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Investing in Infrastructure Bonds in Brazil Chair: Karyn Koiffman - Kirkland & Ellis LLP Speakers: Celso Costa – Machado Meyer Silvia Fiszman – Machado.

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Presentation on theme: "Investing in Infrastructure Bonds in Brazil Chair: Karyn Koiffman - Kirkland & Ellis LLP Speakers: Celso Costa – Machado Meyer Silvia Fiszman – Machado."— Presentation transcript:

1 Investing in Infrastructure Bonds in Brazil Chair: Karyn Koiffman - Kirkland & Ellis LLP Speakers: Celso Costa – Machado Meyer Silvia Fiszman – Machado Meyer José Prado – Machado Meyer Fernando Tonanni – Machado Meyer Richard L. Winston – K&L Gates LLP

2 Machado Meyer Foreign Investment in Brazil Offer and Distribution of Debentures in Brazil Investment Funds February 09 th, 2012

3 3 Direct Investment by creating a new corporate entity or by acquiring an equity participation in existing Brazilian entities Direct Investment by creating a new corporate entity or by acquiring an equity participation in existing Brazilian entities Legal basis: Direct Investment: Law n. 4131/62 (the Foreign Capital Law), Resolution No. 3844/10 issued by CMN, and the Regulations of the Foreign Exchange Market and International Capital (Regulamento do Mercado de Câmbio e Capitais Internacionais, or “RMCCI”), established by the Central Bank by means of Circular No. 3280/2005 and amendments Indirect Investment: Resolution No issued by CMN on January 26, 2000 (“Resolution 2689”), and Instruction No. 325 issued by CVM on January 27, 2000, (“CVM Instruction 325”) and amendments Legal basis: Direct Investment: Law n. 4131/62 (the Foreign Capital Law), Resolution No. 3844/10 issued by CMN, and the Regulations of the Foreign Exchange Market and International Capital (Regulamento do Mercado de Câmbio e Capitais Internacionais, or “RMCCI”), established by the Central Bank by means of Circular No. 3280/2005 and amendments Indirect Investment: Resolution No issued by CMN on January 26, 2000 (“Resolution 2689”), and Instruction No. 325 issued by CVM on January 27, 2000, (“CVM Instruction 325”) and amendments Indirect Investment by investing in the financial and securities market where there is no requirement to create or acquire participation in a Brazilian company Indirect Investment by investing in the financial and securities market where there is no requirement to create or acquire participation in a Brazilian company Foreign Investment in Brazil

4 4 Direct Investment The 4131 Investment shall be registered in the RDE-IED Module (Registro Declaratório Eletrônico – Investimento Externo Direto), which is part of the Central Bank’s on-line Information System Requirements: (a)both the Brazilian recipient company and the foreign investor must be previously registered before the corporate registry of the Central Bank (“CADEMP”); (b)the Brazilian company shall create a RDE- IED number that shall link its CADEMP to the CADEMP of the foreign investor. Direct Investment The 4131 Investment shall be registered in the RDE-IED Module (Registro Declaratório Eletrônico – Investimento Externo Direto), which is part of the Central Bank’s on-line Information System Requirements: (a)both the Brazilian recipient company and the foreign investor must be previously registered before the corporate registry of the Central Bank (“CADEMP”); (b)the Brazilian company shall create a RDE- IED number that shall link its CADEMP to the CADEMP of the foreign investor. Indirect Investment Non-resident investors may invest in the Brazilian financial and capital markets Requirements: appoint an agent in Brazil fill-out an application form attached to Resolution 2689; enroll himself with CVM, application to the Brazilian Revenue Service and issue its respective enrollment number (the so- called “CNPJ/MF”); register the investment proceeds with the Central Bank (“RDE-Portfolio”); enter into a custody agreement with a financial institution Indirect Investment Non-resident investors may invest in the Brazilian financial and capital markets Requirements: appoint an agent in Brazil fill-out an application form attached to Resolution 2689; enroll himself with CVM, application to the Brazilian Revenue Service and issue its respective enrollment number (the so- called “CNPJ/MF”); register the investment proceeds with the Central Bank (“RDE-Portfolio”); enter into a custody agreement with a financial institution

5 5 Foreign Investment in Brazil Types of accounts ProprietaryAccount Proprietary Account Omnibus or Collective Account  The non-resident investor can be both the account holder and also a participant in one or more accounts. The accountholder of an omnibus account may invest his/its own funds in this same account, as long as registration for this purpose has been requested;  Omnibus accounts are generally available to foreign financial institutions or broker-dealers which operate in the name of third-party investors.

