Federal Appellate Judge Leandro Paulsen, of the Federal Regional Court for the 4th Region, issued a preliminary injunction in Interlocutory Appeal No. 5026333-41.2026.4.04.0000/RS, ordering the tax authorities to refrain from requiring the withholding agent and the taxpayer to withhold income tax at a rate higher than that which would apply if monthly profit and dividend payments ranging from BRL 50,000.00 to BRL 100,000.00 were annualized over the twelve months of the calendar year. In practice, the monthly withholding will be calculated at a rate presumed to be equivalent to the rate applicable under annual taxation, without prejudice to the adjustment to be made in the annual income tax return.
By Way of Background:
The ruling was issued in an interlocutory appeal filed by Flamil Comércio, Transporte Rodoviário e Logística Ltda. and its individual shareholder against a trial court decision that had denied preliminary relief in a mandamus proceeding. The petitioners sought relief from the requirement to withhold personal income tax at the fixed rate of 10%, as provided for in Article 6-A of Law No. 9,250/1995 (added by Law No. 15,270/2025), on profits and dividends distributed by the legal entity to the individual whenever the monthly threshold of BRL 50,000.00 is exceeded.
The appellants argued that the levy violates the principles of progressive taxation, ability to pay, equal treatment, proportionality, reasonableness, and the prohibition against confiscatory taxation, while also imposing an additional layer of taxation on wealth already taxed at the level of the legal entity under the Actual Profit regime. They further contended that, unlike gradual, bracket-based progressive taxation, the fixed 10% rate results in radically different treatment of virtually identical situations.
Grounds of the decision:
In considering the request for interim appellate relief, the reporting judge acknowledged that gradual, bracket-based progressive taxation is indeed the approach that most effectively gives effect to the principles of ability to pay and equal treatment. He noted, however, that the Brazilian Federal Supreme Court (STF) had previously upheld the constitutionality of simple progressive taxation in a similar context when ruling on General Repercussion Theme No. 833 (Extraordinary Appeal No. 852.796, 2021).
The central issue in the ruling lies in the distinction between monthly withholding (Article 6-A of Law No. 9,250/1995) and the annual taxation of high incomes (Article 16-A of the same statute). According to the Federal Appellate Judge, monthly withholding is merely an advance payment of the amount ultimately due as annual tax, and the law expressly provides for the refund of any excess amount withheld. Accordingly, anyone receiving less than BRL 600,000.00 during the year is not subject to annual taxation, and any monthly amounts withheld throughout that period must be refunded in full.
For individuals receiving more than BRL 600,000.00 per year, the annual tax is calculated under a specific formula (rate (%) = (income/60,000) − 10), which preserves equal treatment because it applies to the entire tax base and imposes a tax burden only on those exceeding the minimum threshold. The issue identified by the reporting judge lies precisely in the mismatch between this annual formula, which follows gradual progressive taxation, and the fixed monthly withholding rate of 10%: for monthly income ranging from BRL 50,000.00 to BRL 100,000.00 (equivalent, under the annual parameters, to BRL 600,000.00 and BRL 1,200,000.00, respectively), the presumed monthly rate should range from 0% to 10%, rather than being imposed at the maximum rate from the outset.
The Federal Appellate Judge provided the following example: a taxpayer receiving BRL 601,000.00 in a given year would owe only BRL 100.16 in tax—an insignificant amount compared with the sums that would be withheld monthly at the fixed 10% rate. The ruling characterized this advance collection of amounts presumed not to be due, without regard to the taxpayer’s projected ability to pay, as a requirement that disproportionately deprives the taxpayer of the use of their funds and, in the reporting judge’s view, resembles a compulsory loan imposed without satisfying the requirements of Article 148 of the Constitution, which mandates enactment by complementary law and the allocation of the proceeds to a designated purpose.
The Ruling:
Having found a likelihood of success on the merits and a risk of harm arising from the newly imposed requirement and the lack of any alternative available to the withholding agent, which could not reduce the withholding without becoming subject to penalties, the reporting judge partially granted interim appellate relief. The ruling does not eliminate the withholding requirement altogether but limits it. For monthly payments of profits and dividends ranging from BRL 50,000.00 to BRL 100,000.00, the tax authorities may not require withholding at a rate higher than the rate that would apply under annual taxation if the monthly income were annualized over twelve months, using the formula “monthly rate (%) = (monthly income × 12 / 60,000) − 10,” without prejudice to the annual adjustment.
Conclusion:
The ruling is significant because it exposes a weakness in the new framework for taxing profits and dividends: the fixed 10% monthly withholding rate, disconnected from the progressive taxation applicable to the annual adjustment, requires taxpayers to advance funds to the tax authorities without regard to their actual ability to pay—particularly those in the intermediate annual income range between BRL 600,000.00 and BRL 1.2 million.
It is, moreover, a preliminary ruling issued by a single judge, subject to an internal appeal and subsequent affirmance or reversal by the adjudicating panel. Nevertheless, it already signals a well-founded judicial challenge supported by the Brazilian Federal Supreme Court’s own precedent on progressive taxation.
Companies and shareholders distributing profits and dividends in excess of BRL 50,000.00 per month—particularly those subject to the Actual Profit regime—should carefully assess the impact of this withholding on their cash flow and determine whether there are grounds to seek the same treatment through judicial proceedings.
Our tax team is available to review the specific circumstances of each case and assess the feasibility of appropriate legal action to recover amounts improperly withheld or obtain relief from such withholding.