Brazil introducing VAT on financial services

2026-32 VAT banking, loans, insurance and financial services regime based on non-cumulative system

Brazil is set to replace its vastly complex indirect tax regime with VAT in a 2026-32 phased launch. This includes implementing VAT on banking, insurance and other financial services. Brazil will be one of the few countries to not exempt financial services from VAT. This brings it into line with pioneers such as China and Australia. The EU financial services VAT exemption is also under review.

Brazil already taxes financial services using turnover taxes (PIS/COFINS), and the government therefore decided to use a “subtraction method” instead. This is closer to the current system and is simpler to apply.

Fee and Margin-based VAT regime

1. Fee-based services (like banking fees or commissions). These will be taxed like regular VAT — each transaction is taxed at the point of sale.
2. Margin-based services (like loans and investments). These will use an accounts-based system. VAT will apply to the difference between income and expenses. This includes services like:

• • Loans
  • Currency exchange
  • Buying/selling securities and financial instruments

Banks and financial companies will calculate VAT on the net margin — that is, total revenue minus specific deductible expenses like:

• • Interest costs (cost of funding)
  • Currency exchange costs
  • Losses on financial instruments

🧾 Input Tax Credits

To avoid tax “cascading” (tax on tax), financial service providers can claim input tax credits on their expenses. Businesses that buy financial services and are registered for VAT can also claim input tax credits — but there are some specific rules.

💸 Special Case: Loans

Businesses that take out loans can claim input tax credits based on how much interest they pay above the risk-free interest rate (Selic). Here’s how the credit is calculated:

• From each loan instalment, remove:

1. 1. The principal amount (based on the repayment schedule)
   2. The part of interest equal to the Selic rate

• What’s left is the excess interest, and the tax credit is calculated based on that amount using the VAT rate the lender paid on its margin.

Banks, on the other hand, will deduct their actual cost of funding, not Selic. This creates a difference between how much tax banks pay and how much credit borrowers can claim. But this is intentional — large banks usually have cheaper funding than Selic, while smaller banks have higher costs.

🧮 Loss Provisions and Mismatches

Banks can also deduct expected losses on loans, including on the principal. This is based on standard accounting rules. This may cause mismatches — for example, when a bank claims a loss, but the borrower still makes payments.

💵 Bonds and Capital Market Instruments

If a financial institution is the creditor (lender), the VAT rate is 0% on bonds and similar debt instruments. If the lender is a regular investor, the transaction isn’t taxed. In both cases, debtors can’t claim input tax credits, but it’s expected that these loans will carry lower interest rates.

🌍 Foreign Exchange Limitation

The law does not provide a way to claim input tax credits on currency exchange services. This is because it’s too complex to measure the exact margin on every transaction.