Brazil: Brazil Eliminates The IOF On Foreign Investments On Shares And Private Securities

Last Updated: 2 December 2011
Article by Walter Stuber

As of December 1, 2011 the Brazilian government decided to attract and foster the return of foreign investors to the Brazilian market by reducing to zero the applicable rate of the Tax on Financial Transactions (IOF) levied on foreign investments in shares and private securities. The IOF is a regulatory tax and the rates are decreased or increased by the Brazilian government whenever the authorities decide to foster or reduce the inflow of foreign currency funds into the country.

According to the announcement made the Minister of Finance, Guido Mantega, the following measures have been adopted to encourage the entry of foreign capital in Brazil with a profile of long-term investment in: (i) stocks (both in primary offerings and in the secondary market), venture capital and cancellation of receipts of shares of Brazilian companies traded abroad, such as Depositary Receipts (DRs), the IOF rate is decreased from 2% to zero; and (ii) in private securities lasting more than four years, the IOF tax rate is decreased from 6% to zero.

This reduction has been approved by means of Federal Decree No. 7632, of December 1, 2011, which amends article 15-A of Federal Decree No. 6306, of December 14, 2007 (the IOF Regulation), as follows:

"Art. 15-A ........


XII - the settlement of exchange transactions by foreign investors to inflow of funds in the country, including through simultaneous operations, for application in the financial and capital markets, excluding the operations referred to in items XIII, XIV, XV, XVII, XVIII and XXIII of the main section: six percent;

XIII - the settlement of exchange transactions by foreign investors, as of December 1, 2011, concerning transfers of funds from abroad for use in the country in variable income (equities) on the stock exchanges or futures and commodities exchanges in the form regulated by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN), except for derivative transactions that result in predetermined income: zero;

XIV - the settlement of exchange transactions by foreign investors, as of December 1, 2011, for the entry of resources into the country to acquire shares in a public offering registered or exempt from registration with the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM), or to subscribe shares, provided that in both cases the issuing companies are registered for trading of shares on stock exchanges: zero;

XV - the settlement of exchange transactions by foreign investors, as of December 1, 2011, for the entry of resources into the country, including by means of simultaneous operations, to purchase units (cotas) of equity investment funds (fundos de investimento em participações), investment funds in emerging companies (fundos de investimento em empresas emergentes) and investment funds in units of those two funds (fundos de investimento em cotas dos referidos fundos), constituted as authorized by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM): zero;

XVI - the settlement of foreign exchange transactions for return of funds invested by foreign investors in the financial and capital markets, in the operations mentioned in items XI, XII, XIII, XIV, XV, XVII, XVIII and XXIII of the main section: zero;

XVII - the settlement of simultaneous exchange operations contracted as of December 1, 2011, for the entry of resources into the country through cancellation of depositary receipts for investment in shares traded on stock exchanges: zero;

XVIII - the settlement of simultaneous exchange operations contracted as of December 1, 2011, for the entry of resources into the country originated from regime change of the foreign investor, from direct investment as provided for in Law No. 4131 of September 3, 1962, to investment in shares traded on stock exchanges, in the form regulated by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN): zero;


XXIII - the settlement of exchange transactions by foreign investors to inflow of funds in the country, to purchase bonds or securities issued pursuant to articles 1 and 3 of Law No. 12431 of June 24, 2011: zero. "

The private bonds and securities benefited from this IOF reduction are those mentioned in articles 1, 2 and 3 of Law 12431/2011. These provisions are commented below.

Pursuant to article 1 of Law 12431/2011 these bonds and securities must be for public distribution and issued by legal entities that are not classified as financial institutions and that are regulated by CVM or CMN. Moreover, they must pay a fixed interest rate based on an index-linked price or reference rate (the total or partial post fixed interest rate is expressly prohibited) and must also cumulatively present: (a) an average maturity term of more than four years to be defined by the CMN; (b) a prohibition to the repurchase by the issuer of the paper in the first two years after their issuance and early settlement by means of redemption or prepayment; (c) a lack of commitment on resale assumed by the buyer; (d) a term of periodical income payment, if any, at intervals of at least 180 days; (e) evidence that the asset has been traded on regulated markets of securities; and (f) a simplified procedure to be set by the CMN. This latter must evidence the purpose of allocating the proceeds in investment projects, including those focused on research, development, and innovation.

Article 2 of Law 12431/2011 refers to debentures issued by any Brazilian Special Purpose Company (Sociedade de Propósito Específico - SPE) incorporated to invest in either infrastructure projects or intensive economic production projects focused on research, development, and innovation in places considered to be priority areas by the Brazilian Federal Government.

And article 3 of Law 12431/2011 deals with Brazilian investment funds with portfolios composed of at least 85 per cent of debentures issued by SPEs.

These measures are very adequate for this moment. The Brazilian government believes that the elimination of the IOF is a strong impetus to foreign capital inflows directed to productive investment and will help the Brazilian stock exchange to raise funds from foreign investors. This decision occurs in a very important phase of the global economy where the values ​​of publicly traded stocks worldwide fell as a result of the international crisis. Just to mention the effects in Brazil, so far this year (2011) purchases of foreign investors in the Brazilian stock market outweigh sales by just R$ 353 million. The total shows a strong downturn in the previous year (2010), when the net amount invested reached almost R$ 6 billion.

Obviously these measures are circumstantial and can be reversed at any time by the elevation of the IOF, should the Brazilian authorities conclude that there is imminent risk that the country may face purely speculative flows.


1 The official name of the Brazilian IOF is Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários (tax on credit and exchange transactions, insurance and securities). It is assessed on the amount of bank loans and similar transactions, on the amount of foreign currency purchased or sold, on insurance premiums and the price of securities purchased or sold. The applicable tax rate may vary from zero to 25% and depends on the kind of the operation.

2 Pursuant to CVM Instruction No. 461, of October 23, 2007, the Brazilian regulated markets comprise organized markets of securities. This means the physical space or electronic system designed for the negotiation or registration of operations with securities by a certain number of people authorized to trade, whether they are acting on their own account or on behalf of a third party. Organized markets of securities are the stock exchanges, commodities and futures markets, and the organized over-the counter (OTC) markets. These markets shall be administrated by managing entities authorized by CVM.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
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