Thin Capitalization in Brazil: Interest Limits in 2026

Interest a Brazilian company pays to a related party abroad is deductible only up to a limit. The debt can reach 2 times the creditor's share of net equity (patrimônio líquido). If the creditor is in a tax haven or a privileged tax regime, the cap is 30% of net equity. Interest on the excess is not deductible.

Interest on the excess does not reduce corporate income tax (IRPJ) or CSLL. These are the thin capitalization (subcapitalização) rules in arts. 24 and 25 of Law No. 12,249/2010 (Lei 12.249/2010), as amended by Law No. 14,596/2023 (Lei 14.596/2023).

Many people get this wrong by treating the rules separately. Since 2024, the transaction goes through two independent filters. The first limits the size of the debt relative to net equity. The second, the transfer pricing law, tests whether the interest rate is at market level and whether the transaction is really a loan or a disguised capital contribution. A debt can pass the first and still have its interest disallowed under the second.

What are the thin capitalization rules in Brazil?

The thin capitalization rules limit the deduction of interest paid to creditors connected to the company abroad. The law does not prohibit the debt. It only treats as an unnecessary expense the portion of interest that exceeds the limit, and that portion goes back into the IRPJ and CSLL base (art. 24, § 3, of Law 12,249/2010).

The goal is to prevent profit generated in Brazil from leaving as deductible interest instead of dividends. Without a limit, the foreign shareholder would only need to lend instead of investing: the expense would reduce taxable profit here, and the income would go abroad. The rules apply to companies under the actual profit regime (lucro real), which are the ones that deduct financial expenses when calculating IRPJ and CSLL.

Three rules govern the subject:

1. •Art. 24 of Law 12,249/2010: creditor that is a related party and is in a country with normal taxation.
2. •Art. 25 of Law 12,249/2010: creditor in a country with favored taxation or under a privileged tax regime, whether or not a related party.
3. •Arts. 27 to 29 of Law 14,596/2023: delineation of the transaction (debt or equity) and the interest rate under the arm's length principle.

What are the limits on indebtedness abroad?

The limits depend on where the creditor is and whether it holds an interest in the Brazilian company. Interest on the excess over any of them is not deductible:

The art. 25 limit is the harshest for two reasons. It applies even when the creditor is not a related party. And it adds up the debts with all entities in those jurisdictions against the entire net equity. The concepts of tax haven (country with favored taxation) and privileged tax regime come from arts. 24 and 24-A of Law No. 9,430/1996 (Lei 9.430/1996). The official list is in Normative Instruction RFB 1,037/2010 (Instrução Normativa RFB 1.037/2010).

Art. 25 does not apply to funds raised abroad by financial institutions for on-lending operations (art. 25, § 5). Art. 24 has the same exception (§ 7).

How do you calculate the limit in practice?

The calculation uses the monthly weighted average of debt and net equity, not the December 31 balance (art. 24, § 4, and art. 25, § 4). That is why increasing capital on the eve of the balance sheet does not help: the year's average still carries the months in which the debt was above the limit.

Three rules broaden what counts as debt:

• •Every form of financing counts, of any term, with or without registration of the contract with the Central Bank (art. 24, § 1, and art. 25, § 1).
• •A related-party guarantee triggers the limit. If the guarantor, surety or any party intervening in the loan is a related party, the debt falls under art. 24 even if the creditor is an independent bank (art. 24, § 2). Under art. 25, the same applies when the guarantor is in a tax haven or privileged regime (art. 25, § 2).
• •Net equity is the accounting figure, not the market value of the assets.

Numerical example. A Brazilian company has average net equity of BRL 1 million, and 100% of it belongs to a parent company in Portugal (normal taxation). The art. 24 limit is BRL 2 million of debt with that parent. If average debt is BRL 5 million at 10% a year, interest totals BRL 500 thousand. The portion of debt above the limit is BRL 3 million, or 60% of the total. So BRL 300 thousand of interest becomes non-deductible. With IRPJ and CSLL adding up to 34% for a company under the actual profit regime, that is about BRL 102 thousand of additional tax in the year.

Does the shareholder's own US LLC count as a privileged tax regime?

