Brazil: Brazil Adopts Thin Capitalization Rules

Until very recently it was true to state that there were no rules on thin capitalization in Brazil which prevented foreign companies to use intercompany loans instead of direct equity investments in order to transfer funds to finance the activities of their Brazilian subsidiaries. However, this is no longer the case! By means of Provisional Measure (Medida Provisória – MP) No. 472, of December 15, 2009, the Brazilian tax legislation has been substantially amended and for the first time includes, among the various changes, the so-called "thin capitalization rules", which will be outlined below. At the end of this article, we will also comment another novelty contained in the same MP 472/2009 which is very relevant and needs to be highlighted - how a Brazilian resident may be free of its status as a local taxpayer for Brazilian tax purposes.

The new thin capitalization rules are primarily designed to determine how much of interest paid on corporate debt is deductible for tax purposes and consequently to prevent that Brazilian companies become undercapitalized as a result of the use of excessive indebtedness.

These rules are in full force and effect as from January 1st 2010 for corporate income tax purposes (IRPJ), but will only be valid regarding the social contribution on net profits (CSLL) 90 days after the publication of MP 472/2009 in the Official Gazette of the Union (Diário Oficial da União – DOU), which happened on December 16, 2009. The expression "income tax" as used herein comprises both the IRPJ and the CSLL1.

Before dealing with the applicable provisions of MP 472/2009, it is paramount to define the meaning of "related party", which includes any individual or legal entity resident or domiciled abroad (outside Brazil) whose capital stock characterizes its controller or affiliate as defined pursuant to Law No. 6.404, of December 15, 1976 as subsequently amended (the Brazilian Corporation Law – BCL). Affiliate (coligada) is a company in which the investor has a significant influence over it (article 243, § 1 of the BCL, as amended by Law No. 11.941, of May 27, 2009). One company will have significant influence over another when it holds or exercises the power to participate in decisions on financial or operational policies of the affiliate (article 243, § 4 of the BCL, added by Law 11.941/2009). Significant influence is presumed to exist when one company holds at least 20% of the voting stock of another, but does not control it (article 243, § 5 of the BCL, added by Law 11.941/2009). Controlled company (controlada) is a company in which another company, known as the controller (controladora), either directly or through other controlled companies, has the rights of a partner in the first company which permanently grants to the controller prevalence in voting the first company´s corporate decisions and the power to elect the majority of its management (article 243, § 2 of the BCL). For tax purposes2, the following entities will be deemed to be related to the Brazilian company:

  1. the parent company, when domiciled abroad;
  2. an offshore branch (filial) or dependency (sucursal);
  3. any individual or legal entity resident or domiciled abroad who/which is its controller or affiliate, as defined by the BCL;
  4. any legal entity domiciled abroad which may be deemed as its controlled company or affiliate, pursuant to the BCL;
  5. any legal entity domiciled abroad when both such non-resident company and the Brazilian company are under the same corporate control or common administration or when at least 10% of the capital stock of each one belongs to the same individual or legal entity;
  6. any individual or legal entity resident or domiciled abroad who/which, jointly with the Brazilian company, holds an equity participation in a third company and the aggregate sum of the participations characterizes them as controllers or affiliates, as defined by the BCL;
  7. any individual or legal entity resident or domiciled abroad who/which is an associate of the Brazilian company in any undertaking through the formation of a consortium or condominium3;
  8. any individual resident abroad who is a relative or collateral of any kind (relative in-law) up to the third degree, spouse or companion of any of the Brazilian company´s directors or of its direct or indirect controlling partner or shareholder;
  9. any individual or legal entity resident or domiciled abroad who/which is its exclusive agent, distributor or grantee (concessionário) for the purchase and sale of goods, services or rights; and
  10. any individual or legal entity resident or domiciled abroad to whom/which the Brazilian company is the exclusive agent, distributor or grantee for the purchase and sale of goods, services or rights.

