Government hammers out deal to offset IOF increase

The more immediate proposals will be implemented via a provisional measure (MP), which takes effect immediately but must still be approved by Congress. In the case of ending the income tax exemption for LCI and LCA, the change would take effect in 2026 due to Brazil’s fiscal annuality rule.

The new MP would allow the government to reissue the IOF decree with lower tax rates. These changes still require approval from President Luiz Inácio Lula da Silva, who is due to return from France on Monday evening (9).

The revised plan is expected to reduce the fiscal impact of the IOF decree by one-third. According to the Finance Ministry, this shortfall will be offset by the MP. In its current form, the decree was projected to generate R$19.1 billion in 2025 and R$38.2 billion in 2026.

The government presented the new proposals after intense backlash from lawmakers, who threatened to overturn the original decree. Chamber of Deputies Speaker Hugo Motta said the alternative measures are less harmful than the original tax hike.

“The MP provides the government with financial compensation, but it’s much less damaging than the continuation of the original IOF decree. Plus, we’ve opened the door for a broader and more meaningful debate on tax exemptions,” Mr. Motta said.

One key element of the MP is raising the tax rate on Gross Gaming Revenue (GGR) from 12% to 18%, aligning with the government’s original proposal to regulate the betting sector. GGR refers to the total amount wagered, minus the payouts to players.

Another measure targets incentives for LCI and LCA investments. According to Mr. Haddad, these instruments—currently exempt from income tax—will now be taxed at 5%. “These securities will no longer be tax-free but will still enjoy significant incentives. We’re narrowing the gap between 0% and 17.5% down to 5%,” he explained.

The MP will also standardize the Social Contribution on Net Profit (CSLL) paid by financial institutions. The preferential 9% rate for fintechs will be eliminated, leaving the standard rates of 15% and 20%.

Under the revised IOF decree, one significant change involves the tax on reverse factoring—a form of early payment to suppliers by banks. This measure had drawn strong criticism from the financial and retail sectors.

“The most affected part of the IOF will be on risco sacado. The fixed component of this tax will be removed, and the daily rate will be recalibrated to better align with the existing credit system,” Mr. Haddad said. The original decree set a fixed IOF rate of 0.95% for reverse factoring, along with a daily rate of 0.0082%. The fixed rate will be eliminated, and the daily rate adjusted.

As for Brazil’s broader system of tax expenditures, Mr. Haddad said the plan is to reduce them by at least 10%, although the exact figure has yet to be finalized. According to reporting by Valor Econômico, essential items such as the basic food basket, Simples Nacional regime, and the Manaus Free Trade Zone will be spared.

“We agreed here on cutting tax expenditures by at least 10%. Everything will be subject to deliberation by Congress. The Executive’s initiative is based on input from both congressional presidents and leaders who participated in the meeting,” Mr. Haddad stated.