Brazil’s Supreme Court Upholds Most IOF Tax Hike, Boosting Lula’s Fiscal Plan

Brazil’s Supreme Court has upheld most of President Luiz Inacio Lula da Silva’s controversial decree increasing the Financial Operations Tax (IOF), delivering a key fiscal win for his administration. The ruling, issued by Justice Alexandre de Moraes, only struck down the hike on forfait transactions—advance payments to suppliers that had previously been treated as credit operations.

The original decree, issued in late May, aimed to boost government revenue by raising IOF rates on select corporate credit, foreign exchange, and private pension operations. It was designed to ease the impact of a mandatory budget freeze and ensure compliance with this year’s fiscal targets.

The measure drew swift backlash from lawmakers and the financial industry, prompting the government to partially reverse some of the proposed increases shortly after the announcement. Despite these concessions, Congress passed a decree to overturn the measure entirely, pushing the government to escalate the dispute to the Supreme Court.

According to the Finance Ministry, the court’s decision will help preserve fiscal balance and interbranch cooperation. However, blocking the forfait tax hike will cost the government an estimated 450 million reais ($80.9 million) in 2025 and 3.5 billion reais ($628 million) in 2026. The ministry emphasized the ruling’s importance for maintaining budget stability.

Finance Minister Fernando Haddad acknowledged the lost revenue but noted Brazil remains on track for a solid primary fiscal result this year. He confirmed that the administration will explore new strategies next week to offset the shortfall and is already planning the 2026 budget accordingly.

This ruling secures a large portion of Lula’s planned tax increases, potentially averting a projected shortfall of 12 billion reais ($2.16 billion) in 2025 and even greater deficits in the coming years.