Brazil’s Transfer Pricing Rules Now Consistent with OECD Guidelines

On 15 June 2023, Law 14,596/2023 was published (the “TP Law”). The TP Law converted Provisional Measure 1,152/2022 into law, making Brazil’s transfer pricing rules consistent with the OECD Transfer Pricing Guidelines.

The rules came into force on 1 January 2024, although taxpayers were allowed to elect to apply the new principles from 1 January 2023.

The TP Law:

• implements the arm’s length principle, replacing Brazil’s former fixed-margin regime;
• introduces specific rules relating to intragroup services and assets, cost contribution agreements, business restructurings and corporate guarantees;
• treats transactions with parties located in jurisdictions that impose income tax below 17% as controlled transactions, even where the parties are not otherwise related;
• makes the deductibility of interest subject to a “necessity” requirement and to Brazil’s thin capitalisation rules;
• introduces new rules on the deductibility of royalties and certain service fees;
• allows taxpayers to seek transfer-pricing-specific rulings from the Federal Revenue Department for periods of up to four years; and
• introduces penalties of up to BRL 5 million where taxpayers fail to produce the relevant documentation for a controlled transaction.

Arm’s Length Principle Introduced

Article 2 of the TP Law sets out the general rule applicable to related-party transactions. It provides:

“For the purposes of determining the calculation basis for [corporate income tax and the social contribution on net profits], the terms and conditions of a controlled transaction will be determined in accordance with those that would have been established between unrelated parties in comparable transactions.”

Article 3 of the TP Law provides that a “controlled transaction comprises any commercial or financial relationship between two or more related parties, established or carried out directly or indirectly, including contracts or arrangements in any form and series of transactions”.

When assessing whether the terms and conditions of a transaction comply with the arm’s length principle, the authorities will consider the scope of the transaction and carry out a comparability analysis. For transactions involving intangibles, the authorities will also consider the intangibles involved and their ownership, the parties that control the economically significant risks and have the financial capacity to assume them, and the parties responsible for financing or otherwise contributing to the intangibles.

Methods

The “most appropriate” of the following methods will be applied to controlled transactions:

• comparable uncontrolled price: the price of the controlled transaction is compared with the prices of comparable transactions carried out between unrelated parties;
• resale price minus profit: the gross margin that a buyer in the controlled transaction obtains on a subsequent resale to unrelated parties is compared with the gross margins obtained in comparable transactions between unrelated parties;
• cost plus profit: the gross profit margin earned on the supplier’s costs in a controlled transaction is compared with the gross profit margins earned on costs in comparable transactions between unrelated parties;
• transactional net margin: the net margin of the controlled transaction is compared with the net margins of comparable transactions between unrelated parties, with both being calculated using an appropriate profitability indicator;
• profit split: the profits or losses (or parts of them) in a controlled transaction are allocated by reference to what would have been obtained between unrelated parties in a comparable transaction, taking into account the relevant contributions in the form of functions performed, assets used and risks assumed by the parties involved; and
• other methods may be applied, “provided that [the method] produces a result consistent with that which would be achieved in comparable transactions carried out between unrelated parties”.

The comparable uncontrolled price method is deemed to apply where prices for comparable transactions between unrelated parties can be reliably ascertained. However, where a taxpayer can show that another method is more appropriate in the circumstances and better reflects the arm’s length principle, that method may be used instead.

Specific rules apply to transactions involving intangibles that are difficult to value.

Intragroup (“Intercompany”) Supplies of Services and Assets

The rules applicable to intragroup services also extend to the supply of assets (whether tangible or intangible) by a party where that supply results in benefits to a related party.

An activity will be regarded as “resulting in benefits” when it “provides a reasonable expectation of commercial or economic value for the other party of the controlled transaction, so as to improve or maintain its commercial position in such a manner that unrelated parties in comparable circumstances would be willing to pay for the activity or carry it out themselves”.

The following activities are deemed not to “result in benefits” to the receiving party:

• activities considered to be shareholder activities, namely matters relating to corporate decision-making, the issuance of shares and stock exchange listings, the preparation of corporate reports and accounts, capital raising and investor relations, and tax compliance obligations imposed by law; and
• duplication of a service already provided to the taxpayer or a service that the taxpayer has the capacity to perform itself, except where it is demonstrated that the duplicated activity generates additional benefits for the party receiving the services.

Specific calculation rules apply where the resale price minus profit method or the transactional net margin method is used.

Cost Contribution Agreements

For the purposes of the TP Law, cost contribution agreements (also referred to as cost sharing agreements) are agreements under which two or more related parties agree to share the contributions and risks relating to the acquisition, production or joint development of services, intangibles or tangible assets, in proportion to the benefits that each party expects to obtain under the arrangement.

The “participants” in a cost sharing agreement are the parties that:

1. exercise control over the economically significant risks relating to the agreement;

2. have the financial capacity to assume those risks; and

3. have a reasonable expectation of obtaining the benefits of:

(a) the services developed or obtained, where the subject matter of the agreement is the development or procurement of services; or

(b) the intangibles or tangible assets developed, produced or obtained under the arrangement, upon attribution of rights or interests over them, where the subject matter of the agreement concerns intangibles or tangible assets and the participant is capable of exploiting them in its activities.

