Recent initiatives of Brazil’s federal government to increase the rate of the financial transactions tax (IOF) have resulted in revisions, reversals and alternate plans. The fate of the IOF rate increase is now in the hands of the Federal Supreme Court, which has been asked to weigh in on the dispute.
The IOF is a tax on legal entities and individuals on various financial transactions carried out in Brazil, with the rate depending on the type of transaction.
The dispute surrounding the IOF initially arose out of two decrees published on 22 and 23 May 2025 (Federal Decrees No. 12,466 and No. 12,467, respectively), which substantially increased the IOF rates on credit transactions, foreign exchange transactions and insurance transactions that were originally established in a 2007 decree (Federal Decree No. 6,306/2007). On 11 June, the government released Provisional Measure (PM) No. 1,303, which sets out a new framework for the tax treatment of financial investments and includes measures on fixed income investments, stock exchange net gains, investment funds, derivatives, incentivised securities and crypto assets, increases the withholding tax on interests on net equity and corporate tax applicable to financial institutions, and revises the rules governing tax offsets. (It should be noted that a PM has the force of law immediately or on a date specified, but the PM must be converted into law within 120 days (two 60-day periods) by Congress or it will expire.)
The main changes to the IOF as proposed in the two decrees were as follows:
The measures in PM No. 1,303 will generally apply as from 1 January 2026, except for those relating to online betting and the social contribution on net income (CSLL) on technology companies, which will apply as from 1 September 2025:
A decree also published on 11 June (Decree No. 12,499) made more changes to the IOF and revoked the two May decrees but retained most of their provisions.
The raises in the IOF rates faced considerable backlash from taxpayers and created political turmoil when the president of the Senate issued yet another decree on 26 June (Legislative Decree No. 176 of 2025), which suspended the effects of the three previous decrees, reinstating the original IOF rules in the 2007 decree, and thus overturning the IOF increase endorsed by President Lula da Silva. Without the tax increase, which was designed to balance Brazil’s budget, the government will lose about BRL 20 billion in tax revenue in 2025.
The Socialism and Liberty Party and the Lula government immediately filed lawsuits with the Federal Supreme Court asking the court to reverse the Senate’s position and reinstate the IOF rate increases. The court upheld the Senate’s decision but suspended the effects of the May and June decrees, as well as the Senate’s Legislative Decree and scheduled a hearing on 15 July, after which the Federal Supreme Court likely will issue its own decision on the decrees.
If the IOF changes and PM rules are approved, they will have the following combined effects: (i) a 2.5% increase (= 17.5% - 15%) in the taxation of financial investments; (ii) revocation of the tax exemption on bonds, shares and stocks certificates; (iii) maintenance of the 25% withholding tax on persons resident in tax haven jurisdictions; (iv) an increase in taxes (IOF) levied on purchases and/or payments abroad; and (v) the introduction of tax on crypto assets. Ultimately, these changes are likely to contribute to reduced foreign investment in Brazil.
Edilson Muniz
Queli Morais
BDO in Brazil
The IOF is a tax on legal entities and individuals on various financial transactions carried out in Brazil, with the rate depending on the type of transaction.
