The Financial Transactions Tax (IOF) can directly affect various financial transactions made in Brazil. Impacted transactions may include everything from loans, to the purchase of foreign currency. Given its wide-ranging applicability, understanding the IOF, when it’s charged, and how to calculate it can help consumers and companies make more accurate financial decisions.
Introduced as a means of controlling the financial markets, the Financial Transactions Tax is essential to the government’s monetary policy.
This article will cover these topics in detail, providing practical examples and tips on avoiding or reducing the impact of this tax on certain transactions.
The IOF (Portuguese acronym for Financial Transactions Tax) was introduced in Brazil as a means of controlling the financial markets, serving as an essential tool in the government’s monetary policy. The tax is levied on transactions such as loans, foreign exchange, insurance, and even investments. In addition to its regulatory role, the IOF also contributes significantly to the government’s tax revenue.
In practice, the IOF affects both individuals and companies. It is levied on everyday transactions, such as buying foreign currency for trips abroad, and also on more complex operations like investment withdrawals.
Thus, for all Brazilians, it is essential to understand how the IOF varies in its wide-ranging applicability in order to avoid unpleasant surprises and to reduce its burden whenever possible on their personal finances.
A frequent question among Brazilians is whether the IOF and interest are the same thing, since both are usually found in credit transaction reports. The answer is no. Interest refers to the cost of lending money, i.e., compensation to the issuing financial institution for offering credit.
Whereas, the IOF is a tax levied by the government on such a transaction. Unlike interest, which depends on the issuing financial institution and the type of credit operation performed, IOF rates are set by the federal government, and its applicability is standardized across financial transactions.
While interest refers to the cost of lending money, IOF is a tax collected by the government that directly affects the final cost of financial transactions.
For instance, when you take out a loan, you pay interest to the financial institution, and the IOF to the government. This is an important distinction, as the IOF may significantly increase the transaction’s final cost in many cases.
The IOF is levied on a wide group of financial transactions, encompassing credit operations, foreign exchange, insurance, and investment withdrawal. When IOF is paid is determined by the transaction type. In loans, for example, the tax is paid when the loan amount is credited to the borrower. In foreign exchange transactions, it is paid when foreign currency is bought or sold.
Here are the more common examples of IOF applicability:
Loans and financing, including personal and payroll-deducted loans;
International credit/debit card transactions;
Buying and selling foreign currency;
Taking out insurance;
Withdrawing investments of certain types.
The IOF rate varies among different types of financial transactions. Here is a breakdown of its computation in different contexts and its impact on transactions.
The IOF applies to credit transa ctions at a fixed rate of 0.38% on the transaction’s total value. There is also an extra fee that depends on the length of the contract. This extra fee is 0.0082% per day for individuals, and 0.0041% per day for companies.
For example, if you took out BRL 12 000.00 on a 10-month loan, the calculation would be as follows:
Fixed IOF: 0.38% * BRL 12 000.00 = BRL 45.60
Daily IOF for individuals: 0.0082% * BRL 12 000.00 * 300 days = BRL 295.20
Total IOF: BRL 45.60 + BRL 295.20 = BRL 340.80
In the above example, the loan would include a total of BRL 340.80 in IOF tax.
The IOF rate for international transactions made by credit or debit card is 4.38%. That means if you buy BRL 1000.00 in foreign currency, you will be charged an additional BRL 43.80 in IOF tax.
It is important to note that the 4.38% IOF rate applies even if you acquire a prepaid card in foreign currency. This rate is applied uniformly to credit, debit, and prepaid cards. The rate is currently being cut every year. The aim is to eliminate it by 2028.
Foreign exchange transactions are also subject to the IOF. The rate varies depending on the transaction type. When buying foreign currency in cash, the applicable rate is 1.1%, considering its recent increase.
As mentioned above, the IOF rate for payment card transactions is 4.38%. This varying tax rate makes financial planning very important in international travel, as the IOF can significantly affect the cost of the trip, depending on how the money is obtained or used abroad.
IOF is levied on insurance transactions. The applicable rate is also different for specific insurance types.
For property insurance, the rate is 7.38%.
For life insurance, the rate is 0.38%.
For health insurance, the rate is 2.38%.
There is no IOF levied on home loan insurance, which is an exempt transaction.
It’s important to remember that these are the current figures. They may be subject to change in accordance with the VAT tax proposal included in the ongoing Brazilian tax reforms.
