The Brazilian Senate has rubber stamped an executive decree which will remove capital gains tax for foreign investors in domestic government bonds. The law, due to be signed by next week by President Luiz Inacio Lula da Silva, will mean that foreign investors are exempt from the 15% tax.
The law will also grant them exemption from the 0.38% Provisional Contribution on Financial Transactions, known as the 'check tax', which applies to a wide range of transactions, from electronic payments to personal checks.
The tax break will not, however, apply to investments that have originated in what the Finance Ministry deems "tax havens".
The original decree, issued in February, was due to have expired on June 16.
One of the consequences of boosting the amount invested in federal bonds is that it may help the government borrow for longer terms and at lower interest rates. However, the move has also undermined its efforts to depreciate the national currency, the real, which has been steadily appreciating in value against the US dollar, hurting the country's exporters.
It has been estimated that the tax exemption will cut government revenue by about $72 million a year, although this will be balanced out by lowering the cost of servicing its debt.
Tax breaks and high levels of interest rates helped Brazilian investment funds attract a record 39.9 billion reals ($18.7 billion) in the first quarter of 2006, the National Investment Banks Association (Anbid) reported in April.
Fixed-income funds led the way in attracting new investors, pulling in a net BRL16.7 billion during the first three months of 2006. By comparison, local investment funds attracted net investments of BRL22.2 billion throughout the whole of 2005.
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