Brazil: Understanding the Tax on Financial Operations (IOF)
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Brazil: Understanding the Tax on Financial Operations (IOF)

Brazil World Cup

During the recent and most severe global economic crisis in more than six decades, Brazil is proving to be a solid and strong economy and has been identified as one of the largest consumer markets in the world, as well as a major centre of opportunities for foreign investors, says Marienne Mendonça Shiota Coutinho, of KPMG.

As the Financial Times has already stated, Brazil "is one of the fabled fast-growing BRIC economies – Brazil, Russia, India and China – that are reshaping the international order. And as the host of the next football World Cup and, in 2016, the Olympic Games, Brazil has confidently arrived on the global stage".

This economic and political progress is driving foreign investment in the country. For multinationals, a better understanding of the extensive and complex Brazilian tax system is essential when weighing up investment opportunities.

With this in mind, this article provides insights into the Brazilian tax system especially in regards to the Tax on Financial Operations (IOF), which is a very important tax in Brazil. This is because this tax was previously zero-rated for most transactions involving foreign parties. However, this has significantly changed in the recent past.

One explanation for the recent IOF tax rates increase is the end of the CPMF (Provisional Contribution on Financial Transactions). The CPMF was a federal contribution charged on almost all bank account transfers at 0.38% that ceased to be charged because of political pressure. It was originally created on a temporary basis to fund the public health system yet was being used for other purposes. The lack of the associated tax revenue led the government to increase the IOF tax rate on most foreign exchange transactions to 0.38%. Since then, further changes have also been introduced.

The other driver for the changes in IOF was the appreciation of the Brazilian currency (real) and the desire of the federal government to balance the fluctuation. The Brazilian real has significantly appreciated over the past few years, affecting the competitiveness of Brazilian exporters. The Brazilian government has no direct influence over exchange rates, which merely reflect market conditions. However, the country has received a significant influx of speculative foreign capital, including short-term financial investments attracted by high interest rates, which resulted in this harmful appreciation of the Brazilian real against the US dollar and other foreign currencies.

By increasing the IOF tax rate on certain foreign exchange transactions, the government intended to reduce the level of speculative inflow of foreign currency into the country.

Generally speaking, the Brazilian Federal Constitution provides that taxes may only be increased by means of a law duly approved by the National Congress. After approval, a certain period of time (commonly after 90 days or as of the subsequent fiscal year, according to the specific case) must lapse before such law can take effect.

Nevertheless, some exceptions exist, which is the case with the IOF. In this regard, IOF rates can be easily changed by the federal government at its own discretion, by means of a decree that becomes effective as of its enactment date. Another example is the import tax.

Taxable transactions

As foreseen by Decree 6,306/2007, IOF is a federal tax levied on credit (including inter-company loans), foreign exchange, insurance and securities transactions. The tax also applies to transactions with gold or involving gold (that is, transactions with gold financial assets or exchange gold agreements).

The tax base varies according to the taxable event and the financial nature of the transaction, and rates vary depending on the type of transaction and maturity terms, if applicable.


Tax Rate

Foreign Exchange transactions

0 - 25%

Security transactions

0 - 1.5% per day

Insurance transactions

0 - 25%

Credit transactions

0 - 1.5% per day

Gold transactions

1% payable on the first sale transaction

IOF levied on insurance

As mentioned above, insurance transactions are also subject to IOF tax, with rates ranging from 0% to 7.38% on the value of the insurance premium. The current applicable rate, however, is 7.38% for most transactions.

IOF levied on securities

For securities transactions, the IOF tax rate varies from 0% to 1.5% per day, depending on the type of investment. Generally, IOF on securities is charged at 1% per day on the value of redemption, cession or refinancing, limited to the gains of the operation.

According to the provisions of Decree 6,306/2007, IOF on securities applies in accordance with a regressive table that varies proportionally to the period of the investment, with such period limited to 30 days. In other words, IOF on securities only applies to the redemption, cession or refinancing of investments before the abovementioned period.

In addition, it is important to mention that the Brazilian government has increased the range of facts subject to the incidence of IOF on securities by means of Decree 7,563, enacted in conjunction with Provisional Measure 539/2011, both on July 27 2011. These rules provide that derivatives contracts whose liquidation value is affected by a variation of currency exchange rates shall be subject to IOF at a 1% rate over the adjusted notional amount at the time of acquisition, sale or maturity of the applicable derivatives contract. For the purposes of applying this rule, the adjusted notional amount is deemed to be the product of the notional amount of the contract resulting from the variation of the derivative price in respect of the price of the underlying asset.

