Droughts have increased in frequency, duration, and severity across most of the tropics but their effect on forest communities remain not fully understood. Here we assessed the effects of a severe El Niño-induced drought event on dominant and low abundance understory plant species and the consequent impacts on ecosystem functions in the South American Atlantic Forest. We established 20 permanent plots with contrasting vegetation structure and topography. In each plot, we measured the stem diameter at breast height (DBH) of every understory woody plant (i.e. 1 to 10 cm stem diameter) before and after a severe 4-year drought event to calculate relative growth and mortality rates after drought. Litter biomass, litter nutrient content and soil nutrients, as well as tree canopy cover, were also quantified. High stem density reduced survival to drought for both dominant and low abundance understory woody species. The growth rate of dominant and low abundance species was lower on steeper slopes during the drought. Dominant species were the main contributor of litter biomass production whereas low abundance species were important drivers of litter quality. Overall, our findings suggest that habitats with low tree density and larger trees on flat areas, such as in valleys, can act as refuges for understory plant species during drought periods. These habitats are resource-rich, providing nutrients and water during unfavorable drought periods and might improve forest resilience to climate change in the long term.