A strategic overview of indirect taxation, tax reform, customs regimes, and cross-border structuring considerations for Chinese companies investing in Brazil
Introduction
Brazil has emerged as a strategic destination for Chinese investment, particularly in agriculture, logistics, energy, and infrastructure. However, the complexity of Brazil’s indirect tax system remains one of the most significant challenges for foreign investors seeking to establish or expand operations in the country.
This article provides Chinese investors with a comprehensive overview of Brazil’s indirect tax framework, highlights key risks and opportunities, and offers practical guidance for structuring investments in a tax-efficient manner.
This article is co-authored by Fernanda Ramos Pazello and Ricardo Maito, partners in the Tax practice at TozziniFreire, and Hairong Li, partner in the Cross-border Investment/M&A at Zhonglun, Chinese law firm, combining Brazilian regulatory expertise with the Chinese perspective on cross-border structuring, bilateral treaties, and remittance planning.
- Brazil’s Indirect Tax System: An Overview
Brazil’s indirect tax regime comprises multiple taxes levied by different levels of government. For Chinese investors, understanding this multi-layered structure is essential to avoid unexpected costs and ensure compliance.
- ICMS (Imposto sobre Circulação de Mercadorias e Serviços) is a state-level value-added tax levied on the circulation of goods, interstate and intercity transportation, and communication services. Each of Brazil’s 27 states sets its own rates, exemptions, and incentive programs, resulting in a patchwork of rules that varies significantly depending on where operations are located. Interstate transactions are subject to rate differentials that directly affect supply chain decisions, particularly for investors considering logistics hubs or agricultural processing plants. Currently, certain Brazilian states, such as Santa Catarina, Minas Gerais, and Espírito Santo, among others, grant tax incentives for import transactions, including tax deferral and reductions in the tax base or presumed tax credits on subsequent intrastate or interstate sales.
- PIS and COFINS (Contribuição para o Programa de Integração Social / Contribuição para o Financiamento da Seguridade Social) are federal contributions levied on gross revenue. They apply under either a cumulative regime (with rates of 0.65% and 3%, respectively, and no input credits) or a non-cumulative regime (with rates of 1.65% and 7.6%, respectively, with input credits). The choice of regime depends on the taxpayer’s corporate income tax method, and the rules governing creditability are highly detailed and frequently litigated. For imports, PIS-Importação and COFINS-Importação are levied at the customs clearance stage, adding to the cost base of goods entering Brazil.
- IPI (Imposto sobre Produtos Industrializados) is a federal excise tax applicable to manufactured goods, including imported products upon customs clearance and domestic products upon leaving the manufacturing facility. Rates vary widely depending on the product classification under Brazil’s tax nomenclature (TIPI).
- Imports and Exports: Tax Treatment and Planning Opportunities
Chinese investors involved in trade flows between Brazil and China must carefully evaluate the tax treatment applicable to imports and exports.
On the import side, goods entering Brazil are subject to Import Duty (II), IPI, PIS-Importação, COFINS-Importação, and ICMS, all calculated on a cascading basis that significantly increases the effective tax burden. The customs value, determined in accordance with WTO valuation rules, serves as the starting point, but each tax is calculated on a progressively broader base that includes the preceding taxes. Transfer pricing rules also apply to transactions between related parties, which is relevant for Chinese groups establishing Brazilian subsidiaries.
On the export side, Brazil’s Constitution grants immunity from ICMS and IPI on exported goods, and PIS/COFINS are levied at zero rate on export revenues. This favorable treatment is designed to enhance Brazilian competitiveness in international markets. However, the practical realization of these benefits often requires careful management of accumulated tax credits. Exporters frequently accumulate ICMS credits from inputs that cannot be easily offset against other liabilities, leading to cash flow challenges. Several states offer mechanisms for credit transfer or monetization, but these processes can be bureaucratic and time-consuming.
Special Customs Regimes
Brazil offers several special customs regimes that can substantially reduce the tax cost of operations involving imports and exports. For Chinese investors, the most relevant include:
Drawback allows the suspension, exemption, or refund of taxes paid on inputs used in the production of exported goods. It is one of the most widely used instruments for reducing the tax burden on export-oriented operations and is available in three modalities: suspension (taxes suspended at import, conditioned on future export), exemption (tax-free replacement of previously imported inputs used in exported goods), and refund (restitution of taxes paid on inputs incorporated into exported products).
RECOF (Regime Aduaneiro Especial de Entreposto Industrial sob Controle Informatizado) permits the import of inputs with suspension of federal taxes (II, IPI, PIS, and COFINS) for industrial processing, provided that a minimum percentage of the resulting products is exported. This regime is particularly attractive for manufacturing operations that serve both domestic and international markets.
