On 11 June 2025, the Brazilian Government published in the Official Gazette Provisional Measure No. 1,303/2025 (the PM), which introduces increases in the taxation of Interest on Net Equity (INE) payments, certain financial investments and corporate income tax for financial institutions, among other provisions. These changes should take effect from 1 January 2026. The PM also includes increases in the taxation of online betting operations, effective 1 October 2025.

Also on 11 June, the Government published Decree No. 12,499/2025 (the Decree), effectively reverting some of the recent changes to the Tax on Financial Operations (IOF) legislation introduced in May 2025. These changes are effective immediately from 12 June 2025.

Background

In May 2025, the Government published Decree 12,466/2025, implementing significant increases to IOF rates for credit and foreign exchange (FX) operations. (For background, see EY Global Tax Alert, Brazilian Government introduces changes to regulations dealing with taxation of financial operations, dated 27 May 2025.) These changes were included in the current Government's announcement of a 31.3 billion Brazilian real (BRL31.3b) budget freeze as part of measures to control spending, reduce the public deficit and meet fiscal targets.

Decree 12,466/2025 sparked an immediate negative response from the market, with the Government almost immediately rolling back some of the provisions. The negative reaction from both the market and Congress continued and, following discussions with Congress, the Brazilian Government has now issued the PM as an alternative to revert additional IOF increases, without jeopardizing the revenue being contemplated by such increases.

Summary of the changes introduced by the PM

The key changes can be summarized as follows:

¹ These acronyms refer to various securities: LCA refers to Agribusiness Credit Letters; LCI refers to Agribusiness Credit Letters; CRI is a Real Estate Receivables Certificate; CRA is an Agribusiness Receivables Certificate; and LCD is Development Credit Letter.

² CSLL refers to Social Contribution on Net Profits.

Withholding tax (WHT) on Interest on Net Equity

The PM has increased the WHT rate on INE payments from 15% to 20% starting in January 2026. INE is a deductible mechanism to remunerate shareholders and compensate the time value of money on investments due to local inflation. It had been the subject of numerous discussions in recent years, with previous attempts by the Government to revoke this cash repatriation mechanism and a successful reduction in the calculation base introduced in 2023 (Law 14.789/2023).

The increase in the WHT rate had also already been proposed in 2024. (See EY Global Tax Alert, Brazilian Government proposes to increase combined CIT rate, and withholding tax on INE payments, dated 4 September 2024.)

Income tax on financial investments

The PM has introduced a 5% WHT on income from Real Estate Credit Letters (LCI) and Agribusiness Credit Letters (LCA), as well as other securities tied to the real estate business and the agribusiness. These securities were previously tax exempt. This change will be effective as of January 2026. However, these changes will apply only to new issuances starting in 2026, preserving the tax-exempt status of existing security holdings.

The PM also introduced a fixed 17.5% WHT general rate on income derived from financial investments, including but not limited to bank deposits, public and private securities, certificates of deposit, structured notes, credit bills, receivables certificates, commercial notes, debentures, derivatives, investment fund units, stocks, and digital representations of these assets. The rates should also apply to cryptocurrencies.

Previously, the rules generally provided for regressive rates ranging from 22.5% to 15% depending on the holding period. These changes should be applicable from 1 January 2026. Certain reductions will continue to apply for certain listed securities and funds.

Losses incurred on financial investments from 1 January 2026 may be offset against gains from other financial investments.

The rules surrounding foreign hedges have been aligned with local hedges, and the beneficial treatment previously reserved for market hedges is extended to over-the-counter hedges.

Increased taxation for online betting operations

The tax rate on betting operators' receipts, less prizes and taxes (also referred to as gross gaming revenue or GGR) increases from 12% to 18% as from 1 October 2025.

CSLL increase for payment institutions

Starting in October 2025, the Social Contribution on Net Profits (CSLL) rate for certain types of financial institutions, such as payment institutions, will be increased from 9% to 15%.

The CSLL is a component of the Brazilian corporate income tax. With this increase, the affected entities should be subject to a combined corporate income tax rate of 40% (increased from the standard 34%). Other major financial institutions, such as banks, remain subject to a 20% CSLL rate and a combined 45% corporate income tax rate.

Taxation of nonresident capital gains upon the conversion of investment registrations

The PM determines that the conversion of foreign investment into another modality (or registration) that is subject to the regulations of the National Monetary Council (CMN), Brazilian Central Bank (BACEN) and Securities and Exchange Commission (CVM), should be subject to nonresident capital gains taxation rules.

This would be the case, for example, in a change from privately to publicly listed shares. In this regard, the PM provides that the gains should correspond to the positive difference between the market value of the investment at the date of the conversion and the acquisition cost of the investment. Any gain so arising should be subject to tax at progressive rates ranging from 15% to 22.5%, depending on the gain amount.

The conversion of modalities has historically been a controversial issue, given the discussion as to whether the conversion itself should be considered to be a realization of the relevant investment generating 'income' for the non-resident shareholder.

Summary of the changes introduced by the Decree

The table below summarizes the key changes to the IOF legislation and have immediate effects.

The other changes previously introduced by Decree No. 12,466/2025 remain in force. For completeness, the Decree revoked Decrees 12,466/2025 and 12,467/2025 and replicated the provisions that were maintained.

Notably, the IOF-FX rate on the return of foreign investment was reduced to 0%.

This includes operations such as capital reductions performed by Brazilian entities. Originally, these operations were subject to a 0.38% rate, but the rate had been increased to 3.5% by Decree 12,466/2025. The reduction to 0% represents a significant relief for foreign investment.

It will be interesting to monitor this in the future to see if such relief will be extended to the inflow of capital (currently at the rate of 0.38%).

Implications

A Provisional Measure is a provisionary law issued by the executive branch of the Brazilian Government that has the authority of law until it is acted upon (amended or converted) by the Congress within a prescribed 60-day period (extendable by one additional 60-day period). If Congress does not act within this period, then the measure expires.

Similarly, the Decree should take immediate effect and already forms part of the relevant IOF regulations.

As such, these changes will have broad implications across multiple sectors:

• For foreign investors: The reduction of the IOF-FX rate on the return of foreign investment to 0% signifies a substantial easing of the tax burden, fostering a more attractive environment for foreign investors and the return of capital. On the other hand, the increase in the WHT rate on INE payments from 15% to 20% may undermine the mechanism's effectiveness and may warrant analyzing repatriation alternatives and holding structure.
• For financial investments: The elimination of tax exemptions for LCI, LCA and other securities, may require portfolio reassessment and affect investment allocation strategies.
• For financial institutions: The increase in CSLL rates will increase the effective tax rate for such taxpayers, particularly payment institutions that previously benefited from lower rates.
• For betting operators: The increased taxation from 12% to 18%, will significantly impact costs for online betting operators.
• For corporate treasuries: The IOF recalibration, particularly the changes to forfaiting operations and corporate credit, will affect cash-flow management and financing strategies for companies, especially small and medium enterprises.