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lender and the Brazilian bank. The charges paid by a repass
borrower to the borrowing bank were in the same proportion as the
charges paid by the borrowing bank to the foreign lender. If the
interest rate charged by the foreign lender to the Brazilian bank
was net of the Brazilian withholding tax, then the interest rate
payable by the repass borrower was net of the Brazilian
withholding tax.
Beginning in 1974, borrowing banks could deposit with the
Central Bank Resolution 63 funds not used in repass operations.
When such funds were so deposited, the Central Bank paid the
interest on the foreign loan; and if a net loan4 was involved, no
withholding tax was paid with respect to the Central Bank’s
interest payment.5
4In a net loan, the borrower contractually agrees to pay
both the interest on the loan to the lender and any local (in
this case, Brazilian) tax that the lender incurs as a result of
the interest income. Under Brazilian law, when the Brazilian
borrower under a net loan assumes the burden of withholding tax,
the amount of interest remitted is considered net of tax and an
adjustment known as a "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
5Art. 19 of the Brazilian Constitution prohibits the
Brazilian Government, States, and municipalities from taxing the
assets, income, and operations of public-sector entities,
including autarquias, like the Central Bank. The Brazilian
Supreme Court held that public-sector entities were not required
to pay withholding tax with respect to their net loan interest
remittances abroad, because they assumed the tax burden in such
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