Temporary Admission (Admissão Temporária) allows the import of goods into Brazil for a specified period with the suspension of taxes. However, after the agreed period has elapsed, the imported goods have to be re-exported or have the regime extinguished through another legally permitted form. For Chinese investors in the agricultural sector, the economic use modality is particularly relevant for the temporary importation of machinery, equipment, and industrial tooling. At the end of the regime, the investor may choose to re-export the goods or nationalize them by paying the remaining suspended taxes.
Bonded Warehouses and Free Trade Zones such as the Manaus Free Trade Zone (Zona Franca de Manaus) offer significant tax reductions for specific sectors and regions. While not always aligned with agricultural investments, they may be relevant for Chinese investors in electronics, industrial components, or other manufactured goods.
State-Level Tax Incentives in Agriculture and Logistics
Brazilian states actively compete to attract investment through ICMS-based incentive programs, which may include reduced rates, tax credits, deferrals, or outright exemptions. For Chinese investors in agriculture and logistics, the most significant opportunities are typically found in states with strong agribusiness sectors, such as Mato Grosso, Goiás, Mato Grosso do Sul, Minas Gerais, and São Paulo.
Common incentive structures include ICMS rate reductions for specific agricultural products or for transactions within certain supply chains, presumed credit regimes that reduce the effective ICMS rate on interstate sales of agricultural commodities, tax deferrals on inputs used in agricultural production or processing, and specific programs for logistics infrastructure such as warehouses, cold storage, and transportation hubs.
It is important to note that state incentives have historically been a source of significant legal uncertainty in Brazil due to the so-called "fiscal war" (guerra fiscal) between states.
The Constitutional Amendment 160/2023 and complementary legislation have sought to validate existing incentives and establish clearer rules going forward, but investors should conduct thorough due diligence on the legal stability and compliance requirements of any incentive relied upon.
- The Tax Reform: IBS and CBS and Their Impact on New Investments
Brazil is undergoing its most significant indirect tax reform in decades. Constitutional Amendment No. 132/2023 introduced a dual value-added tax model that will progressively replace the current system between 2026 and 2033. The new framework comprises:
- IBS (Imposto sobre Bens e Serviços), a subnational VAT that will replace ICMS (state) and ISS (municipal tax on services), collected by states and municipalities under uniform national rules.
- CBS (Contribuição sobre Bens e Serviços), a federal VAT that will replace PIS, COFINS, and IPI, administered by the federal government.
Both taxes will operate on a destination-based principle, with a broad base, taxation on the outside, few exemptions, full creditability of inputs, and a unified rate (with reduced rates for specific sectors such as food, health, and education). We still don’t have the definition of the rates.
For Chinese investors planning medium- and long-term operations in Brazil, the reform has profound implications. The transition period (2026–2033) will require companies to operate under both the old and new systems simultaneously, increasing compliance complexity in the short term. However, once fully implemented, the new system promises greater simplicity, legal certainty, and neutrality.
For the agricultural sector specifically, the reform contemplates reduced rates and special treatment for certain staple foods and agricultural inputs, though the detailed regulations are still being finalized. Investors should monitor regulatory developments closely and consider the long-term tax environment when making location and structuring decisions today.
- The Chinese Perspective: Structuring Cross-Border Investments
From the Chinese investor’s standpoint, the structuring of investments into Brazil must also account for considerations arising under Chinese law and bilateral arrangements.
China Brazil Double TAX Treaty: Brazil and China have a Double Taxation Agreement (DTA) in force since 1993, which provides reduced withholding tax rates on dividends, interest, and royalties, as well as mechanisms to avoid double taxation of business profits. Proper treaty planning is essential to ensure that profits repatriated from Brazilian operations are not subject to excessive taxation in both jurisdictions.
Holding Structures: Chinese groups frequently use intermediate holding companies (in Hong Kong, Singapore, or other jurisdictions) to invest in Latin America. The choice of holding jurisdiction affects not only withholding tax rates under applicable treaties but also Chinese CFC (Controlled Foreign Corporation) rules, which may trigger current taxation in China on undistributed profits of foreign subsidiaries.
Profit Remittance and Foreign Exchange: Brazil imposes withholding income tax (IRRF) on dividends, interest on equity (juros sobre capital próprio), royalties, and service fees remitted abroad. The applicable rates vary depending on the nature of the payment and the existence of a tax treaty. Chinese investors must coordinate Brazilian withholding obligations with Chinese foreign tax credit mechanisms to minimize the overall tax burden on repatriated income.
Outbound Investment Approvals: Chinese companies investing abroad must comply with NDRC (National Development and Reform Commission) and MOFCOM (Ministry of Commerce) filing or approval requirements, depending on the size and nature of the investment. These regulatory steps should be coordinated with the Brazilian investment timeline.
