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.