Background of the Dispute
The dispute surrounding the IOF initially arose out of two decrees published on 22 and 23 May 2025 (Federal Decrees No. 12,466 and No. 12,467, respectively), which substantially increased the IOF rates on credit transactions, foreign exchange transactions and insurance transactions that were originally established in a 2007 decree (Federal Decree No. 6,306/2007). On 11 June, the government released Provisional Measure (PM) No. 1,303, which sets out a new framework for the tax treatment of financial investments and includes measures on fixed income investments, stock exchange net gains, investment funds, derivatives, incentivised securities and crypto assets, increases the withholding tax on interests on net equity and corporate tax applicable to financial institutions, and revises the rules governing tax offsets. (It should be noted that a PM has the force of law immediately or on a date specified, but the PM must be converted into law within 120 days (two 60-day periods) by Congress or it will expire.)The main changes to the IOF as proposed in the two decrees were as follows:
| Credit Transactions | ||
| Event | Rate in Effect | Proposed Change |
| General loans, discounts, advances and financing for legal entities | 0.0041% per day | 0.0082% per day |
| Acquisition of quotas of credit rights investment funds | 0% | 0.38% |
| Foreign Exchange Transactions | ||
| Event | Rate in Effect | Intended Change |
| International transactions by individuals using credit or debit cards or international prepaid cards | 0.38% | 3.5% |
| Purchase of foreign currency in cash and for remittances abroad | 1.10% | 3.5% |
| Insurance Transactions | ||
| Event | Rate in Effect | Intended Change |
| Contributions for the cost of life insurance plans with survivor coverage (e.g., certain life insurance) | 0% | 5% |
The measures in PM No. 1,303 will generally apply as from 1 January 2026, except for those relating to online betting and the social contribution on net income (CSLL) on technology companies, which will apply as from 1 September 2025:
| Area | Current Rules | New Rules | ||||||||||
| Taxation of online betting | 12% on Gross Gaming Revenue (GGR), which corresponds to the gross revenue of online bets | 18% GGR, which corresponds to the gross revenue of online bets | ||||||||||
| Withholding tax (IRRF): Income derived by residents from financial investments (including investment funds) | Regression table
|
17.5% for financial revenue | ||||||||||
| IRRF: Income derived by residents from the stock exchange and over-the-counter markets | 15% on capital gains exceeding BRL 20,000 | 17.5% on capital gains exceeding BRL 20,000. Losses on financial investments will be able to be offset against other income of the same nature for up to five years. Losses incurred through 31 December 2025 will be subject to the current rules | ||||||||||
| IRRF: Income derived by nonresidents from financial investment and investment funds | 15% on income | 17.5% on income, with the 25% maintained where the person is resident in a favourable tax jurisdiction | ||||||||||
| Interest on Net Equity (INE) | 15% on INE credited | 20% on INE credited | ||||||||||
| Incentivised securities, such as real estate and agribusiness letters of credit, real estate and agribusiness receivables certificates, etc. | 0% on bond yields | 5% on bond yields | ||||||||||
| Net gains earned from transactions involving virtual assets, including transactions in which the virtual assets are in the custody of a Brazilian resident taxpayer, with keys or codes that enable, without an intermediary, access to its control, and transactions involving virtual assets legally classified as financial investments abroad | 0% on net gain |
17.5% on net gain Losses involving virtual assets will be available for offset over five quarters Companies taxed under the actual, presumed or arbitrated profit regimes will have to include the net gain in the calculation of IRPJ and CSLL, and the deduction of losses will be prohibited |
||||||||||
| Taxation of technology companies in financial services ("fintech") | 9% Social Contribution on Net Income (CSLL) | Taxed like other financial institutions, with CSLL rates of 15% or 20% | ||||||||||
| Limitation on tax credit offsets | Requests for tax credit offsets will be denied where they are due to undue payments or larger payments than what is due based on non-existent collection documents or when they relate to the non-cumulative tax calculation of a contribution to PIS/PASEP or COFINS whose credits have no relation to the taxpayer’s economic activity |
A decree also published on 11 June (Decree No. 12,499) made more changes to the IOF and revoked the two May decrees but retained most of their provisions.
The raises in the IOF rates faced considerable backlash from taxpayers and created political turmoil when the president of the Senate issued yet another decree on 26 June (Legislative Decree No. 176 of 2025), which suspended the effects of the three previous decrees, reinstating the original IOF rules in the 2007 decree, and thus overturning the IOF increase endorsed by President Lula da Silva. Without the tax increase, which was designed to balance Brazil’s budget, the government will lose about BRL 20 billion in tax revenue in 2025.
The Socialism and Liberty Party and the Lula government immediately filed lawsuits with the Federal Supreme Court asking the court to reverse the Senate’s position and reinstate the IOF rate increases. The court upheld the Senate’s decision but suspended the effects of the May and June decrees, as well as the Senate’s Legislative Decree and scheduled a hearing on 15 July, after which the Federal Supreme Court likely will issue its own decision on the decrees.
BDO Insight
If the IOF changes and PM rules are approved, they will have the following combined effects: (i) a 2.5% increase (= 17.5% - 15%) in the taxation of financial investments; (ii) revocation of the tax exemption on bonds, shares and stocks certificates; (iii) maintenance of the 25% withholding tax on persons resident in tax haven jurisdictions; (iv) an increase in taxes (IOF) levied on purchases and/or payments abroad; and (v) the introduction of tax on crypto assets. Ultimately, these changes are likely to contribute to reduced foreign investment in Brazil.Edilson Muniz
Queli Morais
BDO in Brazil