Supreme Court Declares Pension Tax Unconstitutional

In a landmark decision, Brazil’s Supreme Court (STF) has ruled against the flat 25% tax rate imposed on non-residents’ retirement income, addressing a long-standing inequality in the tax system.

Retirees living in Brazil are taxed progressively on their pensions, with rates ranging from 0% to 27.5% depending on their income. They can also file annual tax returns and claim deductions to lower their tax burden. Non-residents, however, pay a 25% flat tax regardless of their income. Since they don’t file tax returns, they’re unable to claim deductions.

This disparity came under scrutiny when a taxpayer living abroad, who received a Brazilian pension, challenged the flat 25% tax. She argued that the tax rate for non-residents was unfair because residents with similar incomes benefit from exemptions and deductions that aren’t available to non-residents.

The court agreed. In a majority decision, the STF held that the 25% tax rate was unconstitutional. According to the justices, imposing a flat tax solely based on a retiree’s residency status is unreasonable, particularly because pensions often serve as the primary source of income for retirees.

Rather, the court reasoned that the tax rate should be determined by an individual’s ability to pay. Under Brazil’s progressive income tax regime, those who earn more should contribute more in taxes, ensuring fairness and equity in the system.

Now that the Supreme Court has ruled, the focus shifts to how the Brazilian Revenue Service (Receita Federal) will respond. While the ruling establishes a clear precedent, its practical application will depend on if and how the government complies.