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If the 432 program loan was a gross loan, the Central Bank
would pay the withholding tax due on the interest payable to the
foreign lender during the period the funds were deposited in the
Central Bank. If the 432 program loan was a net loan, the
Central Bank would pay no withholding tax with respect to the
interest payable to the foreign lender.
Some foreign lenders sought to have the Central Bank pay
withholding tax and issue them DARFs with respect to the Central
Bank’s 432 loan program net loan interest remittances, as this
would enable these foreign lenders to claim potential foreign tax
credits.6 Their efforts were unsuccessful, however, because the
Central Bank (a tax-immune governmental entity) was not required
to pay the withholding tax.
Decree-law 1,215, enacted May 4, 1972, gave the Brazilian
Minister of Finance discretion to grant a reimbursement or
reduction of, or exemption from, the withholding tax on interest.
Decree-law 1,351, enacted on October 24, 1974, as amended by
Decree-law 1,411, enacted July 31, 1975, authorized the National
Monetary Council to (1) reduce the income tax on interest,
commissions, and expenses remitted to persons resident or
6Although, in the case of a net loan, the U.S. lender had to
pay U.S. income tax with respect to the additional interest
income resulting from the gross-up, the lender would receive a
foreign tax credit equal to the additional interest income that
would reduce the lender’s U.S. income tax liability dollar for
dollar.
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Last modified: May 25, 2011