those earning more than 600,000 reais annually, the tax becomes progressively steeper. The scope of these measures, as outlined by the Special Committee, aims to ensure that the reform is both broad in reach and targeted in its impact.
The next steps for the legislation are procedural but crucial: the bill now advances to the Federal Senate for further debate. If approved there, it will return to the House for a final review before being sent to the President’s desk for signature into law.
The reform’s significance goes beyond mere numbers. For President Lula da Silva, this initiative forms the backbone of his administration’s promise to deliver economic justice and support for working families. "This is a landmark initiative to exempt the middle class from income tax," BFMTV quoted government sources as saying. The government has repeatedly emphasized that the plan is about fairness, ensuring that those who have benefited most from Brazil’s economic growth contribute a larger share to the public good.
Still, not everyone is convinced. The financial markets reacted negatively to the proposal when it was first floated last year, leading to a historic decline in the value of the real, Brazil’s national currency. Investors expressed concerns about the potential impact on the country’s fiscal stability, fearing that the loss of middle-class tax revenue might not be fully offset by the higher rates on the wealthy. The government, for its part, has argued that the number of high earners is sufficient to make up the difference, especially with the new rates in place.
Some lawmakers also questioned the potential effects on states and municipalities, which often rely on federal transfers to fund essential services. The inclusion of quarterly compensation payments in the final text was intended to address these concerns, providing a mechanism to ensure that local governments are not left shortchanged by the reform.
Meanwhile, the business community and financial analysts have raised questions about the broader economic implications. Will the higher tax rates on the wealthy discourage investment or prompt capital flight? Could the reform, despite its good intentions, end up constraining economic growth? These are not idle worries in a country that has seen its share of fiscal turbulence over the years.
Supporters of the measure, however, point to the urgent need to address inequality and the rising cost of living. With inflation eroding purchasing power and many families struggling to make ends meet, the tax exemption is seen as a lifeline for millions. "The government projects that about 16 million Brazilians will no longer pay income tax by 2026 if the initiative is fully implemented," BFMTV reported, highlighting the scale of the reform’s potential impact.
There are also practical considerations. The bill includes specific carve-outs for certain types of income and professions. For example, officeholders of notary and registry offices who make mandatory remittances required by the National Council of Justice are excluded from the new taxation rules. This reflects the complex realities of Brazil’s tax system, where one-size-fits-all solutions are rarely feasible.
As the Senate prepares to take up the bill, the debate is far from over. Lawmakers on both sides of the aisle are expected to scrutinize the details, weighing the promise of relief for the middle class against the risks of fiscal imbalance and market volatility. The outcome will shape not only the immediate fortunes of millions of Brazilians but also the broader trajectory of the country’s economy and social contract.
For now, though, the message from Brasília is unmistakable: the government is betting that a fairer, more progressive tax system is the key to a stronger, more inclusive Brazil. Whether that bet pays off remains to be seen, but one thing is certain—the stakes could hardly be higher.