LCA and LCI lose exemptions, CSLL for Fintechs and wagering income tax rises again

Tax rate on risk withdrawn will be reduced, and exemptions for companies will be reviewed;the agreement came after a six-hour meeting between Fernando Haddad and congressional leaders.

After nearly three weeks of back and forth, the Executive and Legislative branches sat down to discuss the changes to the Tax on Financial Operations (IOF) announced on May 22nd.

In a nearly six-hour meeting on Sunday night (8), Finance Minister Fernando Haddad and the leaders of the Chamber of Deputies, Hugo Motta (Republicanos), and the Senate, Davi Alcolumbre (União Brasil), reached an agreement to reduce the IOF on credit, especially on risk-drawn operations.

Conversely, taxes will increase on fintechs and betting companies. Furthermore, investors in fixed-income securities that are currently exempt, such as Real Estate Credit Notes (LCI) and Agribusiness Credit Notes (LCA), will now be subject to income tax.

In addition to Haddad’s presence, other members of the economic team participated and made presentations to the parliamentarians.

Haddad stated that the government should announce, later this week, measures to reduce so-called sub-constitutional tax expenditures by 10%. These are expenditures that can be altered by ordinary laws, without the need to amend the Constitution. For example, tax exemptions for companie , which, according to government calculations, should result in a tax revenue loss of R$500 billion this year. Another meeting to cut primary expenses is already scheduled, but a date has not yet been set.

“I would divide what we discussed into four interconnected themes. A Provisional Measure that will regulate revenue collection matters, which basically targets the financial market. In addition, a recalibration of the IOF decree, measures regarding tax expenditures, and also primary spending,” said Haddad. According to the minister, the new decree will recalibrate the IOF collection, which will raise about a third of the original project, while a Provisional Measure will be issued to compensate for the losses.

Below are the main changes that were announced on Sunday night and that will still be submitted to the House and Senate:

End of exemption for LCI and LCA.
Currently, income from Real Estate Credit Notes (LCI) and Agribusiness Credit Notes (LCA) is tax-exempt. Under the proposal, investors may start paying 5% tax on these earnings. This rate is lower than the tax on Bank Deposit Certificates (CDBs), where investors pay between 22.5% and 15% on gains, depending on the term. However, it remains to be seen whether the rate will remain at this 5% level.

– increased taxation for betting
Betting companies will now pay an 18% tax on what’s called Gross Gaming Revenue (GGR), which is the difference between what the company collects from bettors and what it pays out in prizes. Currently, in addition to service taxes, betting companies pay 12% in taxes. “The 18% was the original rate proposed by the government [during the regulation of betting],” said Haddad.

– End of the minimum CSLL tax rate for fintechs
The financial system is the main payer of the Social Contribution on Net Profit (CSLL). Fintechs currently pay rates of 9%, 15%, or 20%. The lower rate will be eliminated, and they will start paying 15% or 20%, just like traditional banks. This is expected to increase the cost of credit, as this tax will most likely be passed on to the borrower.

IOF on risk withdrawn could fall by up to 80%
The biggest change proposed after the meeting was a reduction in the IOF tax levied on factored-in transactions. This is a specific type of credit for the retail sector, where companies in the sector obtain advance funds from banks based on their sales history. The proposal announced on May 22nd raised this rate to 3.95%, which made this type of loan unfeasible for many retail companies.

This tax has been heavily criticized by parliamentarians and business leaders. In a presentation to parliamentary leaders, members of the economic team estimated that the IOF (Tax on Financial Operations) could be reduced by 80% in these transactions. Neither Haddad nor the parliamentarians commented on changes to other controversial points of the IOF decree, such as those relating to foreign exchange transactions and investments abroad.