For the second time this year, by means of Decree No. 7698, of March 9, 2012 (Decree 7698/2012), published in the Official Gazette of the Union of March 12, 2012, the Brazilian Federal Government decided to increase from three to five years the term of the foreign currency loans which are subject to the tax on exchange transactions (IOF) at the rate of 6%. As in the previous IOF increases, this measure comprises all form of loans which are subject to registration with the Central Bank of Brazil (Banco Central do Brasil - Bacen)1. On March 1st, 2012, Decree No. 7683, of February 29, 2012 (Decree 7683/2012) increased from two to three years the average minimum maturity term of the foreign currency loans subject to IOF.
Therefore, the IOF which is assessed on the entry of funds into the country or through symbolic exchange transactions is now applicable to any foreign currency loans contracted as from March 12, 2012 with an average minimum maturity term of 1800 days2.
From now on, only for transactions exceeding the five year-period, there is no such taxation, because the applicable IOF rate is zero3.
According to the Ministry of Finance, this new extension of the average minimum maturity term of the foreign currency loans has a prudential character and reinforces the decision to reduce the flow of speculative capital that enters in Brazil to gain with the difference between the interest adopted in the most developed countries and the basic interest rate practiced in Brazil and it also aims to restrict the entry of foreign capital for short-term investments in the country.
1 This includes not only direct loans (either banking or intercompany loans) but also bond issues in the international market, and symbolic exchange transaction for the renewal, renegotiation or transfer of existing loans. 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.
2 This change was introduced by Decree 7698/2012 which contains the new wording for item XXII of article 15-A of the IOF Regulation approved by Decree No. 6306, of December 14, 2007.
3 However, if and when a transaction originally contracted for more than five year-period is prepaid, partially or totally, without complying the average minimum maturity term of five years, 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. This provision is contained in paragraph 2 of article 15-A of the IOF Regulation, as amended by Decree 7683/2012.
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