How to Manage the Taxation of Pensions in Brazil

Payroll is full of rules, exceptions, and checklists. Brazilian payroll is no different. I’ve worked in payroll here for many years, and one of the issues that I come across a lot is the issue of pensions. Or, more specifically, how to correctly calculate the correct deductions for a pension.

Let’s start with some general information about pensions in Brazil.

Both employers and employees make pension contributions to the government.
Contributions are paid monthly, and the tax rates differ according to certain criteria.
Generally, the contribution rate is 20% (or 22.5% for financial institutions) on payments made through payroll.
Public sector (government) workers are subject to different plans under specific pension provisions.
Typically, in Brazil, the retirement age is 65 for both men and women. A pension is provided for men with 35 years of contribution and 30 years of contribution for women.
There are other criteria that entitle an individual to a pension at an earlier date, including:
- Time spent on education.
- Activities that are harmful to health or physically prejudicial.
- Where the insured persons have disabilities.
The state pension received will depend on the value of contributions. Currently, the range for monthly state pension payments is between BRL788 and BRL4,663.75.

How are contributions taxed?

Contributions made to the public pension program are deducted from the employee's taxable income, and employer contributions are deducted from the employer's income as a deductible expense for corporate tax purposes.

Private pensions

Although not a legal requirement, some employers provide private, optional pension plans to their employees. Only individuals can participate in private pension plans. Companies can only make contributions as sponsors, providing benefits to individuals (usually their employees or officers). Under Brazilian law, a private pension scheme (Regime de Previdência Privada) must be organized separately from the government pension scheme.

There are 2 types of private pension plans:

Open Private Pension Entities (Entidades Abertas de Previdência Complementar). These offer pension plans to any individual, regardless of the existence of employment or occupational relationships. They can be personal (accessible to any individual) or collective (accessible to individuals linked, directly or indirectly, to certain companies).
Closed Private Pension Entities (Entidades Fechadas de Previdência Complementar). Also known as pension funds, they handle social security benefits only accessible to employees of a single company or group of companies, public servants or members of a professional category, class, or sector.

Private pension plans fall into 2 categories:

Defined contribution plans.

The contributions are established when the relevant agreement is completed and based on the amount of contributions made.

Defined benefits plans.

The pension or benefits to be granted are defined based on calculations set out in the scheme’s rules.

There are also variable contribution plans, the benefits of which have characteristics of the other 2 types of plans. For instance, the criteria for pensions may be defined when the plan is agreed on, and the contributions may vary. Enrolment in these plans is always voluntary, and the law does not set out minimum levels of contributions to be provided by either party.

The minimum period of service

Every plan will have different rules and are all regulated by state bodies.

Tax relief on employer contributions

Companies are exempt from paying social security contributions to the Brazilian Social Security Institute (Instituto Nacional do Seguro Social) (INSS) on the amounts paid to private pension plans where these plans are granted to all their employees and officers.
Companies can also deduct their contributions to private pension plans from their taxable profits for corporate income tax purposes (Imposto de Renda da Pessoa Jurídica) (IRPJ) and social contribution on net profits (Contribuição Social sobre o Lucro Líquido) (CSLL)), as operational expenses for an amount equivalent to 20% of the compensation paid to employees and officers participating in the plan.
Employees and officers are exempt from income tax on contributions made to supplementary pension schemes by their employers on their behalf.

Tax relief on employee contributions

Employees may deduct from their annual taxable income the contributions they make to private pension schemes. A deduction is limited to 12% of their annual taxable income and, to be eligible to the deduction, they must also be contributing to the applicable public pension program.
The establishment of an open plan is subject to the approval of the Insurance Supervisory Authority (Superintendência de Seguros Privados) (SUSEP) and the establishment of closed pension entities are subject to the approval of the National Office for Complementary Private Pensions (Secretaria de Previdência Complementar) (SPC).
Investments are generally not subject to withholding income tax and corporate taxation since funds will be taxed when paid to individual participants. However, certain investments may trigger a tax on financial transactions (IOF).

There are 2 tax options for private pension products

progressive taxation system (PGBL)
regressive taxation system (VGBL)

Members must choose one of these for a private pension plan.

Under the regressive taxation system, pension benefits are subject to a final or definitive withholding income tax levied at regressive rates that vary according to the length of time that contributions to the plans have been made, as follows:

Up to 2 years at a rate of 35%.
Between 2 and 4 years at a rate of 30%.
Between 4 and 6 years at a rate of 25%.
Between 6 and 8 years at a rate of 20%.
Between 8 and 10 years at a rate of 15%.
Over 10 years at a rate of 10%.

Under the progressive taxation system, withholding income tax will be levied at the regular withholding income tax rates (from zero to 27.5%). This income will be added to the individual's ordinary taxable income under his annual income tax return. Taxes previously withheld at source will be credited against the individual's annual tax liability.

The main tax difference between the PGBL and the VGBL schemes is that under the PGBL income tax is levied on the whole amount of the funds received by the individual, including the original contributions made. With VGBL, income tax is levied only on the net income received, so the amounts corresponding to the original contributions made are not taxed.

Some pensions and benefits may be subject to other tax charges, such as a tax on financial transactions (Imposto sobre Operações Financeiras) (IOF), depending on how they are granted.

What else should you know about pensions in Brazil?

The following list, not exhaustive, are points to note about pension in Brazil.

Business transfers

A change in the company's ownership or legal structure does not affect existing employment contracts and the interested rights of the employees.

Participation in pension schemes for employees working overseas

There are no legal restrictions for employees working abroad to participate in private pension plans established by a participating company in Brazil if there are no restrictions in the relevant private pension plan contract.

Employees of a foreign subsidiary company

Collective pension plans offered by open private pension entities are accessible to individuals indirectly linked to certain companies, such as employees of subsidiary companies. Employees of a foreign subsidiary company may be a participant

if there is no restriction in the relevant private pension plan contract.

Solvency requirements for funded schemes

To ensure the solvency of private pension plans, there are guidelines that must be followed by private pension entities when managing and investing the funds. These rules aim to enforce economic (interest rates) and demographic (longevity) assumptions.

Member's transfer of funds

Employees can transfer from one plan to another. However, it is not possible to make withdrawals only to choose to receive the benefit in accordance with the new plan conditions.

Taking pension benefits

What each plan means for an employee is set out in the contract. In my experience, the payments are usually by either a lump sum or withdrawal once certain conditions are met.

Early and ill-health retirement provisions are not compulsory under Brazilian law and the situation and rules vary from plan to plan.

Dependents' benefits

Contributions for private pension plans are made to finance benefits for the participants. Therefore, where the participant dies, their dependents (or persons appointed by them in the plan contract) are entitled to receive benefits or pensions or withdraw amounts referring to the past contributions, according to the rules applicable to each plan.

Penalties for non-compliance include: