Brazil Ends Loophole on Higher Tax for Futures Trades

(Adds comment from Odilon in fifth paragraph.)

Oct. 20 (Bloomberg) -- Brazil’s Monetary Council closed a loophole on capital inflows in a bid to prevent foreigners from circumventing a recently increased tax on investment in the country’s derivative market.

The new rules ban Brazilian financial institutions, including banks and brokerages, from renting, lending or swapping assets to foreigners seeking to invest in the futures market.

The new rules don’t affect existing transactions with a set maturity date, though those without one must be terminated by Dec. 31, said Sergio Odilon, a central bank official in charge of implementing the new rules.

Brazil’s government on Oct. 18 boosted for the second time this month a tax on foreign capital inflows that pushed the real to a two-year high. The government raised to 6 percent, from 4 percent, the so-called IOF tax foreign investors must pay to purchase fixed-income assets. It also raised the tax on foreign investors’ margin deposits for futures markets to 6 percent from 0.38 percent.

BM&F Bovespa SA, the owner of Latin America’s largest exchange, will block banks from issuing guarantee letters for foreign clients seeking to trade in the derivatives market, Odilon said.

Profits from bets in the futures market that are reinvested there or used to buy fixed-income assets are exempt from the IOF tax, Odilon said.

The real has gained 38 percent to 1.6775 per U.S. dollar since the beginning of 2008, the second best performer after the Australian dollar among currencies tracked by Bloomberg.

--Editors: Joshua Goodman, Brendan Walsh

To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net