Brazil tax: Financial transactions tax applies to depositary receipts traded abroad

As from 19 November 2009, Brazil will tax the issuance of depositary receipts in international markets. As part of the efforts to reduce speculation in the Brazilian stock and capital markets, and to contain the appreciation of the Brazilian currency (Reais), Decree No. 7,011 published on 19 November introduces a 1.5% financial transaction tax (IOF) on depository receipts of Brazilian companies listed on foreign exchanges.

The measure also aims to correct distortions caused by the 2% IOF imposed on all fixed income and equity investments made by foreign investors on the Brazilian stock and capital market in two decrees issued 19 and 20 October. To avoid the 2% IOF, foreign investors have been purchasing Brazilian depository receipts listed on foreign exchanges, rather than on Brazil's stock and capital markets.

The 1.5% IOF will be applied on the assignment of shares that are admitted to be traded on the Brazilian stock exchange "with the specific intention to secure the issuance of depositary receipts traded abroad".

The taxable base for calculating the IOF will be determined by applying the number of shares to the last listed share price in the Brazilian market on the closing date before the transaction, or if there is no trading activity, by the last listed share price available.

Recent indicators have shown that the daily trading volume of American Depositary Receipts (ADRs) of Brazilian companies on the New York stock exchange have exceeded the trading volume of shares in the Brazilian stock exchange. The new IOF aims to abate this migration.