Brazilian Court rules on interpretation of substantial economic activity of Dutch holding companies for application of thin-capitalization rules

On December 31, 2019, the Brazilian Administrative Council of Tax Appeals’ published its decision involving the substance of “economic activity” of a Dutch holding company, lending to its related entity in Brazil. The case involved the application of the Brazilian thin-capitalization rules. The Brazilian court ruled that the lender, a Netherlands holding company, had insufficient economic activities. Hence, the thin-capitalization rules applied and part of the interest was not-deductible in Brazil. Consequentially, it resulted in (a partial) double taxation for the Group.

Background of the case

The Netherlands HoldCo. (the lender) and Unilever Brasil Ltda (the borrower) signed a loan agreement. Universal Brasil Ltda made interest payment to the Netherlands Holdco.

Under Brazil’s thin-capitalization rules, outbound interest payments made by a Brazilian entity to its foreign related lender, through loan agreements, are deductible for income tax purpose. If, however the foreign related lender is a resident either of a tax haven or subject to a privileged tax regime, additional requirements (debt-to-equity ratio and the interest expenses are business related) must be satisfied in order to safeguard the deduction of interest. The Brazilian Tax Authorities challenged the economic activity of the lender.

Want to read the complete article?
Share this article on:

Patrick T.F. Schrievers

Patrick T.F. Schrievers is a tax lawyer and member of the

Co Author(s):

Related posts

Please feel free to exchange ideas with us on your tax position and/or that of your company.

Contactform

Locations

Nijmegen

FiftyTwoDegrees Jonkerbosplein 52 6534AB Nijmegen The Netherlands

Amsterdam

Nieuwezijds Voorburgwal 162 1012 SJ Amsterdam The Netherlands

Research and Articles

We collect cookies to analyze our website traffic and performance; we never collect any personal data. Read terms