Decree No. 656 of October 7, 2014 (Decree 656/2014), issued by the Brazilian Executive Branch, reduced to zero the applicable rate of the Tax on Financial Transactions (IOF) on credit operations intended to finance logistics infrastructure projects in connection with works of highways and railways that originate from concession by the Federal Government.

Decree 656/2014 is in full force and effect as of October 8, 2014, date of its publication in the Official Gazette of the Union (Diário Oficial da União – DOU) and amends Decree No. 6306, of December 14, 2007 (the IOF Regulation).

Until the enactment of Decree 656/2014, the IOF zero rate was only valid for credit operations granted by the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social – BNDES) and the relending of funds for infrastructure projects made by any other bank was subject to the payment of IOF at the rate of 1.88%.

This measure aims to increase the number of Brazilian infrastructure projects. According to the Executive Secretary of the Ministry of Finance, the operations already in the pipeline exceed the sum of R$ 1.5 trillion.

From now on, the benefit given to BNDES and its financial agents with resources of BNDES or of investment funds administrated by BNDES has also been extended to any credit transaction performed via Financier of Studies & Projects (Financiadora de Estudos e Projetos - FINEP) or its financial agents with FINEP resources.

FINEP is a public company that aims to promote science, technology and innovation in companies, universities, technological institutes and other public or private institutions and before Decree 656/2014 any relending made by FINEP was subject to the payment of IOF at the rate of 1.88%.

As per the explanation of the Ministry of Finance, the measure will cover relending made by development banks and development agencies to smaller municipalities.

Decree 656/2014 establishes zero rate of IOF for trading operations of units of Fixed Income Index Funds (Exchange Traded Funds – ETFs) on the stock exchanges or organized over-the-counter market. The ETF has a portfolio of long-term securities and liquidity is very important to enable the investors to sell their units on the market. It is expected that this measure would help to create a market for securities of longer time limits.

Furthermore, Decree 656/2014 also clarifies that exchange transactions arising out of purchases of goods and services made abroad by means of debit cards are subject to the IOF at the rate of 6.38%, as it is the case with transactions with credit cards. The collection of this tax already happens and the inclusion of such provision in the Decree only occurred because the financial institutions requested that this practice be formalized by the Federal Government. There is an exception to this general rule. Should the user of the debit or credit card be the Union (Federation), the States, the Municipalities, the Federal District or their foundations or agencies (autarquias), then the IOF rate is reduced to zero.

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