Bolsonaro's conviction could hinder income tax exemption and tax reform

The conviction of former President Jair Bolsonaro (PL) by the Federal Supreme Court (STF) deepens political and economic uncertainty in Brazil. The decision threatens to paralyze discussions on tax reform and income tax changes in Congress, while the market reacts to the risk of US sanctions, based on the Magnitsky Act, and the advancement of the 2026 presidential race.

This scenario reinforces the distrust of consumers and business owners . According to the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre), the business confidence index fell to its lowest level since March 2021.

Bolsonaro's conviction threatens economic agenda

Internally, instability shifts to Congress, where the economic agenda could be affected due to the strong possibility of discussing an amnesty for the former president.

According to the newspaper Valor Econômico , São Paulo Governor Tarcísio de Freitas (Republicans) is expected to resume negotiations this week and attempt a meeting with Senate President Davi Alcolumbre (União Brasil) to discuss the possibility of amnesty for the former president. Leaders of the Centrão party may also step up pressure for the approval of an intermediate amnesty, in a nod to Bolsonaro and his supporters.

Potential discussions could affect the analysis and progress of crucial economic projects. Regulations for the tax reform approved last year, which require supplementary legislation, and changes to the Income Tax system are at risk of being stalled.

"If we have a congressional shutdown due to the focus on a possible review of the former president's impeachment process, this shutdown could have a significant impact on important national agendas," says Monica Araújo, chief economist at InvestSmart XP.

The income tax exemption project for those earning up to R$5,000 is the government's main bet to try to recover Lula's popularity for the 2026 election. A survey released last week, before the Supreme Court's decision, shows that rejection of the president is still greater than approval.

The PT leadership tried to put the project to a vote in the last two weeks, but the Chamber's agenda ended up being emptied due to Bolsonaro's trial by the Supreme Federal Court.

Another discussion that may be affected and that is also related to changes in Income Tax is that of MP 1,303, which provides for the taxation of financial investments and virtual assets.

It is currently before the Joint Committee on Provisional Measures and must be voted on by October 8th to remain in effect. Last week, the government backtracked and agreed to maintain the income tax exemption for incentivized debentures.

US Sanctions: The Shadow of the Magnitsky Act Over Brazil

One of the most important points to watch out for is potential sanctions from the US government . The main concern lies in the potential application of the Magnitsky Act, which allows the US to sanction foreigners involved in human rights violations and corruption.

"The market fears a new round of sanctions from President Donald Trump, with the expansion of the Magnitsky Act and the increase in tariffs," says Gabriel Mollo, investment analyst at Daycoval Corretora.

According to the Eurasia Group consultancy, further visa suspensions for Brazilian officials and a tougher interpretation of the Magnitsky Act are likely measures. Analysts at Genial Investimentos estimate that the First Chamber justices who voted to convict Bolsonaro could be sanctioned. Monica Araújo, chief economist at InvestSmart XP, points out that the US legislation could be extended to new groups representing Brazilian authorities.

The banks' dilemma and the risk to financial institutions

An extension of Magnitsky's effects in Brazil would exacerbate an operational dilemma for financial institutions, created by an August decision by Supreme Court Justice Flávio Dino, which prevents the application of foreign orders without judicial validation in Brazil.

This leaves banks at a crossroads: if they comply with the Supreme Court's ruling and maintain ties with sanctioned authorities, they risk US penalties; on the other hand, if they choose to comply with the Magnitsky Act, they could be punished by the Brazilian justice system. The risk reaches a new level with the possibility of direct sanctions against Banco do Brasil, which is already preparing a contingency plan.

The diplomatic tension is palpable, with figures like Marco Rubio, Secretary of State and close to President Donald Trump, stating that the United States "will respond in kind."

For Rafael Figueiredo, equity strategist at XP Investimentos, statements like the one by President Luiz Inácio Lula da Silva, who said he was not afraid of the consequences, are a "shot in the foot," as the Brazilian Foreign Ministry needs to focus on diplomacy that facilitates business for Brazil.

A less likely scenario is a new tariff hike. The assessment is that the measure would not have any additional economic impact. Brazil is already subject to a 50% tariff, the highest among US trading partners, with exceptions for products such as aircraft and their parts, petroleum and derivatives, and orange juice, which were excluded from the 40% increase announced at the end of July, and cellulose and ferronickel, which are excluded from all tariffs.

However, the sanctions may stem from US pressure on countries that purchase Russian petroleum products, as a way to force peace negotiations with Ukraine. Brazil is a major buyer of Russian diesel.

These risks could generate short-term volatility and affect foreign investor confidence, warns Elson Gusmão, director of foreign exchange at brokerage Ourominas. A major concern, according to Figueiredo, is that the impact of potential sanctions could lead investors to "reduce or even completely exit" the Brazilian market.

The most chaotic scenario, according to analysts, would involve direct sanctions on companies or the interruption of services from American companies to Brazilian companies.

Bolsonaro's conviction accelerates presidential race

In this environment, the sentence against Bolsonaro also accelerates the debate on the 2026 elections.

Genial Investimentos indicates that the approaching election cycle should "raise the tone" of the dispute and "bring volatility" to the market. As a counterpoint, the InvestSmart XP economist points to some possibility of opening up space for centrist forces, a scenario viewed favorably by the market because it suggests greater predictability.

How the political and diplomatic crisis is managed will determine the pace of the economy in the coming months, says Adriana Ricci, partner at SHS Investimentos. She explains that "if Brazil appears more politically fragile, the market will demand a higher price, and this cost will inevitably reach the consumer."