The “contributions” include any contribution made by a participant that has value, including the provision of services, the performance of activities related to the development of intangibles or tangible assets, and the provision of pre-existing intangibles or tangible assets. These contributions are to be determined in proportion to the total expected benefit, assessed by reference to estimated increases in revenue, reductions in costs, or any other benefit expected to arise from the agreement.

Where a participant’s contribution is not proportional to its share of the total expected benefit, adequate compensation will be deemed to arise among the participants. Compensation will also be assessed and deemed payable where participants assign part of their expected benefit to participants that obtain or increase their participation.

When a cost sharing agreement is terminated, the results obtained are to be allocated among the participants in proportion to their respective contributions.

Business Restructurings

For the purposes of the TP Law, “business restructures” are “changes in commercial or financial relationships between related parties that result in the transfer of potential profit or of benefits or losses to any of the parties and that would have been remunerated if they were carried out between unrelated parties in accordance with the [arm’s length] principle […]”.

In assessing the compensation for any benefit obtained, or loss suffered, by a party to the transaction, the authorities will consider the costs incurred by the transferring entity as a result of the restructuring and the transfer of potential profit.

Corporate Guarantees

For controlled transactions that include a “legally binding undertaking by a related party to assume a specific obligation in the event of a debtor default”, the undertaking will be assessed either:

• as a service, in which case remuneration will be deemed to be owed by the debtor to the guarantor; or
• as a shareholder activity or capital contribution, in which case no remuneration will be deemed to be owed.

The TP Law provides a presumption that transactions involving debt owed to unrelated parties, where a related party has provided a guarantee, constitute capital contributions to the entity, “except when reliably demonstrated that, in accordance with the [arm’s length] principle, another approach would be considered more appropriate”.

The value of the deemed remuneration owed as a consequence of the provision of the guarantee will be “the benefit obtained by the debtor above the incidental benefit flowing from the implicit group support”, but may not exceed 50% of that value, “except when reliably demonstrated that, in accordance with the [arm’s length] principle, another approach would be considered more appropriate”.

Deeming Rule for Jurisdictions with Income Tax below 17% or under Privileged Tax Regimes

The rules set out in the TP Law apply to all transactions, including transactions between parties that are not otherwise related, where the counterparty is located in a jurisdiction in which the applicable income tax is below 17% or where the non-Brazilian party benefits from a “privileged tax regime”. Note that this definition of “privileged tax regime” applies only to the TP Law and is not the same as the concept used in Brazil’s broader tax haven rules.

Interest Deductible only if Necessary and if the Transaction Complies with Thin Capitalisation Rules

Interest paid or credited by a Brazilian debtor to a related party located abroad will only be deductible for income tax and social contribution on net profits purposes if the creditor:

1. is not located in a tax haven;

2. receives interest that constitutes a necessary expense for the debtor’s business activity during the relevant assessment period; and

3. is involved in a financing structure that complies with the following thin capitalisation rules:

(a) if the foreign entity is:

(i) a shareholder of the Brazilian entity, the debt owed by the Brazilian entity to the foreign party must not exceed twice the value of the foreign party’s net equity in the Brazilian entity; or

(ii) not a shareholder of the Brazilian entity, the debt owed by the Brazilian entity to the foreign party must not exceed twice the total net equity held by Brazilian residents in the Brazilian entity; and

(b) the sum of the net equity of related parties in the Brazilian entity is not greater than 30%.

Limited Deductibility of Royalties and Service Fees

Royalties or “technical, scientific, administrative or similar assistance” are not deductible for income tax and social contribution on net profits purposes if they are paid or credited to related parties and the deduction results in double non-taxation in any of the following cases:

(a) the same amount is treated as a deductible expense by the other related party;

(b) the amount deducted in Brazil is not treated as taxable income of the beneficiary under the laws of the beneficiary’s jurisdiction; or

(c) the amounts are used to finance, directly or indirectly, deductible expenses of related parties that fall within the situations described in (a) or (b) above.

Safe Harbour: Transfer Pricing-Specific Tax Rulings

Taxpayers may seek from the Federal Revenue Department specific rulings on:

• the selection and application of the most appropriate method and the financial indicator to be examined;
• the selection of comparable transactions and the appropriate comparability adjustments;
• the determination of the comparability factors considered significant in the circumstances of the case; and
• the determination of critical assumptions regarding future transactions.

Taxpayers may also request that rulings apply to previous tax periods. That will be possible where “the relevant facts and circumstances relating to these periods are the same as those considered for the issuance of the ruling”.

The filing fee for each application is BRL 80,000 and the ruling remains valid for four years. It may be extended for a further two years, in which case the filing fee for the extension is BRL 20,000.

Note that, although a ruling may remain in force, the Federal Revenue Department retains discretion to review it in the event of legislative change or where “the critical assumptions that were used as the basis for issuing the ruling” are no longer the same.

Penalties

Taxpayers that fail to present the supporting documentation relating to transactions subject to the transfer pricing rules, when requested to do so, are subject to penalties ranging from a minimum of BRL 20,000 up to a maximum of BRL 5 million. During an audit, however, a taxpayer may be given an opportunity to rectify its tax returns and accounts so as to avoid those penalties.

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Last modified: 4 April 2026