The IOF may also be levied on investment withdrawals, especially when they happen less than 30 days after the investment is made. In that event, the IOF is levied on the earnings at a rate of 96% on the first day, gradually decreasing to 0% by the end of the 30-day period. The values for each day are shown in the table below:
Days | Rate | Days | Rate | Days | Rate |
1 | 96% | 11 | 63% | 21 | 30% |
2 | 93% | 12 | 60% | 22 | 26% |
3 | 90% | 13 | 56% | 23 | 23% |
4 | 86% | 14 | 53% | 24 | 20% |
5 | 83% | 15 | 50% | 25 | 16% |
6 | 80% | 16 | 46% | 26 | 13% |
7 | 76% | 17 | 43% | 27 | 10% |
8 | 73% | 18 | 40% | 28 | 6% |
9 | 70% | 19 | 36% | 29 | 3% |
10 | 66% | 20 | 33% | 30 | 0% |
The applicable rate diminishes gradually with time (in Brazil, this is known as “tabela regressiva”). The aim is to discourage early withdrawal of short-term investments. For example, if you withdraw the investment after 15 days, you will pay a 50% IOF rate on the earnings up to that date.
There are ways to invest without paying IOF tax. Investments such as equity funds, certain alternative assets, and cryptocurrency are exempt from the IOF. So it is possible to invest in Brazil and avoid getting involved with the tabela regressiva.
IOF computation depends on the transaction type, and the rate varies according to each specific transaction’s nature.
As mentioned above, for loans, the IOF rate is 0.38% on the total loaned amount, in addition to a daily rate applicable throughout the payment period.
For international credit card purchases, the IOF is computed directly on the total purchase amount. For example, if you spend BRL 1500.00 on purchases abroad, IOF will be levied on the same BRL 1500.00.
The IOF is calculated as follows:
4.38% * BRL 1500.00 = BRL 65.70
For foreign exchange cash transactions, such as the purchase of BRL 5000.00 worth of US dollars, the IOF is computed at a rate of 1.1% on that amount. The total IOF charge is determined by multiplying BRL 5000.00 by 1.1%, as below:
1.1% * BRL 5000.00 = BRL 55.00
The calculation for investment withdrawals is more complex, as IOF applies only to the return on the investment, and varies depending on the duration of the investment. For example, if you invested BRL 10 000.00 and obtained a return of BRL 500.00 in 10 days, the IOF will be levied on BRL 500.00, as calculated below:
IOF on earnings: 66% (10-day rate) * BRL 500.00 = BRL 330.00
The IOF can have a significant impact on the final cost of loan transactions. In long-term transactions, the 0.0082% daily rate (for individuals) can account for a considerable total cost by the end of the contract in addition to the 0.38% fixed rate.
For consumers, to add to the interest charged by financial institutions, the IOF can increase the total amount to be paid for obtaining credit. This is one of the reasons you should compare the conditions offered on different credit types and check if there are lower-cost alternatives, such as IOF-exempt credit or lower-interest loans (where lower interest compensates IOF charges).
Even though there is a broad range of IOF applications, there are some situations in which it is possible to be exempt from this tax. The exemption is granted to certain groups of individuals and specific transactions, such as car loans. In addition, IOF rates may be lower (or even none at all) on affordable housing loans.
In investment transactions, IOF exemption is automatically applied once the investment has lasted for more than 30 days. After this period, there is no longer any IOF rate to charge, which encourages investors to keep their money invested for periods longer than 30 days.
The Brazilian government also plans to eliminate the IOF on foreign exchange by 2029, as this is one of the requirements for Brazil to speed up its entry into the Organization for Economic Cooperation and Development (OECD).
To better understand how IOF rates work, check out the table below. It shows the main rates applicable to the various financial transactions covered in this article:
Transaction | IOF Rate |
Credit (individuals) | 0.38% + 0.0082% per day |
Credit (entities) | 0.38% + 0.0041% per day |
International purchase (payment cards) | 4.38% |
Foreign currency purchase (cash) | 1.1% |
Insurance | 0.38%, 2.38%, or 7.38% depending on transaction type) |
Investment withdrawal (within 30 days) | 96% to 0% (decreasing rate) |
IOF tax is levied on various financial transactions in Brazil, affecting the total expense for individuals and companies. The different IOF rates, depending on transaction type, can represent a significant cost, especially in credit and foreign exchange transactions.
Understanding IOF application and computation is essential for those who wish to plan their finances more efficiently, avoiding surprises when making important financial transactions. Although the IOF is an unavoidable factor in many situations, there are specific cases where exemption is possible. Knowing these exceptions can result in considerable savings.
Therefore, when dealing with financial transactions where IOF is applicable, it is essential to know the rates and seek ways to reduce the impact of the tax, ensuring more efficient financial management and the best possible rates.
The IOF is levied on various transactions, including loans, international purchases, foreign exchange, insurance, and investment withdrawal. The tax is levied at specific moments, such as when credit is granted or when foreign currency is purchased.
IOF computation on credit transactions includes a 0.38% fixed rate on the total value of the contract, in addition to a daily rate that depends on the duration of the contract. The daily rate is 0.0082% for individuals and 0.0041% for companies.
Yes. IOF exemption applies to certain situations, such as car loans or affordable housing loans. In addition, IOF is not levied on investments lasting more than 30 days, as the rate for any period longer than this is 0%.
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