6 6 Foreign Investment in Brazil Restriction in purchase or sale securities carried out outside stock or commodities exchanges, electronic systems or organized over-the counter markets (“Organized OTC”) authorized to operate by CVM Restriction in purchase or sale that involves securities or financial instruments traded on OTC markets which are not Organized OTC or which are managed by entities not authorized to operate by CVM Exception: securities acquired through initial subscriptions; bonifications; conversions of convertible debentures into shares, indexes referenced in securities; purchases and sales of quotas of open-ended investment funds; and, if previously approved by CVM, delisting, trading cancellations or suspensions, judicial settlements and the acquisition or disposition of shares subject to shareholders agreements

7 7 The debentures give to their holders the right against the company, under the conditions contained in the issuance and, if there is, in the certificate Can be made several issuances and each issuance can be divided into series. Those of the same series have the same par value and grant their holders the same rights Legal basis: Law No. 6,385/76 (the Securities Law), Law No. 6,404/76 (the Brazilian Corporation Law) and specific regulation by CVM (ICVM 400 and ICVM 476) No public issuance of securities will be distributed on the market without prior registration and conditions established by CVM (exception: ICVM 476) Offer and Distribution of Debentures in Brazil

8 No Restricted Placement Efforts Offering Legal basis: ICVM 400 Concept: offering conducted by means of the use of lists or bulletins of sales or subscription, offering circulars, prospectuses or any form of advertisement to the public; negotiation in stores, offices or other premises; and use of marketing; Realized by companies registered with CVM as public companies. Restricted Placement Efforts Offering Legal basis: ICVM 476 Concept: Distribution of debentures in the market with restricted sales effort, without the prior registration in CVM; Offerings of certain securities targeted at 50 and bought by up to 20 qualified investors. Qualified investors: (i) financial institutions; (ii) insurance companies and capitalization companies; (iii) pension funds; (iv) individual or legal entities holding financial investments in excess of R$ 300, and who confirm in writing their eligibility as qualified investors; (v) investment funds organized for qualified investors only; and (vi) portfolio managers and consultants that are duly accredited as such by CVM 8 Offer and Distribution of Debentures in Brazil Public Offer

9 9 Offer and Distribution of Debentures in Brazil Public Offer – Comparative Chart ICVM 400ICVM 476 Register at CVMYESNO ProspectusYESNO MarketingYESRestricted InvestorsNo restrictionQualified Investors Restrictions to new offer of debenturesNOMinimum 4 months Admission to trading on the OTC market, organized or not YES Fiduciary AgentYES Possibility of guaranteesYES Restrictions of maturity termNO Restrictions to commercializeNO After 90 days of subscription or acquisition Due DiligenceYESYES, possibly limited Indication of use of fundsYESPossible Convertible into sharesYESNO

10 10 Currently regulated by the Instruction No. 409 Specific regulation for specific funds, such as private equity funds, receivables funds, real estate funds. Regulation of the Investment Fund – approved by the administrator 1)filed before the Registry of Titles and Deeds (3 business days); 2)applied to the Brazilian Revenue Service to obtain its respective enrollment number (4 business days) and; 3)filed before CVM (until 30 days) Investment Funds Terms and Conditions Purpose condominium designated for investments in assets available in the financial or capital markets Types Open-end : the quota-holder may request the redemption of their quotas at anytime Closed-end : the redemption is only allowed upon liquidation of the fund Lenght of Term Determined term Undetermined term Target Audience General investors Qualified investors

