Brazilian government adjusts IOF and amends rules on financial income taxation

On June 11, 2025, the Brazilian government published Decree No. 12,499 and Provisional Measure (MP) No. 1,303, introducing significant changes to Brazilian tax rules. The decree and replaced the recently enacted Decrees No. 12,466 (May 22, 2025) and No. 12,467 (May 23, 2025), which dealt with the calculation rules for the Tax on Credit, Foreign Exchange, and Insurance Transactions, or Transactions Involving Bonds or Securities (IOF), reproducing most of their provisions with certain specific changes.

Provisional Measure No. 1,303 establishes a new framework for the taxation of financial income, addressing various topics such as fixed income investments, net gains on the stock exchange, investment funds, derivatives, incentivized securities, cryptoassets, and increases the applicable taxation for payment institutions and for the distribution of interest on equity (JCP).

The government initially announced these measures to offset the budgetary effects of a possible reversal of the increase in the IOF published at the end of May. However, a complete reversal of this increase did not take shape, and there was a new IOF/Securities increase for contributions to receivables investment funds (FIDCs) that was not contemplated in the previous decrees. The compensatory measures in this latest decree are quite extensive and will have significant impacts. Some of the main changes introduced by these provisions are outlined below:

Repealed Decrees No. 12,466 and No. 12,467 – changes to IOF rules:

• Additional IOF Rate on Credit Transactions: the additional rate applicable to credit transactions for corporate borrowers was reduced from 0.95% to 0.38%. However, the daily rate of 0.0082% has been maintained (the same level already provided for individuals), which is double the rate provided for legal entities prior to Decree No. 12,466 (0.0041%).
• Forfait or Supplier Risk: a provision for levying IOF/Credit on advance payment transactions to suppliers (‘forfait’ or ‘supplier risk’) was upheld, which is subject to judicial debate. However, such transactions are now exempt from the additional 0.38% rate, meaning they are only subject to the daily rate of 0.0082%. Moreover, a provision stating the taxpayer would be the ‘debtor’ has been removed, keeping the financial institution solely responsible for collection. This seems to shift the role of ‘taxpayer’ – previously improperly attributed to the debtor – to the supplier/creditor.
• Receivables Investment Funds (FIDCs): IOF/Securities is now charged at a rate of 0.38% on the primary acquisition of FIDC shares (including by financial institutions), except for acquisitions made until June 13, 2025, and secondary market transactions.
• Foreign Exchange Transactions: a zero IOF/FX rate has been established for foreign exchange settlements for the return of resources foreign investors invested in equity interests in Brazil. These transactions were subject to a 0.38% rate prior to the publication of Decree 12,466, which increased them to 3.5% in line with the general rule for remittances abroad. However, the increases to all other rates were maintained, including the general rate for remittances abroad and the rate applicable to the inflow of resources for external loans with a term of less than 364 days – both set at 3.5%.
• Life Insurance with Survival Coverage: new IOF/Insurance exemption limits and criteria have been established for individuals in VGBL life insurance contributions. Contributions made by individuals between June 11 and December 31, 2025, are exempt up to the limit of BRL 300,000 (with the same insurer), and as of January 1, 2026, up to BRL 600,000 (even with different insurers) . Above these limits, a 5% rate applies. Contributions made by legal entities as employers to employee life insurance plans remain exempt. Decree No. 12,466 had increased the rate applicable to contributions over BRL 50,000 per month from 0% to 5%, even in plans from different insurers.
• These new rules come into effect on the date of their publication.

Provisional Measure (MP) No. 1,303 – changes to the taxation of income from financial investments and other means

Individuals – income from financial Investments

• Taxation: now subject to Withholding Income Tax (IRRF) at a general rate of 17.5%, to be reported separately in the Annual Adjustment Declaration (DAA). As such, the MP has repealed the regressive rate system of 22.5% to 15% depending on the term of investment and the exclusive source taxation system currently in effect. Under the proposed system, the IRRF becomes an advance on the tax due in the DAA – such income must be declared separately and is subject to Income Tax (IRPF) at a rate of 17.5%. Additionally, the 17.5% rate also applies to financial investments abroad and investments in virtual assets.
• Loss Compensation: proven losses in financial investments can be offset against other income of the same nature within the DAA for up to five years. Losses realized up to December 31, 2025, follow the previous legislation. Furthermore, loss compensation is not permitted in mutual financial resource transactions.

