São Paulo Court Overturns Tax Exemption on Dividends for Tax Purposes (IRPF) 10%

In a recent ruling issued by the Federal Court of the State of São Paulo, the company, which opted for the Real Profit tax regime, sought to be relieved of the obligation to withhold 10% of Income Tax on the total profits and dividends paid to individuals when the amount exceeds 50,000 reais, as established by Law 15.270/25.

The company argued that this requirement violates the constitutional principles of ability to pay, progressivity, equality, and prohibition of confiscation, since a distribution that minimally exceeds the stipulated threshold gives rise to taxation of the entire amount. It also cited a precedent established by the Supreme Federal Court (STF) in case 1.174 of general repercussion, which considered unconstitutional the withholding of income tax at source on retirement and pension income paid to individuals domiciled abroad.

After the preliminary injunction was granted, the judgment acknowledged that:

• The company has the legal standing to file the lawsuit (since the obligation to withhold funds is being disputed);
• The automatic application of the 10% tax on all dividends distributed after exceeding a single monthly limit, without considering the beneficiary's overall income, their effective economic capacity, other sources of income, and legally permitted deductions, is not compatible with the constitutional model of income taxation.;
• The requirement to withhold 10% due to exceeding the minimum amount of 50,000 reais triggers discontinuous, unreasonable, and disproportionate taxation.;
• Taxation of income through a fixed rate, unrelated to total income and the taxpayer's actual economic situation, is incompatible with the principles of ability to pay, equality, and progressivity. Therefore, the unconstitutionality of the withholding tax provided for in Article 6-A of Law 109.250/95, included by Law 15.270/25, was recognized, and consequently, the withholding of 10% of IRPF (Income Tax) on profits and dividends paid to partners was determined to be unenforceable. The decision is from the first instance and may be appealed. On the other hand, it constitutes an important precedent for taxpayers who intend to challenge this taxation.