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Important Provisions Concerning Thin Capitalisation Rules
The Brazilian Federal Revenue Instruction issued thin capitalisation rules on 12 May 2011. Taxand Brazil discusses the most important provisions of these rules.
The purpose of the thin capitalisation rules is to limit the deductibility of interest on loans contracted by a Brazilian company from (i) a related individual or legal entity that is resident or domiciled outside Brazil, or (ii) any individual or legal entity that is resident or domiciled in a "favourable tax regime" or that is under a "privileged tax regime". The following aspects are analysed in detail.
Thin Capitalisation Rules
- Debt owed to related parties
- Debt owed to individuals or legal entities domiciled in a favorable tax regime or under a privileged tax regime
- Intervening Parties
- Mere intermediary and interposed party
- Onlending Transactions
- Calculating the level of indebtedness
Deductibility Of Amounts Paid To A Party Domiciled In A Favorable Tax Regime Or Under A Privileged Tax Regime
In addition to the provisions dealing specifically with payment of interest, the law establishes certain requirements for the deduction, for income tax and Social Contribution on Net Profit (CSL) purposes, of amounts paid, credited, remitted or otherwise made available to parties domiciled in a favourable tax regime or under a privileged tax regime.
General Rules On The Deductibility Of Payments Made To A Party Domiciled In A Favorable Tax Regime Or Under A Privileged Tax Regime
The Instruction creates a new exception from the rules on deductibility of amounts (including interest) paid to parties domiciled in a favorable tax regime or under a privileged tax regime for funds raised outside Brazil through an issue of bonds or other debt instruments.
Although the latest Instruction from the Brazilian Federal Revenue Instruction are largely the same as those set out in 2010, it is important nonetheless that multinationals are aware of the provisions outlined above.
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