11 11 Public Offering Legal basis: ICVM 400 Document: prospectum registered in CVM Concept: offering of quotas with use of marketing Restricted Placement Efforts Offering Legal basis: ICVM 476 Concept: Distribution of debentures in the market with restricted sales effort, without the prior registration in CVM Offerings of certain securities targeted at 50 and bought by to 20 qualified investors Qualified investors: (i) financial institutions; (ii) insurance companies and capitalization companies; (iii) pension funds; (iv) individual or legal entities holding financial investments in excess of R$ 1,000, and who confirm in writing their eligibility as qualified investors; (v) investment funds organized for qualified investors only; and (vi) portfolio managers and consultants that are duly accredited as such by CVM Offer and Distribution of Investment Funds Quotas in Brazil

12 Machado Meyer Investing in Infrastructure Bonds in Brazil February 09 th, 2012

13 13 Infrastructure Bonds in Brazil – Economic Background Infrastructure investments have not accompanied the economic grow of Brazil. Currently, Brazil demands heavy investments in airports, roads, energy, telecom, ports, sanitation, etc. In addition, in the next years, Brazil will host two of the most important sportive events: 2014 FIFA World Cup and 2016 Olympic Games, which will also demand relevant investments. BNDES (equivalent to the US Eximbank) and the Brazilian Government cannot alone support these investments. In this scenario, Law N. 12,431/2011 introduced in Brazil the Infrastructure Bonds, aiming at increasing long term financing transactions in the private markets. In this sense, the private markets would act as a complementary source of funding. Brazilian Infrastructure Bonds were clearly inspired in the Projects Bonds model, created in 90’s and very used in the USA, Australia, Canada and the United Kingdom. Two kinds of Infrastructure Bonds: General Investment Bonds and Infrastructure Bonds (respectively, Sections 1 and 2 of Law N. 12,431/2011). In order to make attractive the Infrastructure Bonds, they were granted with certain tax benefits.

14 14 Infrastructure Bonds in Brazil – Possible Structures Brazilian Entity Brazilian Investor (legal entity) Brazilian Investor (legal entity) 2,689 Investor 2,689 Investor Fund Abroad Brazil Brazilian Investor (individual) Brazilian Investor (individual) 2,689 Custodian Bank

15 15 General Investment Bonds Bonds of Public Negotiation, issued by non-financial entities and regulated by Brazilian Securities Exchange Comission (“CVM”) or Brazilian Monetary Council (“CMN”). Interest: predetermined interest rate, not been allowed, even partially, the usage of post fixed interest rate. Requirements: i.Average maturity term greater than 4 years; ii.Call of the bond by the issuer not permitted in the 2 first years and it is not possible its early liquidation, redemption or prepayment; iii.No resale commitment assumed by the buyer; iv.Term for periodic payment of interest, if any, at intervals of at least 180 days; v.Prove that the bond is negotiated in regulated markets; and vi.Simplified procedure which demonstrates the goal to allocate the funds derived from the bond issuance in investment projects, including those related to research, development and innovation.

16 16 General Investment Bonds Tax Benefits – Exclusive for Non-Residents 0% WHT: i.on interest produced by the bonds, when paid or remitted to beneficiary not located in Low Tax Jurisdiction (“LTJ”) that performs financial transactions in Brazil through a 2,689 account (2,689 Investor). ii.0% WHT on interest derived from investment funds quotas, when such funds have exclusively non-resident investors and invests, at least, 98% of its portfolio in General Investment Bonds. Rules related to Infrastructure Bonds Funds must be observed. 0% IOF/Exchange Exemption on capital gains related to the trade of the bonds at the exchange.

