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.


26 Feb. '20 Birhanu Tadesse Daba

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.


Birhanu Tadesse Daba

Birhanu Tadesse Daba, is a Tax Lawyer and Research Associate at NovioTax.

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