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a completed DARF and payment of the tax as evidence that the proper
amount of the tax had been paid.2
E. Net Loans and Gross Loans
In making loans to borrowers in Brazil and other countries, it
was an accepted and common practice among foreign lenders to
require that interest payments be made to them on a "net quoted"
basis. A net loan is a loan in which the lender and the borrower
have agreed that all specified payments of principal and interest
to the lender, under the loan contract, will be made net of any
applicable Brazilian taxes.
Under Brazilian law, when the Brazilian borrower under a net
loan assumes the burden of the withholding tax, the amount of
interest remitted is considered net of tax and an adjustment known
as a "gross-up" is required to be made for purposes of computing
the withholding tax. This gross-up adjustment would be computed as
follows:
Grossed-up interest = Net interest
1 - Withholding tax rate
2 The borrower prepared the DARF and delivered a copy of
it and the registration certificate to the Brazilian bank
handling the payment of interest through a foreign exchange
contract. The bank recorded the amount of interest and tax on
the Certificate of Registration and submitted the certificate,
exchange contract, and DARF to the Central Bank for approval.
Upon approval by the Central Bank, the bank remitted the interest
to the foreign lender and returned to the borrower a stamped copy
of the DARF, the Certificate of Registration (stamped), and a
copy of the exchange contract. The borrower sent a copy of the
DARF to the foreign lender which then had proof (the DARF) that
the withholding tax was paid. The lender performed no act in
Brazil for the collection of tax.
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Last modified: May 25, 2011