17 17 General Bonds in Brazil – Summary of WHT Taxation Brazilian Entity 2,689 Investor 2,689 Investor Fund 2,689 Custodian Bank Abroad Brazil Non-residents: Withholding interest Tax (“WHT”) on the interest derived from the bonds or by funds quotas - 0%. IOF/ Exchange – 0%. Non-residents: Withholding interest Tax (“WHT”) on the interest derived from the bonds or by funds quotas - 0%. IOF/ Exchange – 0%. Section 1 - General Investment Bonds

18 18 General Investment Bonds – Comparative Chart w/ Other Assets Tax General Investment Bond Treasury Notes (predetermined interest) Other Fixed interest Investments IOF/Exchange0%6% WHT (beneficiary not located in LTJ) 0% 15% WHT (beneficiary located in LTJ) 22,5% a 15% Taxation on interest

19 19 Infrastructure Bonds Issued by a Special Purpose Entity (“SPE”), incorporated specifically to implement infrastructure or research, development and innovation projects. Infrastructure Bonds must obey the issuance requirements of the General Investment Bonds and be issued until December 31 st, Projects must be considered as priority by the Federal Government – Defined by Decree N. 7,603/2011. Infrastructure projects subject to Ministry approval (Ministries related to each Sectors below). Goals of the Project: i.implementation; ii.expansion; iii.maintenance; iv.recovery; v.fitting; and vi.modernization. Sectors: i.logistics and transportation; ii.urban mobility; iii.energy; iv.telecommunications; v.broadcasting; vi.sanitation; vii.irrigation; and viii.among others.

20 20 Tax Benefits – For Non-Residents, Brazilian Entities and Individuals On interest produced by the bonds: i.2,689 Investor: 0% WHT; ii.Brazilian Individual: 0% WHT; iii.Brazilian Entity: 15% WHT. Exemption on capital gains in case of 2689 foreign investors that trades the Infractructure Bonds at the exchange. Benefits also applicable to financial institutions investors. For Brazilian Entities, the interest payments may be excluded from the interest Tax (“IRPJ”) calculation basis (Lucro Real), but not from the Social Contribution on Profits (“CSLL”) Losses related to Infrastructure Bonds are not deductible from the IRPJ calculation basis (Lucro Real). Penalty: 20% on the amount of bonds issued if the project is not implemented. To be paid by the shareholders of the SPE. Infrastructure Bonds

21 21 Infrastructure Bonds in Brazil – Summary of WHT Taxation Brazilian Entity Brazilian Investor (legal entity) Brazilian Investor (legal entity) 2,689 Investor 2,689 Investor Abroad Brazil Brazilian Investor (individual) Brazilian Investor (individual) 2,689 Custodian Bank Brazilian Entities WHT on the interest derived from the bonds - 15%. Brazilian Entities WHT on the interest derived from the bonds - 15%. Brazilian Individuals WHT on the interest derived from the bonds - 0%. Brazilian Individuals WHT on the interest derived from the bonds - 0%. Non-residents: WHT on the interest derived from the bonds - 0%. IOF/Exchange - 0% Non-residents: WHT on the interest derived from the bonds - 0%. IOF/Exchange - 0% Section 2 – Infrastructure Bonds

22 BeneficiaryGeneral Investment BondsInfrastructure Bonds WHTIOF/ExchangeWHTIOF/Exchange Non-resident (not located in LTJ) 0% Non-resident (located in LTJ) 22,5% to 15%0%22,5% to 15%0% Brazilian Individual22,5% to 15%N/A0%N/A Brazilian Entity22,5% to 15%*N/A15%**N/A Comparative Chart: General Investment Bonds vs. Infrastructure Bonds 22 Taxation on interest *Regular taxes on corporate income (IRPJ and CSLL) is of 34 % (banks 40%). Interest derived from General Bonds shall be subject to both IRPJ and CSLL but is it is allowed to discount the WHT previously paid on it. ** Interest derived from Infrastructure Bonds will be taxed at 9% (banks 18%) by the CSLL only.