Individuals – net gains on the stock exchange and organized OTC markets

• Net Gains: the net gains regime remains applicable to transactions carried out on the stock exchange or in the organized over-the-counter market. However, it has been clarified that such transactions should be considered as those that are conducted in ‘centralized trading systems that allow the matching and interaction of buy and sell offers for securities and ensure public price formation, managed by an entity authorized by the Securities and Exchange Commission (CVM)’.
• Transactions carried out in the forward market outside the exchange remain subject to the net gains regime. Swap transactions are now subject to the net gains system and are no longer taxed under the same rules as fixed income transactions.
• Additionally, MP No. 1,303 incorporates many provisions from existing normative instructions, including the Federal Revenue Service’s current interpretation that transactions carried out on the exchange involving fixed income securities are not subject to the net gains system.
• Rate Increase: now taxed at a general rate of 17.5% and calculated quarterly, maintaining the exemption for sales of stocks on the exchange up to BRL 60,000 per quarter. This simplifies the calculations compared to the current monthly regime, which exempts transactions up to BRL 20,000.
• Loss Compensation: losses remain fully compensable in the period in which they are realized, with a compensation limit for the five subsequent calculation periods. The MP now permits losses calculated from January 1, 2026, that cannot be offset with gains in transactions of the same type to be offset with other income from financial investments. Losses realized until December 31, 2025, follow old rules and can only be offset with net gains of the same nature.

Securities lending

New Rules: MP No. 1,303 improves the rules applicable to securities lending transactions, addressing imbalances and imperfections present in existing rules.

Taxation of virtual assets

• Applicable to: net gains obtained in transactions involving virtual assets, including transactions where the virtual assets are under the custody of the resident taxpayer, with keys or codes that allow access to their control without an intermediary; and transactions involving virtual assets legally classified as financial investments abroad.
• Individuals: gains and income are taxed at a rate of 17.5%, with quarterly calculation and the possibility of loss compensation for up to five previous periods. Losses realized from 2026 can only be offset with gains in virtual assets, not with other financial income.
• Legal entities under Actual Profit Method, Deemed Taxable Income, or Arbitrated Profit: gains are included in the Corporate Income Tax (IRPJ) and Contribution Tax on Net Profit (CSLL) calculation bases, with loss deduction prohibited.

Incentivized Investments

Rate Increase: income stemming from securities such as LCI, CRI, CRA, CDA/WA, CDCA, LCA, CPR, LIG, LCD, incentivized debentures (priority infrastructure projects), as well as income from investments in FI-Infra, FIP-IE, FII/FIAGRO (exempt) will be taxed at a rate of 5% when paid to individual investors, who are currently subject to zero IRRF. The rate increase applies only to income produced by securities (including fund shares) issued and paid in from December 31, 2025, with the zero rate preserved for the existing stock.

Investment Funds

• General Rule: the income shareholders earn in investment fund applications is subject to a 17.5% IRRF rate. This rate applies uniformly to funds regardless of whether they are subject to the ‘come-cotas‘ regime. Therefore, the rate applicable to income distributed via FIPs, FIDCs, FIAs, and ETFs has been increased to 17.5%. Funds subject to come-cotas are no longer taxed at regressive rates of 22.5% to 15% (depending on the portfolio composition and investment term) and are now subject to IRRF at a uniform 17.5% rate, with periodic taxation in May and November to continue.
• Real Estate Investment Funds (FII) and Agribusiness Funds (Fiagro): income distributed to resident individual shareholders via FII and Fiagro, whose shares are traded exclusively on the stock exchange or organized over-the-counter market, are subject to IRRF at a rate of 5% provided the fund has at least 100 shareholders. The 5% rate does not apply to individual shareholders holding 10% or more of the total fund shares, those who receive more than 10% of total income, nor to groups of related individuals holding 30% or more of the shares or receiving more than 30% of the income. The fund has up to 180 days from the first payment to reach the minimum number of shareholders and, if it fails to meet this requirement, has a further 30 days to regularize. These requirements are currently applicable for exempting individual shareholders and now apply to the 5% IRRF taxation, instead of the uniform 17.5% rate.
• Fixed Income Index Funds (Fixed Income ETFs): income from funds whose regulations require that their portfolios be composed of at least 75% of financial assets that make up the reference fixed income index are subject to a 20% IRRF rate. Income from funds with portfolios composed exclusively of incentivized assets (such as LCIs, LCAs, CRIs, CRAs, among others) is taxed at a rate of 7.5% when the shareholder is an individual.
• Infrastructure Private Equity Investment Fund (FIP-IE) in Research, Development, and Innovation (FIP-PD&I): income earned on the redemption of shares (including by liquidation) is subject to a rate of 17.5%. For individual shareholders, a 0% rate applies to shares issued and paid in by December 31, 2025, and 5% for shares issued after that date. Non-resident shareholders remain subject to a zero rate.
• Investment Funds and Non-Resident Investors: income is subject to a 17.5% IRRF rate, or 25% for residents in favored tax jurisdictions. However, the zero rate is maintained for income earned by investors resident or domiciled abroad (outside favored tax jurisdictions) via private equity funds (FIPs) that comply with rules and conditions established by Brazil’s Central Bank, the CVM, and National Monetary Council (CMN).

