Decree to Negate IOF tax

Earlier this year, the Brazilian government reduced the tax rate on financial transactions (IOF) on certain infrastructure-related investments to 0 percent. The IOF is generally applicable on credit and currency exchange and insurance and securities transactions including intercompany loans and gold transactions.

It will affect infrastructure-related investment transactions including:

• Production of consumption assets for export.
• Research and development projects including technical and engineering.
• Infrastructure logistic investment for roads and rail.
• Investment in power or energy sector.

Now the Finance Minister, Guido Mantega, has ordered a decree that will expand the tax rate to foreign capital in fixed income investments, primarily in Treasury notes. The previous rate was set at 6 percent.

This decision will help increase the inflow of funds into the country and reduce the devaluation of the real against the U.S. dollar – which has gained momentum recently after the U.S. Federal Reserve reduced the purchase of assets and has planned increases in interest rates in the near future. These moves have caused added inflationary expectations and increased pressure on the Brazilian government to oust the rate.

An increase in foreign funds could help the country get past the current riots that are taking place in numerous cities. One of the biggest issues the citizens are speaking out against is the money going toward the World Cup instead of schools and healthcare.

Any company that does, or is planning on doing business in Brazil, would be wise to partner with Brazilian lawyers to make sure they understand all of the changes to tax rates.