Taxpayers should review the new provisions to be aware of rates applicable for acquisition of foreign currency in cash and repo transactions and to determine if they qualify for a tax rate of zero in certain types of transactions.

Brazil has issued Decree 8,731 (May 2, 2016), which modifies Decree 6,306/2007 to add new provisions to the tax on financial transactions (IOF) triggered on foreign exchange conversions (IOF-FX) and transactions involving bonds and securities (IOF-Securities). The provisions of the Decree are effective as from April 30, 2016, except item b below.

IOF-FX

a) Conversion of direct investment (known as investment 4,131) into investment in stocks negotiable in the stock exchange market (known as portfolio investment or investment 4,373)

The new Decree added paragraph XIX to Article 15-B, which sets forth that the IOF-FX rate is zero for liquidations of simultaneous foreign exchange transactions involving the inflow of funds to Brazil that are required for the conversion of direct investments (regulated by Law 4,131/1962) into investments in stocks negotiable in the stock exchange market (regulated by Resolution 4,373/2014 of the National Monetary Council).

A simultaneous foreign exchange transaction is a cashless exchange conversion, whereby simultaneous inflow and outflow of funds into and out of Brazil (or vice versa) are presumed. Under the conversion mentioned above, although the cash does not effectively enter Brazil, the tax consequences related to its presumed entry and subsequent remittance would still apply.

In this context, it is not clear under the new paragraph whether, under the simultaneous foreign exchange, the outflow of funds also would be subject to an IOF-FX rate of zero.

b) Acquisition of foreign currency in cash

The Decree increased the IOF-FX levied on the acquisition of foreign currency in cash from 0.38% to 1.10% (paragraph XX of Article 15-B). This change became effective for transactions taking place on May 3, 2016 and onwards.

c) Inflow of funds related to foreign loans

Since 2010, the IOF regulation has been changed several times and different maturity terms have been established for the application of the zero rate. Currently, the IOF-FX levied on the inflow of funds to Brazil related to foreign loans with a maturity of up to 180 days is 6%. For long term loans, the IOF-FX is zero rated.

The Decree also establishes that loan transactions that are liquidated before the end of the period established in the legislation for the application of the zero rate should be subject to the 6% IOF-FX rate, plus the applicable interest and penalties.

In this context, the new Decree added a third paragraph to Article 15-B, prescribing the applicable tax treatment when an external loan is granted under one regulation and its liquidation occurs under a new regulation before the maturity date to which the parties previously agreed.

In such case, the taxpayer should observe the most beneficial maturity terms and respective IOF rate.

Just as an example, if a foreign loan was entered on March 12, 2012, with a maturity of more than 1,800 days and liquidated today, the current law should apply (zero rate once the maturity of more than 180 days was respected).

d) Export of services

Currently, a foreign exchange transaction for the inflow of funds to Brazil related to revenue from the export of goods and services is subject to an IOF-FX rate of zero.

The Decree added a fourth paragraph to Article 15-B of Decree 6,306/2007 to clarify that the services classified under Sections I to V of the Brazilian Nomenclature of Services, Intangibles and Other Operations that result in net equity variations (NBS) are subject to an IOF-FX rate of zero, unless otherwise stated in the law.

Sections I to V include a significant variety of services. Section VI, which was left out, comprises intangibles and other services or transactions not mentioned in the previous sections.

IOF-Securities

a) Repo transactions between financial institutions or other entities authorized by the Brazilian Central Bank involving debentures issued by entities of the same economic group

The Decree added a new Subsection (III) to the first paragraph of Article 32 of Decree 6,306/2007. Under the new provision, repo transactions between financial institutions and institutions authorized by the Brazilian Central Bank, involving debentures issued by entities of the same economic group, are subject to an IOF-Securities rate of 1% per day on the value of the redemption, transfer or renegotiation, limited to the yield of the transaction, based on the investment terms according to the table in the Annex of Decree 6,306/2007.

———————————————