BRAZIL Law and Practice Contributed by: Caio Ferreira Silva, Thiago Braga Junqueira, Vinícius Pimenta Seixas and Rodrigo Vieira, Pinheiro Neto Advogados
8.2 Withholding Tax/Qualifying Lender Concepts Onshore Lender As a rule, an onshore payment of interest com- ponent is subject to the assessment of with- holding income tax (WHT) on a cash basis, at regressive rates that vary in accordance with the lending period, starting at 22.5% and reaching 15% after two years have elapsed. When the lender is a Brazilian company, such WHT is considered an anticipation of the corpo- rate income tax (CIT), generally levied at a rate of 34%, in which case the taxpayer is entitled to offset the amount of WHT with the amount of CIT due. If the amount of CIT is insufficient to fully offset the WHT, such overpayment of WHT becomes a refundable credit to the company. When the lender is an individual considered to be a tax resident in a Brazilian company, such WHT is treated as the final amount of income tax, and no adjustment will be made in the income tax return of the individual. Offshore Lender An interest component paid by a Brazilian entity to a foreign beneficiary is generally subject to WHT at 15% on a cash basis. The rate will be increased to 25% when the foreign beneficiary is resident or domiciled in a tax haven jurisdiction. Special Situations – Equity Investment Funds Acquisitions made by private equity investors are often carried out in Brazil by means of private equity funds ( Fundos de Investimento em Partici - pação , or FIPs), due to special tax treatment. As a rule, Brazilian investment funds, such as FIPs, are not subject to taxation at their level, as they are constituted as condominia (tax-neutral enti- ties) rather than as legal entities. The taxation of the fund’s earnings should only occur at the level
of its investors, following their corresponding tax regime and the specific characteristics of the fund. While the FIP is not taxable on its capital gains, the distribution of income made by the FIP to non-res- ident investors that are not resident in a tax haven jurisdiction is subject to WHT at 0%, for as long as the FIP is classified as an Investment Entity under the terms of National Monetary Council’s Resolu- tion No 5,111, of 21 December 2023. Although FIPs are not allowed to raise debt due to regulatory restrictions, when properly struc- tured it is possible to set up an onshore debt financing structure involving the FIP (lender) and the target company (borrower), to increase the efficiency of the acquisition. Special Situations – Incentivised Debt Securities Qualifying incentivised debentures regulated by Article 1 of Law 12,431/11 are entitled to a special tax treatment, whereby interest paid to foreign investors is subject to WHT at 0%, as long as the beneficiary is not resident in a tax haven jurisdiction. Special Situations – Incentivised Debentures Qualifying incentivised debentures regulated by Article 2 of Law 12,431/11 are entitled to special tax treatment, whereby interest paid to individu- als resident in Brazil is subject to WHT at 0%. When the lender is a Brazilian company, WHT is levied at a flat rate of 15%, and such WHT is considered final, rather than an anticipation of CIT. Therefore, the lender will pay no additional income tax, despite the fact that the CIT rate (34%) is significantly higher than the WHT levied on the infrastructure debentures.
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