Social contribution tax is reduced, but administration may be more time-consuming

Although the social contribution tax rate is reduced from 19.5% to 17.5%, the legislation does not contain any transitional rules regarding the tax rate to be applied when preparing the tax return following the change in tax rate during the year. This may be relevant particularly for dividends or capital gains, since the taxpayer generally pays the tax for such income via the annual returns.

In such cases, individuals will generally have two options: either to apply the more favourable tax rate to all income earned in the tax year, or to split the income according to the time it is obtained and prepare the tax return and pay the tax accordingly.

Given the lack of transitional provisions, it is likely that the intention of the legislation was to apply the lower tax rate to such taxable income, considering the administration of previous similar interim tax reductions. For capital gains it is clear that the lower rate should be applied, as the taxable income can only be determined after the calculation of the full annual profit or loss. For dividends the split by date of obtaining the income can be cumbersome from an administrative point of view, particularly for dividends received on a foreign securities account. Of course, from the point of view of administration and taxation of individuals, the application of the lower rate would be more favourable, and this is also the practice usually applied by the Tax Authority when mid-year tax reductions take place.