Tax Reform and Economic-Financial Rebalancing in Administrative Contracts

With the enactment of the Tax Reform and the consequent introduction of new taxes, the rules governing the economic-financial rebalancing of Administrative Contracts were amended for contracts executed prior to 2026, in view of the significant impact that the new tax framework may impose on the contracting parties.

The economic-financial rebalancing of Administrative Contracts is an instrument of paramount importance for both contracted companies and the Public Administration, as it aims to preserve the original economic and financial conditions of the contract, even in the face of subsequent changes that produce material impacts after its execution. This mechanism, commonly applied in practice, is provided for in the Federal Constitution, Federal Law No. 14,133/2021, and, more specifically, in the Administrative Contracts themselves.

Once an economic-financial imbalance of an Administrative Contract is identified, the parties are required to analyze the contractual provisions and strictly follow the rebalancing procedure set forth therein, rather than relying solely on statutory provisions. Recently, a significant development occurred in this area due to amendments to Brazilian tax legislation.

On December 20, 2023, Constitutional Amendment No. 132 was enacted, reforming the National Tax System and giving rise, in subsequent years, to what has become known as the “Tax Reform,” which replaces several taxes previously applicable to taxpayers.

The purpose of the Tax Reform is to create an integrated and efficient tax collection model, primarily by replacing five existing taxes (PIS, COFINS, IPI, ICMS, and ISS) with a value-added tax (VAT) system, structured around two main taxes.

At the federal level, the former system included the Social Integration Program Contribution (PIS) and the Social Security Financing Contribution (COFINS), both levied on corporate revenues, as well as the Excise Tax on Industrialized Products (IPI), imposed on manufactured goods.

At the state and municipal levels, taxation previously included the Tax on the Circulation of Goods and Services (ICMS), which primarily applied to the commercialization of goods and interstate transportation, and the Services Tax (ISS), levied on the provision of services.

In 2025, the laws and regulations required to implement the Tax Reform were enacted, including Supplementary Law No. 214/2025, which instituted the Tax on Goods and Services (IBS), replacing ICMS and ISS; the Social Contribution on Goods and Services (CBS), replacing PIS, COFINS, and IPI; the Selective Tax (IS), applicable to products harmful to health or the environment; established the IBS Management Committee; and introduced other tax-related changes.

However, given the magnitude of these changes, a transition period was established for the implementation of the new tax regime, in addition to the enactment of the specific legislation governing the new taxes.

In 2026, CBS and IBS will be tested in practice, with rates of 0.9% and 0.1%, respectively. In 2027, PIS and COFINS will be fully repealed, with CBS being exclusively levied, in addition to the introduction of the Selective Tax. Between 2029 and 2032, ICMS and ISS will be gradually replaced by IBS, with its rate progressively increased until the new tax model becomes fully effective in 2033.

In light of these changes, Supplementary Law No. 214/2025 seeks to clarify matters that may raise uncertainties for taxpayers, including the treatment of the economic-financial rebalancing of Administrative Contracts executed under the current tax legislation. To this end, the law dedicates a specific chapter to the topic of rebalancing, comprising Articles 373 to 377.

First, it is important to note that the law provides that the rebalancing mechanism applies to contracts executed prior to the effective date of the new tax regime, or whose bids were submitted before such date—that is, contracts and proposals formulated before January 1, 2026. This cutoff date, however, may be subject to debate, given the need for all ancillary tax reform rules to be approved prior to that date.

The purpose of this chapter is to ensure the restoration of the economic-financial balance of the contract when there is a change in the effective tax burden borne by the contractor as a result of the implementation of IBS and CBS, provided that such imbalance is duly demonstrated. Rebalancing may apply to ongoing contracts executed with the direct or indirect Public Administration of the Federal Government, States, the Federal District, and Municipalities, including—but not limited to—public concession contracts.

Paragraph 1 of Article 374 of Supplementary Law No. 214/2025 establishes factors to be considered in determining changes in the effective tax burden borne by the contractor, such as the effects of tax cumulatively on acquisitions and costs, the possibility of passing on financial charges to third parties, impacts arising from tax changes during the transition period, and any tax or financial benefits or incentives associated with the previously existing taxes.

Article 374 further provides that the rebalancing resulting from the tax reform shall apply even to contracts that allocate tax-related risks to the contractor under the risk matrix. It is important to emphasize that, although risk matrices define the allocation of risks and responsibilities between the parties, contracts executed prior to the approval of the Tax Reform could not have anticipated the scope and magnitude of the changes introduced by the new legislation. For this reason, the law permits contractual rebalancing even where tax risks were originally allocated to the contractor.

With respect to the rebalancing procedure, Article 375 establishes that, in cases where the tax burden borne by the contractor is reduced, the Public Administration must, ex officio, review the contract in order to restore its original economic-financial balance.

Conversely, where there is an increase in the tax burden, the rebalancing procedure may be initiated by the contractor. Such request may be submitted upon each new tax change that demonstrably disrupts the contractual balance, or in a consolidated manner to encompass all tax changes expected during the transition period.

It should be noted that any rebalancing request submitted by the contractor must be filed during the term of the contract and prior to any extension thereof. Additionally, proceedings initiated by the contractor must be processed on a priority basis, and the request must be supported by all calculations and documentation necessary to demonstrate the contractual imbalance.

Under the law, contracts may be rebalanced through the revision of contractual values, financial compensation, tariff adjustments or other amounts payable to the contractor, renegotiation of deadlines and delivery or service conditions, increases or reductions in amounts payable to the Public Administration, transfer of costs or charges, or other methods agreed upon by the parties, in compliance with applicable law and the relevant contract. Notwithstanding these alternatives, rebalancing should preferably occur through adjustments to the contract’s remuneration or tariff structure.

A rebalancing request submitted by the contractor must be finally decided within ninety (90) days from the date of filing, extendable once for an equal period upon a showing of necessity.

In cases of significant impact on the contractual balance, provisional rebalancing may be granted, and the final decision must set forth the revised compensation, including the form and mechanisms for charging or refunding amounts paid or received during the provisional phase.

Finally, Article 377 of Supplementary Law No. 214/2025 provides that, in the event of omission, the specific legislation applicable to the administrative contract shall apply. It is important to emphasize that, notwithstanding the detailed statutory framework governing post-reform rebalancing, the Administrative Contract itself must always be observed and, where applicable, fully complied with by the parties.

As with any major change in the Brazilian legal system, the practical application of economic-financial rebalancing in Administrative Contracts will only become clear through real-world implementation, when parties begin to submit rebalancing requests and the new legislation is effectively applied.