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Beginning in 1974, Resolution 63 funds not utilized in repass
operations could be deposited with the Central Bank. When such
funds were deposited, the Central Bank paid the interest on the
foreign loan; and if there was a net loan involved, no withholding
tax was paid with respect to the Central Bank's interest payment.
J. Resolution 432
As a result of the historically high inflation in Brazil and
the periodic currency exchange devaluations, the National Monetary
Council issued, on June 23, 1977, Resolution 432, which authorized
borrowers of registered foreign currency loans to hedge cruzeiros
(intended to be used for payments on the loans) against currency
exchange devaluations by depositing foreign funds at the borrower's
Brazilian bank. Pursuant to Resolution 432, the borrower would
purchase the funds to be deposited at its Brazilian bank at the
official exchange rate. The foreign funds remained on deposit
until such time as the borrower was required to make payment to the
lender. The foreign currency deposited at the borrower's bank was
then transferred to the Central Bank which paid (2 days prior to
the date the borrower was required to make payment to the lender)
interest on the deposited funds at a rate equal to that payable by
the Brazilian borrower to the foreign lender (as set forth in the
certificate of registration). To the extent that interest was paid
to the foreign lender with funds deposited in the Central Bank, the
Brazilian borrower had no obligation to withhold income taxes
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