Thin Capitalization Rules and Distortions in Income Taxation

Abstract

This article aims to analyze the Brazilian thin capitalization rules and how their adoption interacts with the definition of income according to the Brazilian Constitution and the Brazilian Tax Code. To the extent that the thin capitalization rules are based on an approach that uses fixed quantitative criteria and absolute presumptions, it is sought to examine whether the constitutional structure of Corporate Income Tax is duly observed. As a way of making this analysis viable, situations are analyzed in which such rules, due to the impossibility of proving the presumption of excessive indebtedness to be inadequate, lead to distortions in the taxation of income.