The Tax on Financial Transactions (IOF) is levied on foreign exchange transactions. The Brazilian government uses the IOF to control the economy, especially in connection with the appreciation/depreciation of the Brazilian currency.
On October 5, 2010, the Brazilian government enacted Decree No. 7,323 (Decree 7,323/10), which increased the IOF rate to 4 percent on foreign exchange transactions related to foreign investments in the financial and capital market, except for variable income investments traded in the stock exchange, which rate remained at 2 percent (See our Legal update: “Brazilian Government Increases the IOF Rate on Foreign Investments in the Financial Market”).
However, the increase failed to achieve its intended goal: to curb the appreciation of the Brazilian currency in comparison to the US dollar. As a consequence, the Ministry of Treasury announced new steps to solve the so-called “currencies war,” referring to the depreciation of the US dollar.
In this regard, considering the dispositions provided by Decree No. 7,330, of October 18, 2010 (Decree 7,330/10):
- The IOF will be levied at an increased rate of 6 percent on foreign exchange transactions related to the foreign investment in fixed income transactions, investment funds, including Private Equity Funds (FIP), and the attendance of initial or additional margin requirements in connection with futures transactions carried out within the Brazilian Stock, Commodities and Future Exchange (e.g., derivative transactions); and
- The IOF will remain at the rate of 2 percent on foreign exchange transactions related to investments in the Brazilian capital markets (i.e., variable income investments traded on the stock exchange) and for purchase of shares of a public offering or subscription of shares, as long as the corresponding company is registered for trading its shares within the stock exchange.
The IOF levied on the outflow of funds related to foreign investment in both the financial and capital markets remains unchanged at zero percent.
It is worth mentioning that other foreign investments remain subject to the same IOF rates, including:
- Foreign exchange transactions related to direct investment in Brazilian companies, which, according to Law No. 4131 of September 3, 1962 (Law 4.131/62), are subject to a rate of 0.38 percent on the inflow and outflow of cash (e.g., capital increase, dividend payment and capital gains); and
- Foreign exchange transactions related to international loans made after October 23, 2008, which are subject to a zero rate on the inflow and outflow of cash.
Finally, the increase of the IOF rate to 6 percent affects several transactions in the financial and capital markets, including investments in fixed income, investment funds and derivatives transactions.