American Bar Association - International Law Publications

The Year in Review – International Legal Developments Year in Review: 2020 

The International Lawyer – A triannual publication of the ABA/Section of International Law

Country/Region Reports 


Brazil has adopted unilateral measures to amend pertinent legislation dealing with the tax treatment of debt and equity. In Law 12,973/2014, for example, two new paragraphs were inserted into Article 10 of Law 9,249/ 1995, expanding the exemption afforded to dividends attributable to the earnings resulting from financial instruments classified as involving debt  and preventing the deduction of these payments by the payer.8 Law 12,973/2014 also added Article 38-B to Decree-Law 1,598/1977, establishing the deduction of payment at the source and taxation of the beneficiary.

It is also important to highlight that in recent years, influenced by the evolution of accounting pronouncements issued in harmony with international standards, Brazilian tax authorities and administrative courts have been applying a substance-over-form approach, aiming to establish the most expansive legitimate tax treatment of corporate structures and contractual arrangements.

Although Brazil has followed the OECD recommendations by adapting its legal system to this new reality of providing more legal certainty regarding the tax treatment attributed to hybrid financial instruments, the problems that may arise out of the implementation of increasingly sophisticated structures and/or complex contracts that do not follow the traditional classification of debt and equity have not been resolved. In Brazil, constitutional and legal principles and guarantees which govern income taxation still have to be analyzed with special attention to the determination of the taxable basis, the ability to pay taxes, and the freedom of taxpayers to utilize legitimate structures and transactions which are not developed with the exclusive purpose of avoiding taxation.11 As a result, Brazilian constitutional and legal principles and guarantees which govern taxation function as a limitation on the countermeasures that can be enacted to prevent possible future abuses. In this context, it is necessary for Brazil to continue implementing new measures to accompany the evolution of the market, both unilateral and bilateral (or multilateral), in order to harmonize the taxation of these instruments, which would prevent both double taxation and double non-taxation. Until these vexing issues are resolved through adjustments to laws and treaty provisions, the utilization of hybrid instruments in the country may constitute a trap rather than an opportunity.