It does, if the LLC's members are not US residents and it is treated as transparent by the US tax authority. Art. 2, VII, of IN RFB 1,037/2010 includes in the list of privileged regimes the state LLCs of non-residents that do not pay federal income tax. Cosit Ruling (Solução de Consulta Cosit) No. 56 of April 9, 2026 confirmed this reading for a California LLC owned by a Brazilian family.

In practice, this changes the limit. A Brazilian entrepreneur who lends to their own company in Brazil through an LLC in Wyoming or Delaware does not stay under the 2-times cap of art. 24. They fall under art. 25: the debt with the LLC cannot exceed 30% of the Brazilian company's net equity. With net equity of BRL 1 million, that is BRL 300 thousand. Interest on anything above that is not deductible.

Beyond the limit, art. 26 of Law 12,249/2010 applies. Any payment to an entity in a tax haven or privileged regime is deductible only if the company proves, all at once:

1. •who the effective beneficiary of the amount abroad is;
2. •that the entity abroad has the operational capacity for the transaction;
3. •the payment and receipt of the good, right or service, with documents.

An LLC with no structure, which only receives and passes on money, has difficulty with the second requirement. Before using the LLC as a creditor, compare the choice of jurisdiction in Wyoming or Delaware LLC and the effect in Brazil.

What changed for interest with Law 14,596/2023?

Law 14,596/2023 replaced fixed interest rates with the arm's length principle: the rate must be the one independent parties would agree on. It repealed arts. 18 to 23 of Law 9,430/1996 from January 1, 2024, including the interest rate rule of art. 22 (art. 46, VI). The thin capitalization limits in arts. 24 and 25 of Law 12,249/2010 remain in force, with adjusted wording.

The new law brought three points that directly affect loans between companies of the same group:

• •Debt or equity (art. 27). The tax authority may delineate the transaction, in whole or in part, as a capital contribution. It looks at the economic characteristics of the transaction, the parties' perspectives and the options actually available. Interest on the portion reclassified as equity is not deductible.
• •Credit risk and group support (art. 28). The rate considers the debtor's credit risk, including implicit group support. The benefit of that support does not generate remuneration.
• •Creditor's capacity (art. 29). If the related creditor lacks financial capacity or does not control the risks of the transaction, remuneration is limited to the risk-free rate. If it only intermediates third-party funds, it is remunerated for the functions it performs.

Art. 29 hits squarely at the structure with an empty LLC or holding abroad: without its own financial capacity, the accepted remuneration is limited to the risk-free rate. The details on methods and documentation are in the transfer pricing guide.

How much does exceeding the limit cost?

The cost is the loss of the deduction on interest on the excess, without reducing the tax withheld on remittance. The non-deductible portion goes back into the IRPJ and CSLL base. The remittance of interest abroad remains subject to withholding income tax: generally 15%, and 25% when the creditor is in a country with favored taxation (art. 8 of Law 9,779/1999).

The company also reports interests and transactions with foreign entities in the ECF (Escrituração Contábil Fiscal). The fields are in the ECF guide on affiliated companies abroad.

How do you bring a company that has exceeded the limit back into compliance?

There are three paths, which can be combined: increase net equity, reduce the debt with the related creditor or replace the creditor. Because the calculation uses the monthly average, the effect appears gradually over the year.

• •Capitalize the credit. Converting part of the loan into share capital increases net equity and reduces debt at the same time. First, calculate the effect of the exchange variation accumulated on the contract and the foreign exchange and IOF treatment of the transaction on the conversion date.
• •Contribute assets or retain profits. Paying in capital with assets or not distributing profits also increases the net equity that serves as the basis for the limit.
• •Replace with an independent bank. Bank debt falls outside the limit, as long as no related party is a guarantor, surety or intervening party (art. 24, § 2). A cash guarantee from the parent company brings the transaction back under the rule.

Before restructuring, check whether the new structure also passes the Law 14,596/2023 test. Corporate structuring and tax planning look at both rules together.

Conclusion

The thin capitalization limits boil down to two calculations and one test. Debt with a related party can reach 2 times its share of net equity. With a tax haven or privileged regime, the cap is 30% of net equity. In any case, the interest rate must be at market level. Anyone who lends to their own company through a US LLC is usually in the second group without knowing it.

Before signing a loan agreement with a foreign lender, calculate the limit using the projected monthly average for the year. Also check whether the creditor has the substance to justify the rate. To review your structure, book a consultation.