Note, however, that Decree 7,699, enacted on March 16 2012, amended the aforementioned rules and reduced the IOF tax rate to 0% on derivative contracts used to hedge against exchange rate fluctuations. The 0% rate applies to agreements entered into by individuals or companies resident or domiciled in Brazil and is aimed at stimulating export transactions. Nevertheless, for the application of the zero tax rate, the amount involved in the transaction cannot exceed 1.2 times the value of the exports carried out in the previous year.

IOF levied on foreign exchange transactions

According to the legislation, the IOF tax rate on foreign exchange (FX) transactions may apply at a maximum 25% rate. However, actual rates have been much lower.

Exports and imports – The IOF rate is zero on foreign exchange transactions (FX transactions) related to the inflow of revenue derived from the export of goods and services and outflow of funds derived from the import of goods.

The import of services, however, is subject to IOF at a rate of 0.38%.

Equity investment – IOF is charged at 0.38% when a foreign shareholder remits funds to pay the share capital of a Brazilian company (capital contribution). Capital repatriations are also subject to the general 0.38% rate.

Cross-border loans – IOF is also imposed on FX transactions associated with cross-border loans. For incoming loans, the regulations provide that the IOF will be charged on the FX transaction only, and not on the credit transaction (Decree 6,306/2007, art. 2, §2). The IOF is not charged at the time of the payment of the principal nor of the payment of the interest.

At present the applicable rate is 0% provided that the average maturity date of the loan is higher than 720 days (approximately two years). Otherwise, the rate is 6%. The taxation is triggered by the conversion of the foreign currency into reais at the time of the inflow of the funds. Note that the prepayment of the loan may trigger the 6% tax with interest and penalties.

Also, the Brazilian Central Bank has issued Resolution 3,967/2011, which, among other provisions, states that the renewal, renegotiation and assumption of obligations related to a foreign loan is subject to a simultaneous exchange transaction. Therefore, certain changes to the terms of the loan agreement before the two-year period require a symbolic FX transaction, as the loan was being repaid and a new one contracted. This would also produce the same consequences (6% IOF with interest and penalties).

The Resolution requires that once there is an inflow of funds, any subsequent changes in maturity date, financial conditions (renewal) or debtor (debt assumption) must be promptly updated in the Central Bank online system (RDE-ROF – Electronic Declaratory Registration of Financial Operations) by the borrower, which involves writing-off the original debt and constituting a new debt.

In such cases, there is a risk that the changes in the original agreement could trigger the IOF. For example, if the original loan has been contracted at the time when the IOF legislation did not require a minimum two-year period, the IOF may be avoided if the changes result in a new loan that complies with the minimum term.

In principle, the IOF is charged according to the rate and regulations in place at the time of the execution of the FX transaction. Therefore, Brazilian companies may have loans in place for which they would have to observe the minimum two-year period for repayment or novation to avoid IOF taxation and others with different minimum terms or even without such restrictions (older agreements). In any event, each specific case must be carefully analysed since this is a complex and controversial issue.

On the other hand, loans granted from a Brazilian company to a foreign party are not specifically regulated by the current IOF legislation, considering they did not use to be frequent transactions. In any event, considering that there would be a foreign exchange transaction, the general 0.38% rate should apply.

The IOF regulations on foreign exchange transactions associated with foreign loans have been changing quite frequently. The Brazilian government has made five changes to the minimum term since March of 2011 (that is, approximately 16 months). The term was initially increased from 90 days to one year, then to two years, then to three years, then to five years and now back to two years.

As also commented, because the Brazilian government has been trying to stimulate long-term and productive investments in Brazil, cross-border financial investments are subject to higher IOF tax rates. If the securities (which include common debentures) are traded by means of foreign investments in the Brazilian financial and capital markets, the liquidation of the corresponding foreign exchange contract is subject to IOF at a rate of 6%. Note that in this case, besides the IOF levied on the foreign exchange transactions, the investor would, in principle, still have to observe the rules applicable to IOF levied on securities (that is, 1% per day, limited to the gains of the operation and to a period of 30 days).

