The year 2026 marks the start of Brazil’s so-called tax reform “test year,” a transitional phase designed to simplify the tax system and enhance predictability. Complementary Law No. 214/2025 established the Dual VAT model, comprising the IBS (Tax on Goods and Services) and the CBS (Contribution on Goods and Services), with the objective of eliminating cumulative taxation, enabling full recovery of input tax credit, and reducing tax distortions across production chains. For foreign investors, this shift is expected to bring greater transparency regarding the effective tax burden, particularly in industrial operations, foreign trade, and infrastructure-related contracts.

With the test year beginning in the first half of 2026, companies will be required to adapt accounting and tax systems, reconfigure ERP platforms, review pricing policies, and assess the impact of full non-cumulative taxation on margins and cash flow. Detailed IBS/CBS simulations will become essential not only for new investments, but also for the reassessment of existing contractual arrangements.

A critical feature for long-term investments is the economic and financial rebalancing mechanism set out in Article 374, which functions as a de-risking tool. It allows administrative contracts to be adjusted when changes in the tax burden disrupt their original economic equilibrium, protecting investors from unforeseen losses. This safeguard is particularly relevant for private equity funds, energy and sanitation projects, and other capital-intensive investments, as it reduces exposure to regulatory change and enhances certainty for long-term capital allocation decisions.

Despite these advances, the regulatory phase, particularly the final calibration of tax rates, remains a key area of attention. The effectiveness of the Dual VAT system will depend on appropriate sectoral calibration, the treatment of special regimes, and the stability of the credit refund and offset mechanisms. For foreign investors, the transition period calls for close regulatory monitoring and ongoing technical engagement with local legal and tax advisors.

Those who adopt tax-modeling methodologies aligned with Complementary Law 214/2025, review rebalancing clauses in administrative contracts, and implement periodic tax-risk assessments will be better positioned to navigate the post-transition environment. Overall, the reform offers clear advantages, including greater tax predictability, potential cost efficiencies, and increased stability in concession and infrastructure contracts. At the same time, the complexity of the new framework makes specialized oversight essential, ensuring that investment decisions remain aligned with the evolving regulatory landscape and with robust compliance practices in Brazil.