Provisional Measure No 472/09 was released on Wednesday and also includes other significant tax legislation changes.

Under the new rules, interest credited or remitted by a Brazilian entity to an entity domiciled or incorporated abroad is subject to two general criteria.

Interest paid to related parties that are not located in a tax haven or that do not benefit from a preferential tax regime may be deducted on an accruals basis for corporate income tax purposes only if the expenses are necessary for the company’s activities.

To qualify for the rules the related-party debt-to-equity ratio must not be more than 2:1 and the overall debt-to-equity ratio must not be more than 2:1 based on the proportion of total debt to total direct equity investment made by related parties.

Also, the interest paid to an entity located in a tax haven or that benefits from a preferential tax regime (regardless of whether the parties are related) may be deducted only if the expenses are necessary for the company’s activities, and the amount of the Brazilian entity’s indebtedness to the tax haven resident is not more than 30% of the net equity of the Brazilian entity.

The new thin-capitalisation rules will be effective on January 1 2010.