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Thin capitalization rules in Brazil

Last verified: 2026-10-25

Interest paid to related parties abroad is deductible only if related party debt does not exceed twice the lender's equity interest, or twice the borrower's equity for lenders without a stake, and twice aggregate related equity overall. For lenders in low tax jurisdictions the cap is 30% of the borrower's equity. Excess interest is non deductible for IRPJ and CSLL.

The rule

1. Interest paid to a related party abroad that holds equity in the Brazilian company is deductible only if that debt does not exceed twice the related party's share of the Brazilian company's net equity.Law 12,249/2010, as amended by Law 14,596/2023, art. 24, item I, 2023-06-14 official text

2. For a related party abroad without an equity stake, the debt may not exceed twice the Brazilian company's net equity.Law 12,249/2010, as amended by Law 14,596/2023, art. 24, item II, 2023-06-14 official text

3. In either case, total debt with related parties abroad may not exceed twice the sum of all related parties' shares of net equity.Law 12,249/2010, as amended by Law 14,596/2023, art. 24, item III, 2023-06-14 official text

4. Interest paid to entities in favored tax jurisdictions or privileged regimes is deductible only if total debt with all such entities does not exceed 30% of the Brazilian company's net equity.Law 12,249/2010, as amended by Law 14,596/2023, art. 25, 2023-06-14 official text

5. For the 30% test, all forms of financing count regardless of BCB registration, guarantees from such jurisdictions are covered, interest on the excess is non deductible, and debt and equity are measured by monthly weighted average.Law 12,249/2010, art. 25, paras. 1 to 4, 2010-06-11 official text

6. Interest must also be a necessary expense and meet the transfer pricing rules of Law 14,596/2023.Law 12,249/2010, as amended by Law 14,596/2023, art. 24, caput, 2023-06-14 official text

Worked example

A Brazilian subsidiary has net equity of BRL 10,000,000 (about USD 1,985,033), wholly owned by its foreign parent, so the limit is BRL 20,000,000 of parent debt. It borrows BRL 30,000,000 from the parent at 8%. Interest on the BRL 10,000,000 excess, BRL 800,000 (about USD 158,803), is non deductible, costing BRL 272,000 (about USD 53,993) at a 34% rate. Interest also bears withholding at payment. USD at the BCB PTAX selling rate of 23 October 2026, BRL 5.0377 per USD.

Step by step

Measure related party debt and equity on a monthly weighted average basis.
Test each lender individually and then in aggregate.
Check whether any lender or guarantor sits in a favored tax jurisdiction or privileged regime.
Price the interest at arm's length under Law 14,596/2023.
Consider equity contributions or JCP to manage the ratio.

Common traps

Ignoring guarantees from low tax jurisdictions, which pull third party loans into the 30% limit.
Measuring at year end only.
Forgetting the interaction with withholding on interest (15%, or 25% for low tax jurisdictions).

Sources

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