Pursuant to article 24 of MP 472/2009, interests paid or credited by a source located in Brazil (i.e. a Brazilian company) to a related individual or legal entity resident or domiciled abroad (related party), which is not incorporated in a favored taxation country or dependency4 or under a privileged fiscal regime5, will only be deducted on an accrual basis for income tax purposes when they are deemed to be necessary expenses for the Brazilian company´s activity6 and provided that, on the date of payment or credit of the respective interests, the following thresholds are cumulatively complied with: (i) each related party debt-to-equity ratio cannot exceed twice (2:1) the value of the direct equity investment made by such related party in the Brazilian recipient company; and (ii) the overall indebtedness, considering all forms and terms of financing, whether the loan agreement is registered or not with the Central Bank of Brazil (Banco Central do Brasil – Bacen), cannot exceed the same proportion (2:1) in relation to the aggregate amount of the direct equity investments made by all related parties in the Brazilian recipient company. The same concept applies to the transactions in which the guarantor (avalista or fiador), the attorney-in-fact (acting under a power of attorney) or any intervening party is a related person. Whenever these limits are not obeyed, the excess will be deemed as an unnecessary expense for the Brazilian company´s activity and nondeductible for income tax purposes7.

In the case that the lender, guarantor, attorney-in-fact or intervening party involved in a transaction is incorporated in a favored taxation country or dependency or under a privileged fiscal regime, regardless as to whether it/he/she is related or not to the Brazilian recipient company, both the individual and the overall debt-to-equity ratios are reduced to 30% of the net worth value of the Brazilian company, by force of article 25 of MP 472/2009.

Article 26 of MP 472/2009 provides that any amounts paid, credited, delivered, used or remitted, directly or indirectly, by a Brazilian company to any person (individual or legal entity) resident or domiciled abroad in a favored taxation country or dependency or a privileged fiscal regime will be nondeductible for income tax purposes. These amounts may be deductible, however, if the taxpayer can cumulatively met all the following requirements: (i) identify the effective beneficiary of the person abroad who/which will receive the proceeds; (ii) evidence the operational capacity of the non-resident person to carry out the transaction for which the payment is made; and (iii) present a document showing payment of the respective price and the receipt of the goods or rights of the use of services. In this case, the effective beneficiary of the non-resident person cannot be incorporated with the sole or main purpose of obtaining tax savings and must receive the proceeds on its own behalf, and not as an agent, a fiduciary manager or an attorney-in-fact of a third party.

Last but not least, article 28 expressly states that a Brazilian resident (individual or legal entity) who transfers its/his/her residence or domicile to a favored taxation country or dependency or a privileged fiscal regime will continue to be treated as resident in Brazil for fiscal purposes. The taxpayer will only loose its/his/her status of Brazilian resident on the date that is able to prove to the Brazilian tax authorities that it/he/she is in fact residing abroad, or that, by virtue of the law of the foreign country or dependency, is subject to income tax, provided that taxation is based on its/him/her total earnings originated from work (labor) and capital (investment) and can also submit appropriate documents evidencing payment of tax on such earnings. For the purpose of proving residence in fact in a foreign country or dependency, an individual must demonstrate that he/she: (i) has an effective permanent address in such country or dependency for more than 180 days (either followed or consecutive) within a period of up to twelve months, or (i) the country or dependency constitutes the usual place of residence of his/her family and that the major part of his/her assets are physically located in such territory.

Based on the foregoing, we conclude that from now on foreign investors should pay special attention to and revise carefully their intercompany loan structures as well as any outbound payments to be made to tax haven jurisdictions (comprising any favored taxation country or dependency or privileged fiscal regime), even if the transaction does not involve "related parties". Furthermore, Brazilian residents that decide to transfer their residence to an offshore jurisdiction to avoid taxation in Brazil should also analyze all the inherent legal implications of this decision because they run the risk of continuing to be considered as "Brazilian residents" for income tax purposes if they do not comply with the requirements of MP 472/2009.


