How Brazil’s consumption tax reform revolutionises the taxation of financial services

The indirect taxation of financial services has been a highly controversial topic in Brazil, considering the tax base and actual taxes applied. The Brazilian consumption tax reform took the opportunity to address VAT on financial services, introducing a differentiated regime for this activity that provides for the possibility of using credits from the new VATs (CBS and IBS) and certain deductions of expenses from the respective taxable bases.

To this effect, amid the long-lasting international debate on the proper way to address VAT on financial services, Brazil took a leap of faith in deciding to tax the bank spread through CBS and IBS, bringing financial services into a value-added taxation.

The banking spread in Brazil is one of the largest in the world and consists of the difference between the interest rates charged on loans and those paid on investments received by the financial institution, effectively operating as a profit margin for financial institutions.

Under the current system, financial institutions are generally subject to the social contributions on revenues (PIS and COFINS) under the cumulative system, in which the taxes are calculated at a combined rate of 4.65% on the company’s revenues on sales of goods, services, and other core activities, without the right to book any tax credit. Certain expenses may be deducted from the contributions’ taxable bases, such as expenses incurred in financial intermediation operations.

Based on this, several disputes arose as financial institutions argued that PIS and COFINS would only be levied on the revenues arising from the services provided to their clients, and thus the banking spread should not be taxable, as it constitutes revenue but is not from a service provided to a third party.

Nevertheless, in June 2023, the Brazilian Federal Supreme Court ruled that the gross operating revenues arising from a financial institution’s typical business activities are subject to PIS and COFINS. To this effect, it was stated that financial intermediation revenues would consist, for the reality of such institutions, of true gross operating revenues.

Furthermore, banking services compensated with fees charged to clients – such as fees for the opening of bank accounts, the supply of safe deposit boxes, and banking fees in general – are subject to the municipal service tax (ISS), while the relevant revenues are also subject to PIS and COFINS. However, the banking spread is not subject to the ISS.

Thus, under the previous tax system, for consumption tax purposes, financial services are generally taxed by PIS and COFINS on the banking spread and ISS, PIS, and COFINS on services subject to fees.

As previously discussed, IBS and CBS are VAT levies on supplies of goods and services, but Constitutional Amendment 132/2023 provided that some activities, such as financial services, would be subject to differentiated tax regimes. Consequently, there could be different rules for taxable events, tax rates, the taxable base, credit regimes, etc.

Supplementary Law 214/2025 provides for a broad definition of the financial services that are subject to the tax regime, including credit operations, currency exchange, transactions involving securities and financial instruments, factoring, leasing (operational and financial), payment arrangements, private pensions, and insurance.

Financial services are subject to the regime when they are provided by individuals and legal entities supervised by the government bodies that make up the National Financial System, which includes banks of any kind, among several other supervised agents.

The taxable basis for IBS and CBS in the new financial services regime will be composed of revenues from operations, with certain deductions. In general terms, Supplementary Law 214/2025 provides that these deductions are limited to operations authorised by a government agency, provided they are carried out within the operational limits provided for in the relevant legislation, and the deduction of any administrative expense is prohibited.

For financial services related to credit, exchange, securities, and securitisation, the following expenses may be deducted from the revenue:

• Financial expenses related to raising funds;

• Exchange expenses;

• Losses in transactions involving securities or financial instruments;

• Financial charges recognised as expenses, relating to debt instruments issued by the legal entity;

• Losses incurred in the receipt of credits arising from the activities of financial institutions and losses in the assignment of such credits and in the granting of discounts, provided that they are carried out at market value; and

• Expenses relating to investment advisers, securities consultants, and banking correspondents (non-bank entities or individuals authorised to offer financial services on behalf of banks).

With regard to credit operations, the revenues do not include the principal amount, and financial expenses for raising funds do not include the payment of the principal.

Services that, by regulatory provision, can only be provided by banking financial institutions and are remunerated by fees and commissions – including services for opening, maintaining, and closing demand deposit accounts and savings accounts; providing cheques; withdrawals; and transfers of funds – are subject to the general rules for the levy of IBS and CBS.

Furthermore, innovating from the previous tax system, financial services are now subject to a non-cumulative system, and the providers of such services are therefore entitled to book IBS and CBS credits from their acquisitions, while granting credits to their clients, with some exceptions.

The consumption tax reform is a revolution of the Brazilian tax system, aiming at unifying the taxation of all consumption of goods and services under IBS and CBS, guided by the principle of neutrality. Bringing the taxation of banking spreads under the levy of IBS and CBS, based on a full non-cumulative system, is an innovative approach, and will most certainly change the dynamics of credit operations.

It is yet to be seen how the new taxation will impact financial transactions, especially considering that the IBS and CBS rates have not been determined. In any case, Supplementary Law 214/2025 provides that the tax rates on financial services will be set to maintain the current tax burden on credit operations.