Non-Resident Investors

• Change of Regime: MP No. 1,303 changes the special regime applicable to non-resident investors in investments made in the financial and capital markets, increasing the currently applicable income tax rate from 15% to 17.5%. This further restricts the exemption for transactions carried out on the stock exchange or organized over-the-counter market to trades in shares, subscription warrants, subscription receipts, and share deposit certificates.
• Non-resident investors remain subject to a zero rate on gains and income from investments in private equity investment funds (FIP and FIP-IE&PDI).
• Investors who reside in a favored tax jurisdiction – previously taxed under the same rules as individuals in Brazil – are now generally taxed at a rate of 25%.
• Conversion of investment types: converting direct investment into capital market investment is now formally subject to income tax, calculated by the difference between the acquisition cost and the market value on the conversion date. The reverse conversion is exempt from taxation.

Legal Entities – Relevant Rules

• Financial investments are now subject to a general 17.5% IRRF rate as an advance on the calculation of IRPJ and CSLL. Losses can be deducted according to general deductibility rules.
• Investment Fund Shares – Asset Valuation: legal entity shareholders that are taxed based on actual profit may record the portion of the share’s equity value corresponding to the valuation (by equity value) of shares or quotas of controlled or affiliated companies (in the case of FIAs or FIPs) or real estate (in the case of FIIs or Fiagro) in a sub-account in the fund’s portfolio. The sub-account balance will be reversed and included in the tax base for IRPJ and CSLL when the fund sells the asset linked to the sub-account.
• Investment Fund Shares – Fair Value Valuation: if the investment in the fund is recognized in accounting as a financial instrument at fair value, the shareholder may record the difference between the accounting value of the investment (at fair value) and the acquisition cost of the share in a sub-account. This sub-account will be subject to the current rules for the taxation of gains and losses from the valuation of assets and liabilities at fair value.
• Hedge Transactions with Foreign Counterparties: losses will become deductible in transactions carried out with counterparties abroad. Such losses are currently limited to transactions carried out on the exchange, provided that they are registered in foreign exchange or over-the-counter markets, are carried out on a market basis, as well as in cases where the price is formed in a market supported by sufficient quantity among third parties with the same underlying asset, as regulated by Brazil’s Federal Revenue Service. If these conditions are met, the 0% IRRF rate becomes generally applicable to all derivatives for hedging purposes, regardless of the hedged item. Currently, the zero rate is limited to hedge transactions involving interest rate, currency parity, or commodity price variations.
• CSLL Increase – Financial Institutions: the CSLL rate has been increased from 9% to 15% for payment institutions, stock and commodity exchanges, clearing and settlement entities, and some other companies the CMN considers financial institutions, such as Direct Credit Companies (SCD) and Peer-to-Peer Lending Companies (SEP).
• Interest on Equity: the IRRF rate on interest on equity distributions was increased from 15% to 20%.
• Fixed-Odds Betting (BETs): the tax burden on BETs has been increased by 6%. After specific deductions, 82% of the proceeds from fixed-odds betting will be allocated to cover the operating and maintenance costs of the lottery operator and other betting games; 6% will be allocated to social security (for health actions); and the remaining 12% will be specifically allocated according to existing legal provisions.

Effective Date and Efficacy

• If converted into law, most of the new rules will come into effect on January 1, 2026. As an exception, the rules for increasing the CSLL rate for payment institutions and the allocation of proceeds from fixed-odds betting will be valid from October 1, 2025, due to the ninety-day rule (anterioridade nonagesimal).

If MP No. 1,303 is converted into law, it will have a major impact on the tax regime applicable to financial income and may also lead to various debates and disputes about the legality and constitutionality of some changes. Similarly, some of the changes for IOF legislation upheld in Decree No. 12,499 are likely to continue, leading to similar disputes.

For more information on these topics, please contact Mattos Filho’s Tax practice area.