BRAZILIAN UPDATE – Tax Rates Applicable to Foreign Investments in the Brazilian Financial and Capital Markets Reduced to Encourage Investment
MAIN ARTICLE
The Tax on Financial Transactions (“IOF”) is a Brazilian umbrella-type tax comprising different tax modalities, each levied on a different type of financial transaction that is carried out in Brazil. The IOF taxes are regarded as “extrafiscal”, meaning that they have economic and financial purposes other than those strictly related to the collection of tax revenues by the Brazilian government. This enables IOF legislation to be more flexible than the legislation applicable to other Brazilian taxes, and, therefore, more susceptible to changes.
One of the IOF tax modalities is the Tax on Foreign Exchange Agreements (“IOF/Exchange”), which is levied on the liquidation of foreign exchange (“FX”) agreements with the Brazilian Central Bank, related to the conversion of Brazilian currency (reais) into foreign currency, and vice-versa. The rate of IOF/Exchange that is currently imposed on most types of FX agreements is 0.38%, although different rates apply to certain types of FX agreements that are listed in federal regulations.
In particular, rates of IOF/Exchange imposed on foreign investments in the Brazilian financial and capital markets have been modified several times over the past several months. On December 1st, 2011, with the publication of Decree No. 7,632/11 in an extra edition of the Brazilian Official Gazette, the rate of IOF/Exchange applicable to certain FX agreements in connection with investments in the Brazilian financial and capital markets was reduced from 2% to zero percent, as follows:
|
Line No. |
Type of FX agreement |
Previously applicable rate of IOF/Exchange |
Currently applicable rate of IOF/Exchange |
|
1 |
Inflow of funds for floating rate investments carried out in a Brazilian stock exchange environment or in a Brazilian future and commodities exchange environment (mainly shares), according to the rules issued by the National Monetary Council, except for transactions that involve derivatives and that result in pre-determined income. |
2% |
Zero |
|
2 |
Inflow of funds for the acquisition of shares of Brazilian companies in either (a) a public offer of shares that is registered with the Brazilian Securities and Exchange Commission (CVM) or that is not required to be registered with the CVM, or (b) subscription of shares, provided that, in both cases (a) and (b), the Brazilian company issuing the shares is entitled to trade its shares in a stock exchange environment. |
2% |
Zero |
|
3 |
Inflow of funds for the acquisition of quotas in private equity funds (fundos de investimento em participações, or FIP), emerging company fu7nds, or funds that invest in quotas of such funds. This includes investments that are carried out by means of simultaneous FX agreements, without involving any actual flow of funds. |
2% |
Zero |
|
4 |
Inflow of funds for investments in shares that may be traded in a stock exchange environment, through the cancellation of depositary receipts that are traded outside Brazil. |
2% |
Zero |
|
5 |
Inflow of funds deriving from a change in the modality of the investment registration from a direct foreign investment registered pursuant to the rules of Law No. 4,131/62 to an investment in shares that may be traded in a stock exchange environment pursuant to the rules of the National Monetary Council. |
2% |
Zero |
|
6 |
Inflow of funds for investments in long-term bonds or securities (such as debentures) that are issued by Brazilian companies pursuant to the rules of Law No. 12,431/11, or for acquisitions of quotas in funds that invest in such types of bonds or securities also pursuant to the rules of Law No. 12,431/11. |
No specific rule |
Zero |
|
7 |
Inflow of funds for investments in the Brazilian financial and capital markets, other than the particular types of investments described in lines 1 to 6 above. This includes investments that are carried out by means of simultaneous FX agreements, without involving any actual flow of funds. |
6% |
6% |
|
8 |
Outflow of funds related to the exit of foreign investments from the Brazilian financial or capital markets (lines 1 to 7 above). |
Zero |
Zero |
The Brazilian federal government is permitted to increase the rate of the IOF/Exchange, at any time, without prior notice to taxpayers, by up to 25% of the amount of the FX agreement. Any increase in rates may only apply to FX agreements that are executed after such increase in rates enters into force.
