Brazil’s government is close to reaching a deal with Congress on the proposed measure to replace the Financial Transactions Tax (IOF), which would reshape the taxation of investment instruments. The agreement is expected to maintain the income tax exemption for infrastructure debentures, as well as Real Estate Receivables Certificates (CRIs) and Agribusiness Receivables Certificates (CRAs). However, Real Estate Credit Bills (LCIs) and Agribusiness Credit Bills (LCAs), which are issued by banks, would remain subject to income tax, said Dario Durigan, executive secretary at the Finance Ministry.
Mr. Durigan emphasized the government’s willingness to negotiate, as it has done in previous legislative efforts, and said the measure marks progress on the economic agenda by addressing demands from society. “Those who hold closed-end funds must pay income tax. Companies operating in sports betting must pay. This ensures that wage earners pay less,” he said. “The tax burden falls where it should. That approach has been successful and has the support of Congress and public opinion.”
The original draft of the provisional presidential decree (MP) would have ended tax exemptions for all the mentioned instruments starting in 2026, imposing a 5% income tax on LCIs, LCAs, CRIs, CRAs, and infrastructure debentures. Under the new agreement, only LCIs and LCAs would still be taxed. The final version is expected to be presented by the bill’s rapporteur, Congressman Carlos Zarattini (Workers’ Party–São Paulo), this Tuesday (23).
Despite the progress in negotiations, some Treasury officials and market participants are concerned that preserving the tax break for infrastructure debentures could distort the government bond market. As previously reported by Valor, Brazil’s Finance Ministry believes the surge in issuance of tax-exempt debentures has created pressure on specific segments of the interest rate curve.
National Treasury Secretary Rogério Ceron said that discussions around the MP are focused on avoiding such distortions. He said the final design should result in a balanced arrangement that does not worsen existing market imbalances. His comments were made during the release of the fourth bimonthly revenue and expenditure review.
Besides modifying tax exemptions, the original proposal also calls for a flat 17.5% income tax on investment returns starting in 2026. This would eliminate the current tiered model, which taxes investments at 22.5% for those held up to six months, and 15% for those held longer than two years.
Finance Ministry officials told Valor that a flat tax rate would be healthier for the market overall. However, they acknowledged it could initially drive up the cost of public debt, as the government might need to offer higher yields on long-term bonds until the market adjusts.
While the transition may trigger increased volatility, the expectation is that it will not be disruptive. The pace and intensity of market adjustment are still being evaluated. Officials believe the impact will mostly affect a subset of investors, particularly fixed-income investment funds.
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