23 23 Investment Funds created by entities authorized by CVM to perform securities and portfolio management. Infrastructure Bonds Funds Portfolio: i.At least, 85% invested in Infrastructure Bonds; or ii.Investment funds, which invest in other investment funds quotas, must have, at least, 95% invested in Infrastructure Bonds Funds. After the incorporation of the fund, 180 days to fulfill the investment requirements above. If, by any reason, the fund no longer meets the requirements above, it will have 90 days to recompose its portfolio. Infrastructure Bonds Funds

24 24 Tax Benefits – For Non-Residents, Brazilian Entities and Individuals On interest produced by the funds quotas: i.2,689 Investor: 0% WHT; ii.Brazilian Individual: 0% WHT; iii.Brazilian Entity: 15% WHT. Exemption on capital gains in case of 2689 foreign investors that trades the Infrastructure Bonds at the exchange. For Brazilian Entities, the interest may be excluded of IRPJ calculation basis (Lucro Real). Losses related to Infrastructure Bonds Funds quotas are not deductible from the IRPJ calculation basis (Lucro Real). Infrastructure Bonds Funds

25 25 Penalty: If the Fund does comply with the portfolio requirements, it will be either liquidated or transformed in another kind of fund. In this scenario, the interest produced by the quotas will be taxed as follows: i.2,689 Investor: 15% WHT; ii.Brazilian Individual and Entity: 22,5% to 15% WHT and full corporate taxation (34%) for Brazilian legal entities, or 40% for Brazilian financial institutions. Infrastructure Bonds Funds

26 26 Infrastructure Bonds Funds in Brazil – Summary of WHT Taxation Brazilian Entities WHT on the interest derived from fund quotas - 15%. Brazilian Entities WHT on the interest derived from fund quotas - 15%. Brazilian Individuals WHT on the interest derived from fund quotas - 0%. Brazilian Individuals WHT on the interest derived from fund quotas - 0%. Brazilian Entity Brazilian Investor (legal entity) Brazilian Investor (legal entity) 2,689 Investor 2,689 Investor Fund 2,689 Custodian Bank Abroad Brazil Brazilian Investor (individual) Brazilian Investor (individual) Non-residents: WHT on the interest derived from fund quotas - 0%. IOF/Exchange - 0%. Non-residents: WHT on the interest derived from fund quotas - 0%. IOF/Exchange - 0%. Section 3 – Infrastructure Bonds Funds

27 27 General Investment Bonds: i.Penalty (not specified by Law N. 12,431/2011); ii.Term for Issuance of such Bonds (specified in the Law N. 12,431); and iii.CMN Regulation (limitation of a tax benefit). Items Still Under Discussion

28 28 Items Still Under Discussion Infrastructure Bonds: i.Possible of inclusion of costs already incurred by the Issuer Entity (refinancing); ii.Non-deductibility of losses derived from the bonds for IRPJ purposes; iii.For Brazilian Entities: extension of the tax benefits for Social Contribution on interest (“CSLL”) purposes; and iv.CVM Regulation about the information and language to be included in the Prospectus.

29 29 Items Still Under Discussion Infrastructure Bonds Funds: i.Term for compliance with the Fund portfolio requirements

30 Richard L. Winston Investing in Infrastructure Bonds in Brazil An Overview of the Opportunities Available to Foreign Investors Brazilian-American Chamber of Commerce New York City, NY February 09 th, 2012

31 What Does a Lower Interest Withholding Tax Mean For Bonds Issued Under Law ? Interest payments made by the Brazilian corporation are generally deductible against the Brazilian corporate interest tax (34% tax rate) of the Brazilian corporation issuing the instruments. When the interest withholding tax drops from 15% to 0%, the Brazilian corporation paying the interest retains its same interest deductions against its 34% corporate interest tax, but the holder of the corporate instrument earns a greater post-tax return on investment. The Brazilian corporation issuing the instruments can thus offer a lower overall interest rate to investors while allowing for a greater after-tax return to those same investors (compared to other market investments). Cheaper borrowing costs can produce a greater return on investment for the Brazilian corporation. 31

