Brazil’s Tax Reform Forces Small Businesses to Choose a Complex ‘Hybrid Regime’

The implementation of Brazil’s landmark tax reform is creating an unexpected and immediate compliance headache for the country’s micro and small businesses, forcing many to choose a new, complex "hybrid regime" by the end of September or risk losing market share.

Companies under the Simples Nacional, the simplified tax framework designed for small enterprises, must decide this month whether to remain in the current collection model—the "pure regime"—or move to a hybrid system for the new federal Contribuição sobre Bens e Serviços (CBS) and subnational Imposto sobre Bens e Serviços (IBS). The choice is critical for B2B suppliers, as staying in the pure Simples system will prevent their large-customer buyers from claiming the full tax credits required under the new dual Value-Added Tax (VAT) model, making those small suppliers commercially non-viable compared to regular-regime competitors.

The reform aims to replace five complex consumption taxes—PIS, Cofins, IPI, ICMS, and ISS—with the dual VAT structure of CBS and IBS, which allows for full tax credits on inputs. For the Simples Nacional businesses that primarily sell to other companies, migrating to the hybrid regime is the only way to allow their customers to claim these essential credits, thus keeping them competitive in the supply chain. This hybrid model requires the small company to pay the new CBS and IBS taxes separately under the rules of the regular, non-simplified regime, while keeping other taxes (like income) within the unified Simples payment.

This new administrative requirement adds a significant layer of complexity to the very companies the Simples Nacional was created to protect. Companies have until September 30 to make the election on the Simples Nacional Portal for the rules that will govern their taxation of CBS and IBS in 2027. Separately, the transition also requires small service providers to comply with the mandatory use of the national electronic service invoice (NFS-e) starting November 1, 2026.

While the long-term goal of the brazil tax reform is to reduce the country’s prohibitive bureaucracy, the transition phase itself is proving difficult, especially for small firms that lack large compliance departments. The Confederação Nacional da Indústria (CNI) estimates that the Custo Brasil—the structural costs of doing business, primarily driven by tax complexity—currently consumes R$ 1.7 trillion per year, equivalent to approximately 20% of the country’s GDP. This transitional compliance burden is a high, short-term cost for firms seeking the long-term efficiency gains the new system promises.

What it touches

The new Simples Nacional election and the associated compliance costs impact the small-cap segment of the Brazilian market and any foreign-owned entity or multinational that relies on local small and medium-sized enterprises for their supply chain. The uncertainty over which suppliers will successfully navigate the transition, and how that will affect input credit eligibility, is a factor in B2B contracting and vendor selection throughout the transition period, which will see CBS go into effect in January 2027 and IBS begin its phase-in from 2029.