Changes in IOF rules for 2011

On December 30th, 2010, the Brazilian Federal Government enacted Decree n. 7412/2010 (“Decree 7412”) which changed certain rules connected with the tax on foreign currency exchange (“IOF/Exchange”) and on transactions with securities (“IOF/Securities”). The new rules are in force from January 1st on.

There are remarkable changes with respect to IOF/Exchange and the financial and capital markets.

The general rule continues to be the imposition of IOF/Exchange at a 6% rate on investments made in the financial and capital markets, with the collection of such tax at a 2% rate when investments are made in the stock exchange or in the over-the-counter market pursuant to the rules of the National Monetary Council (excluding derivatives with pre-determined income).

The rule of imposition of IOF/Exchange at a 2% rate for acquisitions of stocks in IPOs of corporations, registered or released from registration with the Securities Commission (“CVM”), continues in force, and the same is now also applicable to subscription of shares. In both cases, the company should be registered for trading its stocks in the stock exchange.

Decree n. 7412/2010 provides that the entry of funds for purchase of quotas in investment fund in equity participations (“FIP”), in investment fund in emerging companies (“FIEE”), and in investment funds that are quotaholders of FIPs and/or FIEE (“FIC”) is subject to IOF/Exchange at a 2% rate. This special treatment did not exist before.

The return of funds of the investments made in Brazil and mentioned above to the foreign investors is subject to IOF/Exchange at a 0% rate.

Decree n. 7412/2010 also establishes that IOF/Exchange is imposed at a 2% rate on the following specific situations, which require the execution of symbolic foreign currency exchange agreements, (i) symbolic entry of funds by means of cancellation of depositary receipts and investment in stocks in the stock exchange; and (ii) symbolic entry of funds related to foreign investment formerly registered as foreign direct investment under Law n. 4131/1962 which migrates to the regime set forth by Resolution CMN/BACEN n. 2689/2000, to reflect investment in stocks traded in the stock exchange. Return of investments related to such specific cases is subject to 0% IOF/Exchange.

Decree 7412 also extends the 0% IOF/Exchange to any remittances of dividends and of interest on equity, regardless of being paid by corporations related to investments formerly made in the stock exchange, IPOs, and other limited cases.

The imposition of IOF/Securities at 1% rate on fixed-yield bonds is now limited to bonds issued by the Federal, State and Municipal public bonds. Before, said tax was also imposed on bonds privately issued.

IOF/Exchange and IOF/Securities are relevant taxes of the Brazilian exchange, financial and capital markets and it is important to be aware of their specifics and related costs. There many exceptions and specifics which deserve attention of the foreign investor. In the current scenario, in which the Brazilian government has used the IOF/Exchange as a tool to combat the Brazilian real valuation against the US dollar, it is fair to say that more changes are expected during 2011.