32 U.S. Tax Planning for Brazilian Inbound Investment The Brazilian corporate interest tax rate is 34% (25% CIT + 9% CSLL). The top U.S. corporate interest tax rate is 35%, plus 0-9% state corporate interest tax (+40%). The goal for most U.S. companies investing in Brazil will be to strip the Brazilian earnings base to reduce the overall effective corporate interest tax rate of the Brazilian corporation. One technique that is commonly used to strip away the 34% taxable base in Brazil is the creation of deductible interest payments through the issuance (by the Brazilian company) of debt instruments. Interest stripping is limited by Brazil’s thin capitalization rules (generally, a 2:1 debt/equity ratio is allowed). Brazil imposes withholding taxes on interest payments, but paying the withholding tax (15% on the gross amount) is generally worthwhile to earn the financial benefits of a tax deduction (deduction against 34% taxable interest), assuming that the Brazilian company is moderately profitable. Because U.S. corporate interest tax rates are high (+40%), there is usually no hurry to repatriate lower- taxed funds back to the United States. Tax deferral is usually less important if the offshore profits are taxed at higher rates. 32

33 U.S. Tax Planning for Brazilian Inbound Investment Interest Payments (1)Deduction against 34% taxed interest (2)Only 15% WHT on regular interest and “interest on equity” (3)0% WHT on special instruments issued under Law Royalties Payment (1)Deduction against 34% taxed interest (2)Only 15% WHT (no CIDE on software) Deductible Payment Example Brazilian Corporation (34% Tax Rate) Interest Debt License Software Royalties U.S. Corporation (+40% Tax Rate) 33

34 Does Law Really Benefit the typical U.S. Investor? When the interest paid by the Brazilian corporation is received by the U.S. corporation, the U.S. corporation must pay tax on the interest at a corporate interest tax rate of 35%, plus 0-9% state corporate interest tax (+40%). The U.S. corporation will be entitled to claim a “dollar for dollar” direct foreign tax credit (for any Brazilian taxes paid) against its U.S. federal (and state) corporate interest taxes. Does the U.S. corporation really enjoy an advantage if the Brazilian withholding tax (on a Law investment) is reduced to a 0% tax rate rather than a 15% tax rate? If the Brazilian withholding tax on a $100 interest payment is $0, then the U.S. corporation will pay $40 of corporate interest taxes to the United States (based on a 40% federal plus state tax rate) and $0 to Brazil. If the Brazilian withholding tax on a $100 interest payment is $15, then the U.S. corporation will apply a $15 foreign tax credit against its $40 U.S. tax burden ($25 of taxes to the United States and $15 to Brazil). Either way, the U.S. corporation still pays $40 of total taxes, although the U.S. corporation may appear more “patriotic” to the United States if it takes steps to reduce the Brazilian interest withholding tax rate and pay higher taxes to the United States. In reality, the U.S. corporation will always try generate low-taxed foreign interest due to the way that the U.S. “foreign tax credit system” operates, which sometimes places U.S. corporations in an “excess foreign tax credit” position. 34

35 Brazilian Sociedade Anônima Versus Limitada U.S. Corporation (+40% Tax) U.S. Corporation (+40% Tax) U.S. LLC loaninterest Brazilian S.A. (34% Tax) 99.9% “Disregarded” loan interest Brazilian Limitada (34% Tax) 99.9% 0.1% 35

36 U.S. “Check-the-Box” Rules – “Checking” the Limitada The U.S. tax rules allow U.S. taxpayers to “elect” to treat certain types of foreign entities as “tax transparent” for U.S. interest tax purposes (our so-called “check the box” elections). A U.S. corporation may file a “check the box” election for a Limitada, but not for a Sociedade Anonima (“S.A.”). If the Limitada, which requires 2 owners under Brazilian law, can be structured for U.S. purposes as a single-member entity, it will be treated as a “disregarded” entity for U.S. tax purposes If the Limitada is treated as “disregarded” for U.S. tax purposes, it will be treated as a “branch” (all assets and liabilities of the Limitada will be deemed to be the assets and liabilities of the owner(s)). Any loans or licenses from the U.S. parent to the Brazilian subsidiary would also be “disregarded.” If, for example, a loan is “disregarded,” the interest payments will give rise to a Brazilian corporate deduction, but there will be no U.S. corporate inclusion of interest because the loan will not exist in the eyes of the United States (only Brazilian interest withholding taxes of 15% or 0% will have been imposed). Problem: the “special purpose entities” (SPEs) that are generally used to benefit under Law must be S.A.’s rather than Limitadas. 36

