[ESTABLISHING A BUSINESS ENTITY IN BRAZIL] 75
shareholders’ participation in the Brazilian company’s net worth. Therefore, a debt-to-equity ratio of 2:1 must be observed. This limit is reduced to 0.3:1 if the loan is granted by an entity domiciled in a blacklisted jurisdiction or is subject to a privileged taxation regime, irrespective of being a related party.
The transition period will start in 2026 and extend until 2033, during which the current taxes will coexist with the new system while taxpayers progressively adapt to the CBS/IBS framework. During this period, a gradual credit system and compensatory mechanisms will be implemented to avoid double taxation and ensure revenue neutrality for federal entities. Additionally, a Selective Tax (“IS”) will be introduced, applicable to goods and services considered harmful to health or the environment, such as tobacco, alcohol, and potentially certain industrial or extractive activities. The reform aims to simplify the Brazilian tax system, reduce litigation and compliance costs, and align Brazil with international VAT practices. However, despite the regulation of Tax Reform through Complementary Law 214/2025, many details are still under discussion and should be addressed in the coming months, so that companies can prepare for the transition period. 6.6. Qualified Domestic Top-up Tax: In the context of the global implementation of the Pillar 2 rules, Brazil introduced an additional charge to the CSLL, based on the requirements to be considered as a Qualified Domestic Minimum Top-up Tax (QDMTT) under the OECD framework, with the objective of establishing a minimum effective tax rate of 15% for Brazilian entities. The additional CSLL was enacted in 2024 and will take effect starting in 2025. Pursuant to Law No. 15,079/2024 and Normative Instruction No. 2,228, which regulates the application of the additional
The debt/equity ratio above must be tested every month, considering both the amount of accrued interest, as well as the net equity of the previous year or month (if available). In this sense, profits accumulated during the year may reduce the debt/equity ratio. As of 2024, new transfer pricing rules provided by Law no. 14.596/2023 came into effect. The new transfer pricing rules in Brazil aligned the national practice to the OECD guidelines. On the basis of OECD Guidelines, to calculate the transfer pricing margins of foreign loans, it is necessary to observe whether the conditions of financial transactions between associated enterprises are consistent with the arm’s length principle. The adoption of the new transfer pricing rules was optional for 2023 and is mandatory for 2024. 6.5. Ongoing Tax Reform in Brazil: In December 2023, Brazil enacted Constitutional Amendment No. 132/2023, which introduced a broad tax reform focused on consumption taxes. The reform establishes a dual VAT system composed of the CBS (Contribution on Goods and Services) at the federal level and the IBS (Tax on Goods and Services) at the state and municipal levels, which will gradually replace five existing taxes: PIS, COFINS, IPI, ICMS and ISS.
ILN Corporate Group – Establishing a Business Entity Series
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