Practical Recommendations for Chinese Investors
Chinese investors considering operations in Brazil, particularly in agriculture and logistics, should adopt a structured approach to indirect tax planning.
1) Conducting a comprehensive tax diagnostic before committing to a location or business model is essential, as the choice of state, supply chain structure, and corporate form will significantly affect the indirect tax burden.
2) Investors should actively explore available customs regimes and state incentives, ensuring full compliance with conditions and documentation requirements to avoid future challenges by tax authorities.
3)The ongoing tax reform requires a forward-looking perspective: investment decisions made today should be stress-tested against the future IBS/CBS framework to avoid structures that will become suboptimal once the transition is complete.
4) Actively utilize Brazil’s cross-border tax treat incentives. Firstly, under the China-Brazil Tax Avoidance treat, Chinese companies must submit a tax resident certificate to the Brazilian tax authority before remitting dividends and technology related fees overseas to benefit from a preferential withholding tax rate of 10%. Otherwise, they will face a higher rate of 15% with lengthy post-payment refund procedures. Secondly, the Southern Economic Community including Brazil has signed bilateral trade treat with the EU. Within a future set period, the currently applicable 35% bilateral trade tax rate will gradually decrease annually until reaching zero. This could enable manufacturing enterprises in Brazil to benefit from tax incentives under this treat when exporting goods from Brazil to the EU, potentially creating a second growth curve for Chinese products entering the EU market.
Actively utilize Brazil’s cross-border tax treaty incentives. First, regarding the China-Brazil Tax Treaty for the Avoidance of Double Taxation, Chinese companies should be aware that Brazil reintroduced a 10% withholding tax on dividends paid to nonresident shareholders effective 1 January 2026, pursuant to Law No. 15,270/2025. Under the recently amended China-Brazil Tax Treaty (ratified through Legislative Decree No. 170/2025), the maximum withholding rate on dividends is set at 10% for companies that directly hold at least 25% of the capital of the paying company, which is now aligned with the domestic rate. More importantly, the amended treaty significantly reduces withholding rates on royalties, from 25% to 15% for trademarks, and from 15% to 10% for all other royalties (including technology-related fees), provided the recipient is the beneficial owner and a resident of the other contracting state. Chinese companies must ensure they submit a tax resident certificate to the Brazilian tax authorities to claim these treaty benefits; otherwise, they may face higher domestic withholding rates and complex refund procedures.
Second, Mercosur (the Southern Common Market, comprising Brazil, Argentina, Paraguay and Uruguay) and the European Union concluded a landmark Partnership Agreement on 6 December 2024. The interim Trade Agreement (iTA) has been provisionally applied since 1 May 2026. Under this agreement, Mercosur will reduce import tariffs on 91% of EU exports, including automobiles (currently facing duties of up to 35%), machinery (14-20%) and pharmaceuticals (up to 14%), over a 15-year phase-in period. Conversely, the EU will also reduce or eliminate tariffs on imports from Mercosur countries. This creates a significant opportunity for Chinese manufacturing enterprises operating in Brazil: by producing goods locally that comply with the agreement’s rules of origin, they may benefit from preferential tariff treatment when exporting to the EU market, potentially establishing a competitive advantage for Chinese products entering Europe through Brazil.
5) Coordination between Brazilian and Chinese tax advisors from the outset ensures that cross-border structuring achieves efficiency on both sides and avoids costly restructuring later.
6) Be prepared to handle tax investigations. Tax investigations happen frequently in Brazil, and specialized tax audits often come with severe penalties and prolonged litigation. Even large local enterprises in Brazil routinely face tax investigations as part of their business reality. On one hand, Chinese companies need to ensure their own ongoing daily tax compliance by conducting regular tax compliance checks to promptly identify compliance risks and avoid triggering tax investigations. On the other hand, they should also perform periodic due diligence on local partners or suppliers to prevent to be involved in these parties’ tax investigations from drawing the attention of tax authorities and damaging the company’s reputation.
- Conclusion
Brazil offers significant opportunities for Chinese investors, but its indirect tax environment demands careful navigation. The combination of a complex multi-tax system, significant state-level variation, ongoing reform, and cross-border structuring considerations makes specialized advisory essential. By combining Brazilian regulatory expertise with Chinese cross-border planning, investors can identify structures that minimize tax costs, manage compliance risks, and position themselves to benefit from Brazil’s evolving tax landscape.
Tax compliance is absolutely a most comprehensive issue in Brazil for Chinese investors, a stark contrast to China and other overseas markets. Chinese investors must adopt a highly cautious approach to tax compliance from the outset when they enter the Brazilian market.
