In Brazil, there are three different types of taxes levied on income: the IRPF, the IRPJ and the IRRF. In this article, we will learn more about IRRF.
What is IRRF?
Short for Imposto de Renda Retido na Fonte, which is Portuguese for Revenue Tax Withheld at the Source, IRRF is a modality of the federal tax over taxable income. IRRF applies to
- Labor income
- Capital income
- Remittances abroad
- Money prizes
- Advertising services provided by legal entities
- Remuneration for services provided by legal entities
IRRF started as a tax over financial operations in which there was no need for the taxpayer to identify themselves. Nowadays, IRRF is used as a way of anticipating tax collection. In other words, the taxpayer pays the tax at the same time as they are receiving their profits, and then at the end of the year they prepare a Statement. In this Statement, they will state what they have already paid, and state what they should have paid. In the case where the taxpayer has paid more than what was due, they will:
- Be refunded, in cases of individuals
- Be granted a tax credit, in cases of legal entities
There is a second kind of collection of IRRF, which is the Tributação Exclusiva na Fonte. With this kind of collection, the taxpayer will not have right to a possible refund or tax credit if they paid more tax than what was due. As compensation, the tax levied is lower as it will be taxed as a single income, not being added to the calculation of taxes due in a certain month. The different types of income that may be taxed with this method are:
- Prizes won in sweepstakes, contests, lotteries or bingos
- Earnings made from securities
- 13th salary and other types of salary bonus
There is a particular group of taxpayers, which are addressed as “equivalent to legal entities” even though they are individuals. In other words, for all other types of private laws they are considered as individuals, but for tax laws they are taxed as legal entities. As an example, there are the individual companies, that are addressed by the Brazilian Civil Code as “individual business owners” or other legal entities that are owned by one person only.
Over what is IRRF levied?
As its name states, IRRF is levied over all taxable income. The following kinds of income are subject to IRRF collection:
- Earnings resulting from paid work, paid by individuals or by legal entities
- Earnings resulting from unpaid work, paid by legal entities
- Income from rent and royalties paid by legal entities and income resulting from payment of services between legal entities - such as brokerage, publicity and promotion services
- Earnings paid, credited or delivered to legal entities located abroad, by a paying source located in Brazil. It presents different tax rates according to the legal definition of the earnings, the country to which the earnings are sent and under which tax regime the legal entity located abroad is subject to
For all these cases, the paying source has the responsibility to ascertain, calculate and pay the IRRF instead of the beneficiary.
IRRF can be charged over individuals or over legal entities.
In the case of individuals, all earnings add to the calculation basis of the tax. There are some specific type of expenses that can be deducted from the total amount of tax due, like health care expenses or expenses needed for freelancers to operate their activities, provided they are recorded in the Cash journal. Expenses with education and with dependents used to generate large deductions from the taxable amounts, but no longer do.
In the case of legal entities, the profits are the calculation basis of the tax. Larger entities are the ones who perform this calculation the most, called the Regime de Apuração do Lucro Real, which is Portuguese for Regime of Calculation of Actual Profit. Smaller entities often operate the other way, paying IRRF over the presumed profit they make. The taxation method over presumed profit is a little different, as there are different tax rates depending on the business activity.
IRRF tax rate
There are several different IRRF tax rates, each according to a specific activity which generated the earnings.
Tax rate over earnings resulting from paid work
Monthly basis for calculation - in BRL
Portion of the tax to be deducted - in BRL
Up to 1.787,77
From 1.787,77 to 2.679,29
From 2.679,29 to 3.572,43
From 3.572,43 to 4.463,81
Tax rate over earnings made from securities
Tax rate over long-term funds and fixed income investments are:
- 22,5% over investments with terms of up to 180 days
- 20% over investments with terms between 181 and 360 days
- 17,5% over investments with terms from 361 and 720 days
- 15% over investments with terms above 720 days
Tax rate over short-term investment funds:
- 22,5% over investments with terms of up to 180 days
- 20% over investments with terms above 180 days
Tax rate over equity capital funds is equal to 15%.
Tax rate over other operations
Tax rate over overseas remittance:
- 25% over earnings resulting from paid work - with or without employment bonds - retirement, pension for death or disability, as well as provision of services paid, credited or delivered to non-residents in Brazil
- 15% over all other earnings that will be subject to overseas remittance
Tax rate over earnings that may be collected through the method called Tributação Exclusiva na Fonte:
- 20% over earnings resulting from sweepstakes, contests, lotteries, as well as in prizes distributed in the form of goods and services
- 30% over money prizes won in lotteries, sports contests and bingo, as well as collective bets on lotteries