37 Interest-Stripping Structure Which Generates Tax Deferral of Low-Taxed Brazilian interest U.S. Corp Dutch CV Dutch BV or Cooperative Brazilian Limitada (or S.A.) U.S. LLC Brazilian Withholding Tax Interest = 15% or 0% WHT (gives rise to a tax deduction against 34% interest tax). Back-to-Back Loan Small “spread” earned by Dutch BV (small Dutch tax ) 99.9% 0.1% Loan (0% Dutch interest withholding tax) Equity “Disregarded” Loan 37

38 “Low-Tax Investor” Strategy For a “tax-haven” investor, any Brazilian tax is a “bad” tax. The typical tax-haven investor will simulate the same strategies used by U.S. multinational corporations that have “excess” foreign tax credit positions which cannot be easily used. For many years, the U.S. Limited Liability Company (“LLC”) was considered to be the perfect “intermediary” investment vehicle for a tax-haven investor investing in Brasil. The U.S. LLC, when owned by a foreigner, is now “gray-listed” by the Brazilian government. U.S. LLCs with foreign owners that invest in Brazilian companies will create “thin capitalization” problems for Brazilian companies that wish to issue debt instruments. Tax deductions to the Brazilian company will be limited if “thin capitalization” rules apply. Are the financial instruments set forth under Brazilian law No subject to Brazilian thin capitalization restrictions? Yes. The U.S. Limited Partnership (“LP”) is now commonly used by offshore funds to provide the same benefits that the U.S. LLC formerly provided. 38

39 Low-Tax Investor Strategy Under Law The Brazilian tax authorities understand that financial instruments issued under Law may “strip” the Brazilian taxable earning base to some extent (i.e., interest payments will lower the taxable interest of the Brazilian corporation), but the tax authorities expect that the interest payments that are deducted by the Brazilian issuer of the debt will be paid to entities located in countries that will tax the interest payments at rates of at least 20%. When interest payments are made to entities located in countries that do not apply a rate of at least 20%, the benefits offered under Law are reduced (i.e., the interest withholding tax rate increases). Does the established Brazilian “tax blacklist” (2010) apply to define which countries apply a tax rate of less than 20%? Would, for example, Swiss entities that invest in instruments under Law be subject to higher interest withholding tax rates? Many investment funds that would normally invest in bonds under Law are located in the low-tax jurisdictions. Do investment funds located in low-tax jurisdictions have structuring options to avoid losing the benefits offered under Law ? 39

40 Investment Structures – Options Intermediary Blocker Entities Cayman Fund 99.9% equity 0.1% equity Cayman Fund 100% equity Delaware LLC (2,689 Company) Brazilian SPE Public Securities Investment 100% equity Delaware LP (2,689 Company) Brazilian SPE Public Securities Investment Delaware LLC 40

41 BIOGRAPHY—RICHARD L. WINSTON Richard L. Winston is a partner with the Miami Office of K&L Gates LLP where he practices in the areas of corporate and international taxation. He represents a number of Global 500 corporations on various cross-border initiatives in Latin America and Europe. Mr. Winston is ranked by Chambers Global, Chambers Latin America, Latin Business Chronicle, and many other publications among the leading international tax lawyers (and corporate/M&A lawyers) in the United States. Mr. Winston earned his J.D. from the University of Virginia School of Law where he served as an editor on both the Virginia Law Review and the Virginia Tax Review. He also has an LL.M. in taxation from the New York University School of Law. K&L Gates LLP is an international law firm with more than 1900 attorneys operating through 41 offices on four continents. 41

42 QUESTIONS OR COMMENTS? THANK YOU! 42 Karyn Koiffman José Ribeiro do Prado Jr. Silvia Rajsfeld Fiszman Celso Costa Fernando Tonanni Richard L. Winston


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