Brazil: Interest Rate Applicable To Intercompany Loans In Light Of The New Brazilian Civil Code

Last Updated: 9 April 2003

By Walter Douglas Stuber and Marcos Botter*

The purpose of this article is to analyze the recent changes brought about by the new Civil Code – NCC (Law nº 10406, of January 10, 2002) as concerns the interest rates for loan agreements between non-financial legal entities in Brazil. "Non-financial legal entities" are entities that do not participate in the Brazilian Financial System1.

1. Legal nature of loans

In line with the legal provisions long established in our legislation by the old Civil Code, articles 579 to 592 of the NCC make a distinction between commodate and loan.

Commodate exists where non-expendable things are loaned gratuitously and transferred. Non-expendable things are those that cannot be replaced with others of same kind, genre, quality and amount, such as, for instance, a Picasso.

Loan refers to expendable things, as money, where borrower (debtor) is required to return to lender (creditor) whatever borrower has received, in same kind, quality and amount.

As to companies, they make loans because of the pecuniary nature of the transaction. And as expressly indicated in the NCC, if a loan is made for economic purposes, interest will accrue and, subject to discount, may not exceed the rates provided for in article 406 of the NCC.

2. Legal aspects of interest rates

Article 1062 of the older Civil Code determined that legal interest, if not expressly set out in contract, would be 6% per annum. That determination would not apply if a provision as to the interest rate was included by the parties in the agreement concerned.

Article 1 of Decree nº 22626 of April 7, 1933 (Usury Law), in turn, forbade the inclusion of interest rates higher than double the legal rate, that is, whether or not contractually provided, the interest rate could never exceed 12% per annum, subject to the agreement being rendered null and void and imposition of other penalties provided in the Usury Law. The Usury Law banned any instance of doubled interest (anatocism), but allowed carrying forward overdue interest on net balances of current accounts from year to year.

That system was changed by the NCC, which governs the matter as follows:

"Article 406 – If no provision as to interest on arrears exists contractually, or no rate is set out in the contract, or even if it result from legal order, the rate shall be the rate in force and applicable to late payment of taxes collectable to the National Treasury."

Because article 406 of the NCC prescribes that interest rates will be governed by rule applicable to "payment of taxes collectable to the National Treasury", it is indispensable to analyze the Brazilian Tax Code – CTN (Law nº 5172, of December 25, 1966).

In this sense, article 161(1) of the CTN sets forth that on credits that fail to be fully paid on maturity will accrue delinquent interest at 1% a month, if the law does not provide otherwise. In view of that, the issue was apparently settled in the sense that interest rate would be 12% per annum.

Subsequently, the editing of article 13 of Law nº 9065, of June 20, 1995, and reediting of the provision, which later resulted in article 30 of Provisional Measure nº 2176-79, of August 23, 2001 (subsequently converted into Law nº 10522, of July 19, 2002), made interest rate accruing on taxes collectable to the National Treasury equivalent to the reference rate in the Special System of Settlement and Custody - SELIC for federal instruments, accruing monthly2.

Whether or not the SELIC rate can be used as an index to determine legal interest has been hotly debated. Using that rate means not knowing beforehand the rate, since it is published monthly, not to mention that it is a compound of interest and monetary restatement for a given period.

Nevertheless, since the use of SELIC rate is expressly provided by the federal legislation for payment of overdue federal taxes, it is our opinion that this rate should be used by companies as the ceiling rate of contractual interest. Therefore, the provisions in article 406 of the NCC3 would be complied with.

Another important consideration is that article 591 of the NCC allows annual capitalization of interest.

3. Financial institutions

Loan transactions of financial institutions, that is, institutions that participate in the Brazilian Financial System, are not subject to the Usury Law and are governed by their own rules, laid down by the Brazilian Monetary Council. According to Summary 596, of December 15, 1976, of the Federal Supreme Court (STF), provisions in the Usury Law do not apply to interest rates and other charges accruing on transactions carried out by public or private institutions participating in the Brazilian Financial System.

Later, when addressing the Brazilian Financial System, paragraph 3 of article 192 of the 1988 Federal Constitution (CF) determined that actual interest rates, included therein commission fees and other direct and indirect compensations of granting a loan, could not exceed 12% per annum. According to that constitutional provision, any loan granted at rates above that limit would be considered usurious and, therefore, punishable according to applicable laws.

Applicability of that constitutional provision raised a lot of controversy, because the main section of that same article 192 of the CF establishes that the Brazilian Financial System would be regulated by Complementary Law, which has not been brought into the Brazilian legal system to date. There is, therefore, no legal definition for "actual interest rate".

Some say that, considering that paragraph 3 of the article 192 of the Federal Constitution is an autonomous rule, it is not subject to main section of that article, and, therefore, its provisions should apply immediately4.

Commentators, however, have largely manifested contrary to that reasoning5, with which we concur.

In this sense, we understand that: (i) based on Summary 596 of the STF, provisions in the Usury Law do not apply to transactions carried out by institutions participating in the Brazilian Financial System; and (ii) because no Complementary Law has so far been issued, said transactions are not subject to the provisions in paragraph 3 of article 192 of the CF.

