BRAZIL Law and Practice Contributed by: Caio Ferreira Silva, Thiago Braga Junqueira, Vinícius Pimenta Seixas and Rodrigo Vieira, Pinheiro Neto Advogados
Special Situations – Infrastructure Debentures Law 14,801/24 sets forth a new tax treatment for qualifying infrastructure debentures. It spe- cifically sets forth a more beneficial tax treat- ment for the issuer, which can deduct 130% of its interest expenses for the purposes of deter- mining its CIT tax base (and add 30% over the regular deduction of interest). As a general rule, the tax treatment applica- ble to investors is the same as would apply to non-incentivised fixed-income investments, as described under the “Onshore Lender” and “Off - shore Lender” sections above. 8.3 Thin-Capitalisation Rules Corporate Income Tax Deduction: Interest Expenses As a rule, interest expenses recognised by the Brazilian borrower/debtor are deductible when assessing the CIT base. It is worth noting, how- ever, that such interest expenses will tend to become tax losses when the borrower/debtor is purely a holding company incorporated in Brazil, as dividends distributed by a Brazilian company to such holding company would be considered tax exempt. For this reason, a common strategy to avoid such tax inefficiency is to implement a corporate reorganisation to push the debt down to the level of the target company, which would recognise taxable revenues from its ordinary operations. Although debatable, Brazilian tax authorities understand that interest recognised by the tar- get company after the debt push-down would not be deductible from the CIT base. In addition, the interest expenses recognised by the Brazilian company are only deductible if the Brazilian transfer pricing and thin-capitalisation rules are observed when the lender is a related
party resident abroad or an unrelated party resi- dent in a grey or blacklisted jurisdiction. Until June 2023, Brazil utilised a unique trans- fer pricing (TP) system. Deviating from OECD standards, Law No 9,430, of 27 December 1996, provided for TP control methods based on fixed margins and allowed taxpayers to elect the most favourable method to assess their transactions. However, Law No 14,596 introduced new TP rules aimed at aligning the Brazilian system with OECD standards. The new rules will apply to a wider range of controlled transactions but will also be subject to more suitable and flexible control meth- ods to ensure that related parties adopt prices in line with the arm’s length principle. The concept of “controlled transactions” is similar to the one adopted by OECD guidelines, which have been expressly embraced as a sub- sidiary source of interpretation for the new Bra- zilian TP rules. The new rules came into force on 1 January 2024. Thin-capitalisation rules, in turn, set a maximum deductibility limit based on the ratio between the amount of indebtedness of the bor - rower and the amount of its net equity. The ratio may vary depending on the jurisdiction where the borrower is domiciled. When the level of indebtedness of the Brazilian company exceeds this legal ratio, a pro rata portion of the interest
expense becomes non-deductible. Brazil’s Consumption Tax Reform
On 20 December 2023, the approved “Tax Reform” was converted into Constitutional Amendment No 132, effective as of 21 Decem- ber 2023, with the new taxes to be implement- ed as of 2026. The Tax Reform provides for the
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