Recent government decisions regarding Brazil’s tax reform are already reverberating through the real estate market. A central aspect of the reform is the Value-Added Tax (VAT), which aims to standardize tax collection nationwide. This means that the same product will carry the same tax burden across the country, replacing ICMS, ISS, PIS, Cofins, and IPI. 

Currently, commercial leases face relatively low taxation. ISS, the service tax, is not applied, but indirect taxes like PIS and Cofins—federal levies on company and individual revenues—are charged. With the implementation of VAT, these taxes will be replaced. 

Raphael Caropreso, partner at Veirano Advogados, explained to REsource how the process will work. He notes that for indirect taxation, significant changes are expected. Companies under the presumed profit regime—which includes most commercial property owners—will see an increase in their tax burden. 

“We will move from a Cofins rate of 3.65% to a rate that is yet to be defined. The government currently estimates the reference VAT rate at 28%. For leases, this regime allows a 70% reduction on the rate. So, using the 28% benchmark, the effective rate would be around 8.4%. If the reference is lower, it would be roughly 7.95%. In other words, the rate could potentially jump from 3.65% to between 7.95% and 8.4%,” he details. 

Despite the higher nominal rate, Caropreso points out that the reform establishes non-cumulative taxation for tenants. Any inputs contracted by a logistics operator, for example, will be deductible. Thus, even in a worst-case scenario with an 8.4% rate, the overall effect may be lower. The final cost will increase, but the typical cascading effect of taxes on taxes will no longer occur. 

“When it comes to commercial leases, the renting company can also take a credit for this tax. The dual VAT will be creditable. The goal is to maintain a degree of neutrality in operations, eliminating the cumulative effects typical of the current tax system,” he explains. 

Understanding the impact: 

Consider a company renting a logistics warehouse for BRL 100,000 per month. Today, it pays 3.65% PIS/Cofins (BRL 3,650) without any credit—the amount is simply added to the rent. Under the reform, the lease would be taxed under the dual VAT at around 8%, increasing the tax to BRL 8,000. However, because the new tax is non-cumulative, the company can offset credits from other services it has contracted, such as transport, energy, or maintenance. If it has already paid BRL 5,000 in VAT on these expenses, the net impact on the rent drops to BRL 3,000, making the effective burden close to current levels.