1. Brazil taxes profits at a combined rate of 34%, from which 15% corresponds to the basic rate of the corporate income tax (Imposto de Renda da Pessoa Jurídica – IRPJ), plus a surplus of 10% for annual income of over BRL 240,000.00 and a 9% rate of the social contribution on net profits (Contribuição Social sobre o Lucro Líquido – CSLL).

2. The concept of "related party" (pessoa vinculada), for tax purposes, is contained in article 23 of Law No. 9.430, of December 27, 1996, which introduced the transfer pricing regulations in Brazil.

3. Under Brazilian law the consortium and the condominium are not legal entities but different forms of joint ventures. The condominium is basically the common ownership of an asset which is governed by articles 1.314 to 1.358 of the Brazilian Civil Code (Law No. 10.406, of January 10, 2002). The consortium is a contract governed by articles 278 and 279 of the BCL and must be registered at the Commercial Registry of the place where its head office is located.

4. The expression "favored taxation country or dependency" (país ou dependência com tributação favorecida) is used in the Brazilian tax legislation instead of tax haven or fiscal paradise and means any country or dependency of a country that does not impose tax on income or, when imposes, it is a low-tax country, in which the applicable income tax rate is equivalent to any percentage varying between zero and 20% (maximum). The definition is contained in article 14 of Law 9.430/1996.

5. For the purpose of the Brazilian tax legislation, "privileged fiscal regime" (regime fiscal privilegiado) means any jurisdiction that met one or more of the following requirements: (i) it does not tax income or where the maximum applicable tax income rate is below 20%; (ii) it grants fiscal advantages to a non-resident individual or legal entity: (a) without requiring that substantial economic activity be made in the country or dependency; or (b) conditioned to the non-exercise of substantial economic activity in the country or dependency; (iii) it does not tax the earnings obtained outside its territory or imposes a maximum applicable rate below 20% to such earnings; (iv) it does not permit access to information regarding the capital stock structure, ownership of assets or rights or to the economic transaction entered into between the parties. All these percentages may be reduced or changed at any time by the Executive Branch. This concept is provided for in article 23 of Law No. 11.727, of June 23, 2008, which approved new wording for articles 24-A and 24-B of Law 9.430/96. Article 30 of Law 11.941/2009, clarified that it is not necessary to attend simultaneously and cumulatively all the requirements listed above and that it is sufficient to attend only one for a country or dependency to be treated as a privileged fiscal regime.

6. Under article 47 of Law No. 4.506, of November 30, 1964, which deals with the tax on income or revenues of any nature whatsoever, expenses are deemed to be necessary when they are paid or incurred for the performance of transactions or operations required for the company´s activity. Necessary expenses may be deducted for income tax purposes.

7. Article 22 of Law 9.430/1996 provides that interests paid or credited to a related party, when they arise out of a loan agreement which is not registered with Bacen will only be deductible for income tax purposes up to a certain amount which shall not exceed the value based on the London Interbank Offered Rate (Libor) for six-month deposits denominated in United States Dollars, plus a spread of 3% per annum, calculated on a pro-rata basis according to the respective interest period. In the case of loan with a related party, the Brazilian lender will have to consider at least this limit (Libor plus 3% per annum) as a financial revenue originated from the transaction, for fiscal effects. For the purpose of computing this limit, the interests shall be determined based on the obligation or right expressed in the currency contemplated in the loan agreement and converted into Brazilian Reais pursuant to the applicable exchange rate divulgated by Bacen for the date of the final term regarding the interest calculation. Any amount which exceeds such limit will be added to the taxable income due by the Brazilian company. If the loan agreement is duly registered with Bacen, then the deductible limit may be higher and will correspond to the agreed interest rate between the parties and admitted by Bacen. In this regard it should be noted that Bacen will usually approve any interest rate which conforms with the rates normally accepted in the international market for similar transactions.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Walter Stuber
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions