BRAZIL Law and Practice Contributed by: Thiago Fernandes Chebatt and Luiz Eugênio Araújo Müller Filho, Müller Chebatt Advogados
allocation, otherwise junior positions can become litigation-heavy with limited practical leverage. 3.8 Payment in Kind/Amortisation PIK features exist, particularly in transitional credits, but they are typically negotiated as conditional flex - ibility rather than a permanent payment mechanism. Where permitted, they are usually time-limited, tied to leverage or liquidity conditions, and priced with step- ups to compensate for deferral and risk. Amortisation patterns vary by structure: receivables-based deals often amortise through collections and triggers, while corporate financings more often use bullet maturities with mandatory prepayments for asset sales, insur - ance proceeds and refinancings. In both cases, lend - ers focus on ensuring that the payment mechanics are enforceable and that early-warning triggers allow intervention before a cash crunch becomes irrecover - able. The objective is to preserve optionality for the borrower without converting the credit into a “monitor - ing problem” with delayed recognition of deterioration. 3.9 Call Protection Call protection is widely used in Brazilian private cred - it because refinancing optionality through domestic issuance can be material. In bilateral and club loans, lenders typically negotiate stepped-down prepay - ment fees or make-whole economics for an initial period, together with mandatory prepayment triggers for refinancings and extraordinary proceeds. In debt securities, call mechanics are embedded through call dates and disclosed premiums, often complemented by covenants that restrict debt incurrence and col - lateral leakage. The drafting focus is increasingly on precision, because ambiguous definitions and bas - kets tend to become disputes in stress or during liabil - ity management exercises. Effective call protection is therefore treated as part of a broader package that preserves economics while maintaining operational and enforcement controls.
ject to withholding tax, with the applicable rate influ - enced by the lender’s tax profile and the characterisa - tion of payments. FX settlement can also attract tax and cost items, which makes correct classification of principal, interest, default interest and fees important both for tax and for dispute resilience. Treaty relief may be available depending on the lender’s jurisdic - tion and the nature of the income, but it requires disci - plined documentation and compliance. Sophisticated credit documents commonly include tax gross-up and increased-cost provisions, co-operation undertakings and clear allocation of tax risk to avoid value erosion through disputes or unexpected leakage. 4.2 Other Taxes, Duties, Charges or Tax Considerations Beyond withholding, foreign lenders typically focus on FX-related taxes and operational costs that can be meaningful in Brazil, including notary expenses, sworn translations and registry fees for perfection and releases. Borrower-side deductibility and related limitations can also affect effective pricing and cov - enant headroom, particularly in related-party or struc - turally connected scenarios, so tax analysis must be integrated with financial definitions and compliance reporting. Where the exposure is taken through a Brazilian fund or securitisation vehicle, the tax pro - file shifts and becomes investor-category dependent, requiring early mapping of who bears tax and how returns are characterised. In practice, tax is managed as part of execution risk: an avoidable compliance defect can become a material leverage point for a bor - rower precisely when the lender needs to restructure or enforce. 4.3 Tax Concerns for Foreign Lenders The most recurring tax concerns for foreign private credit providers are withholding on interest and fees, FX-related leakage, and the stability of the tax profile over the life of the investment. Secondary trades and distressed claim acquisitions can also raise charac - terisation questions for gains, which should be con - sidered at entry if the strategy anticipates active port - folio rotation. Mitigation is usually achieved through channel selection (cross-border loan versus domestic issuance or fund participation), disciplined drafting of payment definitions, and robust gross-up and co- operation mechanics. From a litigation perspective,
4. Tax Considerations 4.1 Withholding Tax
Tax is often a pricing and structuring pillar for foreign private credit into Brazil. Interest and certain related amounts remitted to non-residents are typically sub -
22 CHAMBERS.COM
Powered by FlippingBook