Caio Caetano Luna*

Gilberto Ayres Moreira**

Law 12,249/10, enacted through the conversion of Provisional Measure 479/09, set forth the definitive rules for the deductibility of interest paid to related parties domiciled abroad and to entities domiciled in tax havens. These regulations are commonly referred to as thin-capitalization rules, and seek to prevent tax evasion through the transferring of profits disguised as interest expenses.

The concept of related parties is given by article 23 of Law 9,930/96. It comprises of several categories of relationships in which the parties might be expected to contract under artificial conditions, allocating their profits to the jurisdiction providing the lowest possible taxation. These relationships include: (i) share participation; (ii) shared administrative control; and (iii) the existence of commercial relationships between the parties in which the Brazilian entity acts as an exclusive agent, distributor or concessionaire.

Tax havens are defined by article 24 of Law 9,430/96 as jurisdictions that exempt income or tax it at a rate inferior to 20%, or whose legislation forbids the access to information on the ownership of legal entities, among other restrictions. These criteria are also used for determining the tax treatment conferred to entities under preferential tax regimes given by normal tax jurisdictions, which receive the same treatment as tax havens for thin-capitalization purposes.

According to article 24 of Law 12,249/10, interests paid or credited to related parties that are not domiciled in tax havens are deductible as long as:

(i) the debt is inferior to twice the value of the participation of the foreign related party in the net equity of the Brazilian entity;

(ii) the debt is inferior to twice the net equity of the Brazilian entity, if the related party does not hold a share participation in it; and, in any case

(iii) the aggregate debt with related parties abroad does not exceed twice the sum of the share participation of all related parties in the net equity of the Brazilian entity.

These rules also apply to loans contracted by Brazilian entities in which the guarantor, the attorney-in-fact, or any other intervening party is also a related party.

Article 25 of Law 12,249/10, on its turn, provides that interest paid or credited to entities domiciled in tax havens (whether they are related parties or not) may be deducted as long as the aggregate debt with tax haven entities is not superior to thirty percent (30%) the value of the net equity of the Brazilian entity. This rule is also applicable to loans contracted by Brazilian entities in which the guarantor, the attorney-in-fact, or any other intervening party is domiciled in a tax haven.

Additionally, payments to beneficiaries domiciled in tax havens are only deductible if:

(i) the beneficiary owner receiving the funds is identified;

(ii) the foreign entity performs substantial economic activity; and

(iii) there is documental evidence of payment of the price and receipt of the goods, rights or services.

Law 12,249/10 still brings additional provisions to prevent international tax evasion, such as rule for the change of domicile to tax havens and for the deductibility of payments to beneficiaries domiciled in tax havens or under preferential tax regimes.

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* Caio Caetano Luna, associate of Rolim, Godoi, Viotti & Leite Campos Advogados

** Gilberto Ayres Moreira, partner of Rolim, Godoi, Viotti & Leite Campos Advogados

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