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“gross up” is required for purposes of computing the withholding
tax. This gross-up adjustment is computed as follows:
Grossed-up interest = Net interest
1 - Withholding tax rate
In contrast to a net loan, a gross loan is a loan in which
there is no contractual agreement between the borrower and the
foreign lender to pay taxes imposed by the borrower’s country. With
a gross loan, the Brazilian borrower deducts withholding taxes that
are due from the interest specified under the loan contract and pays
the lender the gross interest net of taxes.
From 1970 through 1986, net loans generally were the
predominant type of loan extended by foreign lenders to borrowers
in Brazil. With a net loan, the foreign lender shifts the risk of
any increase in taxes imposed by the borrower’s country to the
borrower. Correspondingly, in a net loan, the borrower, not the
foreign lender, benefits from any reduction in or waiver of taxes
imposed by the borrower’s country.
E. Institution of the Subsidy/Pecuniary Benefit
Under Decree-law 1,215, enacted May 4, 1972, the Brazilian
Minister of Finance was given discretion to grant a reimbursement
or reduction of, or exemption from, the withholding tax on interest
provided: (1) The borrower’s costs were reduced; (2) the loan was
of national interest; (3) the loan met the minimum repayment term
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Last modified: May 25, 2011