Recent Changes In The Brazilian Tax On Financial Operations (Iof) Levied On Cross-Border Loans

Marcello Cimino

The Tax on Financial Operations – IOF – is a Brazilian federal tax, levied on credit applications, foreign exchange, insurance/securities transactions, and gold transactions.

Considering the global economic situation in the past few years, and the optimistic moment currently experienced by Brazil - with the upcoming international events¹ to be hosted in the near future and the exploitation of the Brazilian pre-salt oil reserves – the inflow of foreign currency for investments in the country has become quite relevant since 2011.

In this recent past, the IOF have had a crucial role in the control of the Brazilian currency fluctuation, since it is used by the federal government as an instrument to encourage/discourage the inflow of foreign currency for investments, in order to avoid an undesired currency fluctuation of the Brazilian Real, which ultimately affects the national industry competitiveness in the international market.

In this sense, it is important to notice that IOF rates can be modified by the government with almost immediate effects, throughout the regular enactment of a Federal Decree. In general, the increase of taxes in Brazil must observe a determined lapse of time before such modification can take effect (90 days or the end of the current fiscal year). The Brazilian Tax on Financial Operations (together with the Import Tax) is an exception.

The mentioned strategy has been recurrently used by the Brazilian government, since it has been proven an efficient way of currency control in Brazil. As a result, Brazil experienced over five changes related to the IOF levied on cross-border loans in the last two years. The objective so far was to avoid the inflow of speculative foreign currency for short-term investments. Until November, foreign loans with a maturity term lower than 720 days (approximately 2 years) were subject to a 6% IOF taxation, instead of the 0% rate applied for loans with a higher maturity term.

Nevertheless, on December 4th, 2012, the Brazilian government published Federal Decree nº 7,853/12, which amended the IOF regulation, reducing the mentioned minimum maturity term of foreign loans subject to a 6% IOF taxation to 360 days (approximately 1 year). This time, the intention of the government is to cease the recent appreciation of the Brazilian Real, by encouraging the inflow of foreign currency into the country.

The effects of the new determination started on December 5th, 2012. This way, older Loans will not be affected by the new decree².

This is a good opportunity for short term investments in Brazil. It is important to consider that until June 14th, 2012, only loans with a maturity term higher than 1,800 days (approximately 5 years) were subject to the mentioned 0% IOF taxation. In this fashion, it is imperative for foreign investors to verify the evolution of the IOF legislation before promoting cross-border transactions involving Brazilian companies.

¹ Soccer World Cup (2014), the Olympic Games (2016).

² Each loan contract must be analyzed under the legal determination valid at the contract date.

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