On May 12 2011 the Brazilian Internal Revenue Service issued
Ordinance 1.154 on the principles of thin capitalisation. The
principles had been previously established on June 6 2010 by Law
12.249; the new ordinance consolidates the applicable rules and
procedures.
These rules apply to money borrowed by a Brazilian company from
a foreign related party - namely, a foreign controlling party or a
party under common foreign control.
Thin capitalisation allows the borrowing party to pay interest
to the related party lender instead of paying dividends. Payments
of interest qualify for corporate income tax deduction, while
payments of dividends do not.
Following similar trends in other countries - such as the United
States, the United Kingdom, Australia and Argentina - the Brazilian
regulation attempts to discourage thin capitalisation and
incentivise pure capital increases.