Exceptions apply (zero-rated transactions as per Decree 7,632/2011):

  • Variable-rate income investments held in the stock exchange, as well as in the commodities and futures exchange, with the exception of operations comprising derivatives resulting in pre-fixed income;

  • Inflow of funds with the purpose of acquisition of shares in a public offering – whether registered or exempted from registration in the Securities Commission – or to subscribe shares, since in both cases the companies are duly registered to negotiate their shares in the stock exchange;

  • Inflow of funds with the purpose of acquisition of quotas in Investment Participation Funds (FIPs) or Investment in Emerging Entities Funds (FMIEE), as well as Investment Funds in quotas of these Funds (FIC-FIPs and FIC-FMIEEs);

  • The symbolic foreign exchange transactions related to the conversion of direct investments in the form of Law 4,131/62 to stock exchange market investments;

  • The symbolic foreign exchange transactions related to the cancel of depositary receipts with the purpose of introducing funds in the Brazilian stock exchange market; and

  • Inflow of funds with the purpose of acquisition of (i) international debentures or (ii) quotas in funds that invest in infrastructure debentures.

IOF levied on credit transactions

For domestic credit transactions, the IOF is levied on the average daily balance or on a transaction basis. The applicable rate is 0.38% plus 0.0041% per day if the borrower is a legal entity. With regards to individuals, in addition to 0.38%, daily rates apply but they have been reduced from 0.0082% to 0.0068% in December of 2011, and most recently, in May 2012, they were once again reduced to 0.0041%. This was also an economic measure to stimulate the consumptions and, as a consequence, the economy.

For loans with a pre-fixed maturity date longer than one year, the effective IOF rate is limited to 365 times the applicable daily rate (that is, 365 days). It is then very common for loans that are foreseen to be paid after one year only to have a pre-determined maturity date to minimise IOF burden.

In regards to loans granted from a Brazilian company to a foreign party, there are also discussions on whether or not such transactions would be subject to IOF-Credit in addition to the IOF on the FX transaction. As mentioned above, for incoming loans, the regulations provide that the IOF will be charged on the FX transaction only and not on the credit transaction (Decree 6,306/2007, art. 2, §2).

However, the Brazilian Supreme Court has issued decisions with conflicting understandings. The most recent ones indicate that both IOF-Credit and IOF on the FX transaction are due. According to these decisions, the provision above applies only to inbound loans. Therefore, under a more conservative approach, IOF-Credit could also be charged by Brazilian Tax Authorities (in addition to IOF-FX) at the same IOF-Credit rates applicable to local loans (i.e., 0.38% plus 0.0041% per day, limited to 365 days).

IOF-Credit - Illustrative Calculation

Principal Amount (BRL)



IOF-Credit (Daily Rate)



IOF-Credit (Additional)



Period (Days)



IOF-Credit (BRL)


[(a) × (b) × (d)] + [(a) × (c)]

In addition, the IOF-Credit rate is reduced to zero in case of credit operations whose purpose is to stimulate local production or to support exports, such as in case of credit operations related to payments in advance of exchange contracts related to exports. Still, Decree 6,306/2007 foresees an IOF-Credit tax exemption in case of credit operations made by means of export credit notes.

IOF here to stay

Overall, the uncertainty with respect to the global economic situation and the pressure it produces in emerging markets may continue for longer than expected and result in recurring governmental domestic protection measures in Brazil.

Regardless of all the discussion around the effectiveness of using IOF tax to achieve the desired monetary results, it seems that the Brazilian government will continue to use it as an important tool.

Considering the significant impact this tax may produce in cash flows, projections of investment returns and total cost of the investment, it is very important to monitor its developments and to obtain updated advice before any significant cross-border transaction involving a Brazilian party.

Note that the information contained herein is of a general nature and based on authorities that are subject to change. The applicability of such information to specific situations should be determined through consultation with tax advisers.

Marienne Mendonça Shiota Coutinho



KPMG in Brazil

Av. Paulista, 2.313 – 6th floor

01311-300 São Paulo, SP, Brazil

Tel: +55 11 2183-3182

Fax: +55 11 3138-5001



Marienne Mendonça Shiota Coutinho is a tax partner and leads the International Corporate Tax & Transfer Pricing practice of KPMG in Brazil. She is a lawyer with an IFRS specialisation (FEPECAFI). She has been with KPMG for 18 years and has also worked with KPMG in New York in the Trade & Customs Group. She is a frequent speaker in Brazil and abroad on Brazilian and international tax matters. Marienne also co-leads KPMG's Global Business Group in Brazil, which assists foreign investors entering the Brazilian market.

She specialises in M&A tax structuring, private equity investments, capital markets, corporate restructurings, domestic and international tax planning, supply chain projects and tax governance. She works closely with other KPMG member firms to structure the outbound investments of Brazilian companies in light of Brazilian controlled foreign corporation rules, tax treaties and taxation in other countries.

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