Foreign investments affected by amendments to the Brazilian financial operations tax (IOF)

On December 31, 2007, the President of Brazil, Luiz Inácio Lula da Silva, sanctioned Decree 6.339 changing the rate of financial operations tax (IOF), enlarging the range of the operations subject to its assessment and raising the rate of the social contribution on net profits (CSLL). These measures were taken by the government in an attempt to make up for the income lost from the provisional contribution on financial transfers (CPMF), the extension of which was rejected by the Senate in December. 

These changes are part of the tax package put together by the Government to compensate for the financial losses caused by the termination of CPMF. The Government expects that with the increases in the tax rates it will be possible to recuperate 10 billion reais.

The IOF rate on credit transactions by individuals was raised from 0.0041per cent to 0.0082 per cent per day. Furthermore, Decree 6.339 also created an additional rate of 0.38 per cent for the large majority of financial operations carried out by both individuals and companies. Therefore, this rate of 0.38 per cent is applicable in addition to IOF liability already due, e.g. on credit and exchange transactions such as (1) exportation of goods and services, (2) importation of services and (3) loans with medium term of 90 days.

Hence the changes to IOF affected exchange operations that were not previously subject to this tax, including on the remittance of earnings and profits of Brazilian subsidiaries to their parent foreign companies that are now subject to a payment of 0.38per cent on the total sum remitted. Foreign loans with a term over 90 days are also now subject to IOF at a rate of 0.38per cent.

Finally it is notable that no changes were made regarding foreign investments in the government bonds, financial and stock markets, or on the importation of goods, which remain IOF free. In other words, the government is anxious to reduce the impact of these changes on foreign investments.