By means of Decree No. 7,456, of March 28, 2011, the Brazilian Federal Government decided to increase to 6% the applicable rate of the tax on exchange transactions (IOF) assessed on the entry of funds into the country or through symbolic exchange transactions for any foreign currency loans contracted as from March 29, 2011 with an average minimum maturity term of up to 360 days. The affected transactions comprise all form of loans which are subject to registration with the Central Bank of Brazil (Banco Central do Brasil - Bacen), including not only direct loans (either banking or intercompany loans) but also bond issues in the international market.

For IOF purposes, in the event of bond issues with total or partial acceleration maturity clause in favor of the creditor (put option) or the debtor (call option), the term of the transaction will counted as from the first date for the put or call option, as the case may be.

For transactions exceeding 360 days, there is no such taxation, because the applicable IOF rate is zero. However, if and when a transaction originally contracted for more than 360 days is prepaid, partially or totally, without complying the average minimum maturity term, then the 6% IOF rate will apply, plus interest in arrears and a fine, which may vary from 5% to 100% of the total amount of the transaction, and a penalty of up to R$ 100 thousand to be imposed by Bacen.

Before Decree 7,456/2011, Brazilian borrowers paid a 5.38% IOF tax on loans up to 90 days and zero tax when the transaction exceeded three months.

The higher IOF tax on foreign loans of up to 360 days aims to avoid further appreciation of the Brazilian Real while reducing the exposure of Brazilian borrowers (banks and companies) to assume foreign currency indebtedness by raising funds abroad. It will also diminish the credit available in the Brazilian economy by reducing liquidity in a move that may help to contain inflation.

The Brazilian Federal Government already announced that new measures may be adopted at any time to include transactions maturing longer than 360 days if it detects an increase in the inflow of foreign currency loans.

In this regard, the Brazilian Monetary Council (Conselho Monetário Nacional - CMN) closed a loophole and extended the IOF to renewed, renegotiated or transferred loans, by requiring that these operations be made through symbolic exchange transactions1. This measure has been adopted by means of CMN Resolution No. 3967, of April 4, 2011. According to Bacen, US$ 5.6 billion of debt maturing in up to 360 days was either renewed, renegotiated or transferred in January and February of 2011.

At the same time the Brazilian Finance Minister announced that Brazil will continue to adopt measures seeking to reduce "excessive" dollar inflows. This means that Brazilian authorities are still seeking ways to reduce foreign capital from going into local markets without hurting infrastructure and industrial investments.


1 The total aggregate IOF rate for the symbolic exchange transaction will correspond to 6.38%, comprising 0.38% for the "transfer abroad" of the funds and 6% for the ""entry" of the funds in connection with the renewal, renegotiation or transfer of foreign loans.

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