Brazil's President Luiz Inácio Lula da Silva has resolved to launch legal action at the Supreme Federal Court (STF) following Congress's decision to overturn his administration's increase to the Tax on Financial Operations (IOF), setting off a major constitutional battle between the Executive and Legislative branches.

The Attorney General's Office (AGU) confirmed on June 27 that technical analysis of legal measures had begun to preserve the validity of the IOF decree, at the president's request, O Globo reported.

The move comes after both houses of Congress voted on June 25 to repeal the tax rises on international transactions, dealing a significant blow to the government's fiscal strategy.

Lula reached the decision after lengthy discussions with Attorney General Jorge Messias after they travelled together from São Paulo to Brasília before meeting at the presidential palace, where they hammered out the legal approach.

Government sources indicate unanimous agreement within the administration that Congress's action violated constitutional separation of powers.

But the president's advisers reportedly expressed disappointment with Chamber of Deputies Speaker Hugo Motta, who brought the matter forward without notifying the government and helped override the presidential measure.

Ministers argue parliamentarians have signalled their intention to weaken the administration ahead of the 2026 electoral contest, Folha de S. Paulo reported.

"There is no legal basis for the PDL [draft legislative decree]," Minister Gleisi Hoffmann from the Secretariat of Institutional Relations wrote on X.

Finance Minister Fernando Haddad said that if legal advisers confirm the legislative decree breaches constitutional principles, he would support defending the Constitution through court action.

The minister has been internally advocating for the Supreme Court challenge in recent weeks.

The administration argues the Executive Branch holds constitutional authority to set IOF rates "in view of the objectives of monetary and fiscal policies."

Article 153 of the Constitution states that the Union bears responsibility for imposing taxes on credit, exchange, and insurance transactions, authorising the Executive to modify these rates.

Law 8,894 of 1994, which regulates the IOF, permits the government to "change the rates in view of the objectives of monetary and fiscal policies." Deputy Lindbergh Farias, the ruling party's leader in the Chamber, cited this legislation to argue the congressional action was unconstitutional.

However, legal experts remain sharply divided on the strategy's effectiveness and the constitutional merits of the case.

Tax specialist Luiz Bichara contends the IOF increase represented revenue collection rather than market regulation, constituting "an abuse of the prerogative” that the Constitution conferred on the Executive.

"This prerogative [of the president] has a very clear reason for being: the IOF is an extra-fiscal or regulatory tax, which serves as an instrument for regulating certain markets," said Bichara, as quoted by Folha de S. Paulo.

The expert argued that using the IOF purely for tax collection violated its regulatory purpose.

Conversely, lawyer Eduardo Natal believes Congress overstepped its authority by approving the suspension through legislative decree, because Congress “cannot revoke it [because] it is not its responsibility.”

The overturned measures would have generated BRL12bn ($2.18bn) in additional revenue for 2025, helping the government avoid deeper spending cuts whilst complying with fiscal framework requirements.

Originally projected to yield BRL20.5bn in 2025 and BRL40.1bn in 2026, the government later recalibrated the rates after backing down on taxation of national fund investments abroad.

The Congress's decision now forces the administration to consider alternative fiscal adjustments or further expenditure reductions.

None of the 12 legislative decree projects approved since Brazil's 1988 Constitution have previously faced Supreme Court challenge, though the court has ruled similar state-level measures unconstitutional.

In 2020, the STF unanimously struck down a legislative decree that suspended a Federal District governor's regulatory decree.

Meanwhile, the far-left PSOL party has already filed its own lawsuit challenging Congress's decision, anticipating the government's legal strategy, CNN Brasil reported.

Minister Gilmar Mendes said that legal precedents exist for such appeals to the Supreme Court.

The political dispute reflects broader tensions between the Executive and Legislative branches ahead of 2026 elections, with government ministers arguing that opposition parties are deliberately seeking to weaken Lula's administration through constitutional confrontation.