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 will come into force on 1 January 2024, but taxpayers have already been allowed to elect to apply the new principles from 1 January 2023.

The TP Law:

  • implements the arm’s length principle (replacing the fixed margin regime);
  • creates specific rules relating to supplies of intragroup (intercompany) services and assets, cost contribution agreements, corporate restructures, and the provision of guarantees;
  • the treatment of all transactions with parties based in jurisdictions that impose less than 17% income tax as if they were transactions with related parties;
  • the possibility of deducing interest being subject to a “necessity” requirement and thin capitalisation rules;
  • new rules on the deductibility of royalties and certain service fees;
  • introduces a safe harbour – it allows taxpayers to seek transfer-pricing specific rulings from the Federal Revenue Department for up to four years; and
  • introduces penalties of up to BRL 5 million where taxpayers do not have the relevant documentation relating to a controlled transaction.

Arm’s Length Principle Introduced

Article 2 of the TP Law provides the general rule that will apply to all 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 sets out 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 the transaction are in accordance with the arm’s length principle, the authorities will consider the scope of the transaction and carry out a comparative analysis. For transactions involving intangibles, the authorities will also consider the intangibles involved and their ownership, the parties that have control over the economically significant risks and the financial capacity to assume them in the transaction, and the parties responsible for financing or contributing towards the intangibles.


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 of the controlled transaction obtains on 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 obtained on supplier costs in a controlled transaction with the gross profit margins obtained 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 in accordance with a suitable profitability indicator;
  • profit split: profits or losses (or parts of them) in a controlled transaction are compared to those which would have been obtained between unrelated parties in a comparable transaction, considering the relevant contributions supplied in the form of functions performed, assets used and risks assumed by the parties involved in the transaction; 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 appropriately applicable to comply with the arm’s length principle, then the taxpayer can apply that method.

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 extend to the supply of assets (tangible or intangible) by a party that “result 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:

  • those considered to be activities of a shareholder (namely, matters relating to corporate decision-making, issuing of shares and listing on stock exchanges, the preparation of corporate reports and accounts, capital raising and investor relations, and tax-compliance matters imposed by law);
  • duplication of a service already provided to the taxpayer or that it has the capacity to perform, except in cases where it is demonstrated that the duplicated activity results in additional benefits for the party receiving the services.

There are specific calculation rules when the resale price minus profit method and the net transaction margin method are applied.

Cost Contribution Agreements

For the purposes of the TP Law, cost contribution agreements (also known as cost sharing agreements) will be “those in which two or more related parties agree to share the contributions and risks related to the acquisition, production or joint development of services, intangibles or tangible assets based on the proportion of benefits that each party hopes to obtain in the contract”.

The “participants” of the cost sharing agreements are those parties that:

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

2. have the financial capacity to assume them; 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) intangibles or tangible assets, upon attribution of interest or rights over them, where the subject-matter of the agreement is the development, production or obtaining of intangibles or tangible assets, and that are capable of exploiting them in their activities.

The “contributions” include “any contribution provided by the 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 intangibles or assets existing tangibles”. These will be determined in proportion “the total expected benefit, which will be evaluated through estimates of revenue increase, cost reduction, or any other benefit expected to be obtained from the contract”.

Where a participant’s contribution is not proportional to the participant’s share of the total expected benefit, adequate compensation will be deemed to be made among the participants. Compensation will also be assessed and deemed to be paid to those who assign their share of the benefit to those who obtain or increase their participation.

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

Business Restructures

For the purposes of the TP Law, “business restructures” are those “changes in commercial or financial relationships between related parties that result in the transfer of potential profit or of the 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 […]”.

To assess the compensation for the benefit obtained or for the loss suffered by any of the parties 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 for a related party to assume a specific obligation in the case 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 guarantor; or
  • as shareholders’ activity or capital contribution, in which case no remuneration will be deemed to be owed.

The TP Law provides a presumption that transactions which involve debt to unrelated parties due to a guarantee provided by a related party are 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 be greater than 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 Provision for Jurisdictions with Income Tax under 17% or under Privileged Tax Regimes

The rules set out in the TP Law will apply to all transactions (even those not between related parties) made with parties located in jurisdictions where the income tax imposed is lower than 17% or where the non-Brazilian party is a beneficiary of a “privileged tax regime”. Note that this definition of “privileged tax regime” only applies to the TP Law and is not consistent with the ‘tax haven’ regulations.

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

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

1. is not located in a tax haven;

2. the interest paid or credited is a necessary expense for the business activity during the assessment period; and

3. the Brazilian debtor meets 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) if the foreign entity is 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 the social contribution on net profits if they are paid or credited to related parties, where the deduction results in double non-taxation in any of the following cases:

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

(b) the amount deducted in Brazil is not treated as the beneficiary’s taxable income in accordance with 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 set out in (a) or (b) above.

Safe Harbour: Transfer Pricing-Specific Tax Rulings

Taxpayers will be allowed to seek from the Federal Revenue Department specific rulings on:

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

Taxpayers can seek that rulings also apply to previous tax periods. This 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 will be BRL 80,000 and the ruling will remain valid for four years. The ruling can be extended for two years and the filing fee for the extension will be BRL 20,000.

Note that although the rulings may be in place, the Federal Revenue Department has a discretion to review rulings in case of legislative changes and where “the critical assumptions that were used as the basis for issuing the ruling” are no longer the same.


Taxpayers that do not present the supporting documentation relating to transactions subject to transfer pricing rules when requested are subject to penalties ranging from a minimum of BRL 20,000 up to a maximum of BRL 5 million. However, during audits a taxpayer may be given the opportunity to rectify the tax returns and accounts to avoid the penalties.


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Last modified: August 18, 2023