A bill for amendment is currently processing at the National Congress with respect to article 192 of the Brazilian Constitution, whereby paragraph 3 of that article will likely be deleted.6

4. Tax discussion

In general terms, interest charged in a loan agreement must be in line with the lender’s compensation requirements so that it can meet the obligations undertaken with third parties.

Thus, in addition to the limitation of interest rate to the SELIC rate amount, when the payables of a given company (Company "A") are computed at the FX variation (for US-denominated loans) plus interest used in the international financial market (such as the LIBOR), if Company "A" grants a loan remunerated at rates lower than that, the interest spread could be considered by tax authorities as non-deductible in the determination of taxable income, since it is not a usual expense necessary to maintain its operations.

And that was the opinion of the 1st Council of Taxpayers (Opinion nº 103-9507/89):

"FINANCIAL CHARGES OF ONLENDING LOANS – lender’s income cannot be deducted of financial charges corresponding to transferred loans repayment, if the lender does not require the borrower refund of all charges ratably to the capital shared."

Therefore, limitation imposed by article 406 of the NCC should be considered in conjunction with other payables and receivables of the company. In the event of passive loans, i.e., a company receives money and undertakes to repay it, the interest rates will be those it uses in its active agreements.

In the event of active loans, that is, a company loans money and reserves the right to have it repaid by the debtor, the rates to be used are those the company uses in its passive agreements.

Another consideration in addition to the limitation imposed by article 406 of the NCC is transfer pricing. Indeed, article 22 of Law nº 9430, of December 27, 1996, determined that interest paid to a connected company abroad will only be deductible for Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) purposes up to the LIBOR, plus 3% per annum, computed pro rata to the period on which interest accrues7.

Thus, in the case of active loans, and for the purpose of the above-mentioned taxes, the Brazilian company must recognize a minimum revenue corresponding to the LIBOR plus 3% per annum.

In the case of loans denominated in foreign currency whose interest rate is registered at the Central Bank of Brazil (BACEN), the applicable rates are those generally accepted in the international financial market.

5. Conclusion

In view of the foregoing, we suggest that in case of loans between non-financial legal entities, the interest rate be set out in the relevant loan agreement. In any event, whether or not the interest is set out contractually, they will invariably be limited to the SELIC rate in the period, by operation of article 591 of the NCC.

From a tax viewpoint, the limitation imposed by article 406 of the NCC should be considered in conjunction with the lender’s compensation requirements so that it can meet the obligations undertaken with third parties.

Additionally, in the case of loans involving connected companies abroad, the interest rate may imply adjustment of the transfer pricing to the IRPJ and CSLL calculation.

Loans are legitimate and efficient transactions, which guarantees flow of financial resources among non-financial companies and should continue to be widely used in Brazil and abroad, due respect being given to the limitations discussed above.


1 The following financial or equivalent institutions participate in the Brazilian Financial System: multi-service, commercial, investment, development banks; consumer finance companies; savings and loan companies; mortgage companies; development agencies; leasing companies; securities dealers and brokers; and exchange brokerage companies.

2 SELIC rates for January and February 2003, are 1.97% and 1.83%, respectively. That is, SELIC rate has been floating up invariably 1% a month.

3 The fact that application of SELIC rate can result in interest higher than 12% per annum does not violate paragraph 3 of article 192 of the Federal Constitution, since such constitutional provision refers to agreements between companies participating in the Brazilian Financial System only and has not been made effective yet because it is conditioned on complementary law pending issuance.

4 In this sense, says Professor José Afonso da Silva, in "Curso de Direito Constitucional Positivo", 16a edição, p. 801: "If the text at hand, was an item of the article, although having formal autonomous regulatory effect, it would be conditioned on the provisions of complementary law. However, because it has been made in a separate paragraph, with autonomous regulatory effect, without making any reference to previous legal provision, is fully effective and immediately applicable."

5 Professor Celso Ribeiro Bastos states as follows in "Comentários à Constituição of the Brasil", 7º volume, capítulo IV, p. 444: "It is completely unfounded to argue that, because it is made in a separate paragraph, setting limits for actual interest would not be subject to introductory provision of the article. This is a complex made of main section, paragraphs, items and sub-items. However, as parts of a whole, whatever the precepts, irrespective of category or identification, all are subject to the fundamental rule contained in the main section. There is, therefore, no autonomy of paragraph capable of causing conflict with the higher precept of the main section."

6 The proposed wording is as follows: " Art. 192. The National Financial System, whose structure is design to promote the development of the country and serve the collective interests, in all of the compounding parts, including credit cooperatives, shall be governed by complementary laws which, in turn, will deal with, among others, the ownership interest in companies members thereof."

7 LIBOR, for transfer pricing purposes, means the London Interbank Offered Rate for US dollar 6-month deposits.

* Walter Douglas Stuber and Marcos Botter are, respectively, founder partner and associate lawyer of Amaro, Stuber e Advogados Associados

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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