Brazil is the leading destination for foreign direct investment (FDI) in Latin America, accounting for around 40% of capital flows directed to the region. By July 2026, cumulative foreign direct investment in Brazil over the previous 12 months had reached US$88.4 billion, the highest nominal level recorded since 2013. In August of the same year, foreign investors injected R$22.9 billion into B3, representing more than 60% of total participation in Brazil’s capital markets.

Despite these figures, some economic developments are raising concerns among investors.

Brazil’s tax reform, established through Constitutional Amendment 132 of 2023 and entering its transition period in 2026, promises to reduce legal uncertainty, simplify the complexity and bureaucracy of ancillary tax obligations, and modernize Brazil’s tax system through a more technologically advanced approach to tax structuring.

Brazil’s Tax System Is Changing After Decades of Economic Transformation

Brazil’s National Tax Code was enacted on October 25, 1966, and remains the country’s main legal framework governing taxation. Since the code was introduced, Brazil has gone through the promulgation of Institutional Act No. 5 (AI-5) in 1968, the Economic Miracle in 1973, the Diretas Já campaign in 1984, the redemocratization process, the promulgation of the 1988 Constitution, the launch of the Real Plan in 1994, the 2008 financial crisis and several other political and financial crises that fundamentally changed the country’s social and economic landscape.

During the 1950s, known as the “Development Era,” the state assumed a central role in the industrialization of Brazil’s basic industries and in Juscelino Kubitschek’s Target Plan, attracting the automotive industry and expanding energy and highway infrastructure. During the 1970s, Brazil recorded record GDP growth rates, driven by state investment in major infrastructure projects and strong inflows of foreign capital.

In the 1990s, the Collor administration began a process of privatization and trade liberalization. Runaway inflation eventually culminated in hyperinflation before being brought under control by the Real Plan in 1994, which introduced a new currency, although GDP growth rates remained modest.

At the turn of the 2000s, supported by the international commodities boom and the expansion of domestic credit, Brazil experienced solid growth, reaching a historic peak in GDP per capita in 2011. Today, Brazil ranks among the world’s 10 largest economies, with its economic performance strongly supported by agriculture and the services sector.

The fact is that Brazil has changed repeatedly over the past 60 years, making it increasingly evident that adjustments were necessary for legislation to reflect the country’s current economic model.

Fifty-seven years separate the creation of the National Tax Code from the tax reform. When the code was introduced, it was regarded as one of the world’s most sophisticated and modern tax systems. Today, that reality has changed, requiring substantial reforms to bring the framework up to date.

The tax reform does not repeal the National Tax Code. Instead, the new rules introduced by the reform amend the code and the Constitution so that the country’s tax framework remains aligned with economic realities in the coming years.

How Brazil’s New Dual VAT System Will Work

Constitutional Amendment 132 of 2023 introduced Brazil’s consumption tax reform into the country’s legal framework. The reform changes the five taxes that currently apply throughout the production chain while also altering the logic of taxation at the origin and destination.

Before the tax reform, five taxes applied across the production chain: three federal taxes — IPI, PIS and COFINS — one state tax, ICMS, and one municipal tax, ISS.

The main innovation is the consolidation of these taxes into a dual value-added tax (VAT) system, consisting of CBS at the federal level and IBS at the state and municipal levels.

The main objectives of the new framework are to eliminate tax cascading and reduce tax competition among states.

From Tax Competition to Destination-Based Taxation

Under the previous system, consumption was subject to ICMS, a state tax levied at the origin of a product or service. In practice, states would waive part of the ICMS revenue to which they were entitled, either through tax exemptions or reduced rates, to attract investment and encourage companies to establish operations within their territories. This resulted in a so-called “fiscal war” among states.

Under the reform, the tax will instead be collected by the state where the good or service is ultimately consumed, preventing this type of competition.

The elimination of tax cascading is another central objective of the reform. Under the current system, each stage of production is subject to taxes that accumulate throughout the supply chain. The purchase of raw materials, manufacturing of the final product, preparation, distribution and final sale to consumers are all stages subject to different taxes, creating a cascading effect across Brazil’s production chains.

Under the new rules, taxes paid at previous stages can be offset through the use of tax credits, ending the previous logic of taxing taxes.

What Brazil’s Tax Reform Means for Foreign Investors

When analyzing foreign capital flowing into Brazil, it is necessary to understand how international investors view the Brazilian market.

The World Bank’s 2020 Doing Business report, which ranked countries according to the ease of doing business and their regulatory environments, placed Brazil 184th out of 190 countries.

The same assessment estimated that a company operating in Brazil spent an average of 1,501 hours per year on tax-related bureaucratic procedures, compared with a global average of 233 hours and an average of 159 hours among OECD countries.

This scenario illustrates what is commonly referred to as the “Brazil Cost,” a term that encompasses a range of structural, bureaucratic, economic and tax-related challenges that make producing, investing and doing business in Brazil more expensive and complex compared with other countries.

As a result, foreign investors may view Brazil as a higher-risk market and a less obvious investment destination. The size and dynamism of the Brazilian market attract investment, but capital is often directed toward “safer” and more regulated sectors, such as infrastructure, energy and exports, while opportunities in other areas receive less attention.

Could Tax Reform Make Brazil More Attractive to Foreign Capital?

Against this backdrop, the tax reform is presented as a mechanism to reduce or potentially eliminate part of the effects associated with the “Brazil Cost” by bringing the Brazilian tax system closer to models used in Europe.

VAT is currently used by all 27 members of the European Union, as well as by other European countries outside the bloc. Brazil’s tax reform drew significant inspiration from these systems. However, rather than replicating the model of a specific country, Brazil adapted the general principles of VAT to reflect the particularities of its federal structure.

The central objective is to move away from a fragmented system and adopt a multi-stage, non-cumulative tax collected at the destination, which are among the core principles underpinning VAT systems in Europe.

By adopting a more modern and simplified tax system, Brazil sends foreign investors a signal of greater reliability and predictability, characteristics that are important to investment decisions.

The tax reform aligns national regulatory policies more closely with OECD standards, reduces the “Brazil Cost,” increases predictability regarding the tax burden, and seeks to reduce legal uncertainty through lower levels of tax litigation, providing a clearer path toward improving the investment environment in Brazil’s productive economy.

In this context, at the beginning of 2026, Economy Minister Fernando Haddad highlighted the central role of the tax reform:

“Brazil will increasingly become a destination for foreign investment, due to the competitive advantages it already has, but above all because of the tax reform.... There is no doubt that the most impressive thing that was possible to achieve, with the contribution of Congress and the economic team, was the tax reform.”

The transition period for the tax reform begins in 2027 and ends in 2033. During this period, companies will need to navigate the complex parallel transition between the existing system — PIS, COFINS, ICMS and ISS — and the new dual VAT model based on CBS and IBS.

This transition will require significant technological adaptation. Companies will also need to pay close attention to the potential impact of the Split Payment mechanism on corporate cash flow.

The tax reform brings both benefits and challenges, but it clearly signals Brazil’s path toward modernizing its tax system and expanding its ability to attract foreign capital into the domestic market.