New Income Tax Exemption Law in Brazil Set to Benefit 80% of Small Businesses Starting 2026

Brazil has enacted a new income tax exemption law that will significantly benefit small businesses and low-income entrepreneurs beginning in 2026. The law, sanctioned by President Luiz Inácio Lula da Silva, raises the income tax exemption threshold from R$ 3,076 to R$ 5,000 per month, impacting nearly 80% of small business owners across the country. This expansion allows those earning up to R$ 5,000 monthly to be exempt from paying income tax, while partial tax reductions will apply to incomes between R$ 5,000.01 and R$ 7,350 per month.

To balance the reduced revenue from the broader exemption, the legislation includes a progressive tax rate reaching up to 10% for individuals earning over R$ 600,000 annually. Additionally, a 10% tax on profits and dividends sent abroad was introduced. The law also contains provisions to compensate states and municipalities for revenue changes and extends tax relief benefits to notaries starting January.

President Lula highlighted that the exemption fulfills a campaign promise and aligns with recent improvements in Brazil's income distribution, inequality, and poverty indicators, as reported by the Institute for Applied Economic Research (Ipea). Décio Lima, president of Sebrae, emphasized the law's substantial advantage for low-income entrepreneurs and pointed out that micro and small businesses generated approximately 750,000 formal jobs in the first half of 2025 alone.

This tax reform aims to enhance the purchasing power of poorer citizens and stimulate consumption, evidencing a strategic approach to supporting Brazil's small business sector.

With these changes, the Brazilian government expects to foster economic growth and social inclusion by reducing the tax burden on the majority of small business operators while increasing contributions from high earners.