Published on December 15, 2009, Provisional Measure no. 472 introduced into the Brazilian Income Tax laws new rules governing deductibility of interest paid or credited by a company located in Brazil to related individuals or legal entities resident and/or domiciled abroad for purposes of calculation of Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL).

These rules, which will require the paying source to observe the interest deductibility limits shall be valid both for remittances or credits whose beneficiaries are not resident or domiciled in countries with favored tax treatment or under a privileged tax system, and to those incorporated in the so-called tax havens.

Beneficiaries not resident or domiciled in countries with favored tax treatment or under a privileged tax system must meet all the following requirements:

(i) the debt amount recorded on the date interest is allocated shall not exceed twice the value of the related-party participation in the net equity of the legal entity resident in Brazil; and

(ii) the total sum of indebtedness on the date interest is allocated shall not exceed twice the value of all participations held by all related parties in the net equity of the legal entity resident in Brazil.

Beneficiaries who are resident or domiciled in countries considered tax havens, in their turn, will be required to meet all the following requirements:

(i) the debt amount taken out from the entity located in a country or dependency with favored tax treatment or under privileged tax status shall not exceed thirty percent of the net equity value of the legal entity residing in Brazil; and

(ii) the total sum of indebtedness with all entities located in a country or dependency with favored tax treatment or under privileged tax status shall not exceed thirty percent of the net equity value of the legal entity residing in Brazil.

The calculation of total debt should comprise all forms and terms of financing, regardless of registration of the respective contract(s) with the Central Bank of Brazil (Bacen).

If any amounts in excess of the limits thus set are identified, the interest amount relating to this excess portion is not deemed necessary to the business activity, being therefore considered as a nondeductible item for IRPJ and CSLL tax purposes.