The Latin American Tax System and Foreign Investment ABA Section of International Law Legal Challenges for Foreign Investment in Latin America May 8-9, 2008 São Paulo, Brazil The Latin American Tax System and Foreign Investment Mediator: Dr. José Antônio Miguel Neto Miguel Neto Advogados Associados mneto@mnadv.com.br Speakers: Dr. Roberto Márquez Márquez Alonso Abogados www.bergsteinlaw.com Dr. Jonas Bergstein Estudio Bergstein www.rmarquez@ma-law.biz Dr. Marcio Neves Veirano Advogados www.veirano.com.br Sam K. Kaywood, Jr. Alston & Bird LLP www.alston.com

Overview Holding Company Jurisdictions Financing Structures Other Structures

Holding Company Jurisdictions

Holding Company Jurisdictions Types of Jurisdictions High-Tax Jurisdictions High-tax rates CFC rules Not good for holding companies U.S., U.K., Germany, France, China Tax-Friendly Jurisdictions No tax on capital gains and dividends Good for holding companies May have capital duties Can be good for interest and royalties Good treaty networks Netherlands, Spain Luxembourg, Switzerland Otherwise, high-tax countries Tax-Haven Jurisdictions Totally tax-free No tax treaties Cayman Bermuda BVI Anti-tax haven rules- e.g., Brazil, Mexico

Holding Company Jurisdictions Types of Jurisdictions Ireland 12.5% rate on all income, including interest and royalties Good treaty network Good for R&D, software, licensing, etc. Not a good holding company jurisdiction Hong Kong Dividends and capital gains exempt Good holding company jurisdiction for China Good treaty with China 17.5% corporate tax rate Foreign source income taxed at 50%

Holding Company Jurisdictions Netherlands Participation exemption on capital gains and dividends “Subject to tax” requirements Cannot be “passive” investment 25% withholding tax on dividends paid to shareholders, although many tax treaties reduce this tax Good treaty network No capital duty

Holding Company Jurisdictions Luxembourg Participation exemption on capital gains and dividends 11% subject to tax requirement 29.6% corporate tax rate on interest, royalties or other types of non-exempt income Tax planning to shelter royalties in interest 1% capital duty Tax planning to avoid capital duties (Gibralter)

Holding Company Jurisdictions Luxembourg Preferred Equity Certificates (“PEC”) Can be debt for Luxembourg purposes but equity for U.S. tax purposes No capital duty on amounts invested in PECs Usually a 50+ year instrument Convertible Preferred Equity Certificates (“CPEC”) Like a PEC but is convertible into equity Lower interest rate, usually 1% to 2% Interest is deductible No capital duty on CPECs

Holding Company Jurisdictions Luxembourg Thin capitalization rules allow 85% PECs, 14% CPECs and 1% real equity 1% capital duty on real equity Accrued interest on PECs/CPECs deductible Rulings common and easy to get

Holding Company Jurisdictions Switzerland Dividends and capital gains can be exempt under the “holding company exemption” Varying rules in the different cantons – Zug and Zurich are tax friendly cantons Foreign sourced royalties and interest can be taxed favorably, at rates less than 8% Consequently, Switzerland is a good jurisdiction for R&D

Financing Structures

Financing Structures Debt Push-Down Loan Hold Co Interest LatAm Opco Deduct interest against local tax Withholding tax in LatAm country (Brazil 15%; Mexico 10-15%, etc.) Forex Issues Tax planning needed for interest income in Hold Co jurisdiction

Financing Structures Debt Push-Down Hold Co LatAm Acquisition Co Loan Opco Merger Does not work in Argentina – interest not deductible

Financing Structures Debt Push-Down - Mexico Loan Merge Mex Target Opco Hold Co (Lux) Mex Acquisition Holdco Seller

Financing Structures Debt Push-Down - Mexico Loan Consolidation Mex Opco Hold Co Lux Interest Holdco Deduct interest of Mex Holdco against income of Mex Opco under holding company regime Not a perfect result – creates a deferred tax liability Better to merge Mex Holdco and Mex Opco Need Hacienda approval for second merger

Financing Structures Debt Push-Down - Mexico 3:1 debt/equity limitation under Mexican thin capitalization rules 10% withholding tax under Mexico-Luxembourg Treaty Need tax planning for interest received in Lux Lux HoldCo exposed to Mexican capital gains tax on sale

Financing Structures Use of Switzerland for Mexican Investment Loan Mex Opco Hold Co (Lux) Holdco (Swiss) Same results on interest paid to Lux Hold Co e.g., 10% withholding, 3:1 debt/equity limit Solve capital gains tax issue with Swiss Hold Co (Mexico-Switzerland Tax Treaty provides an exemption for capital gains)

Financing Structures Use of Switzerland for Mexican Investment No tax in Switzerland on dividends and capital gains Be careful to maintain holding company exemption Need tax planning to avoid 1% capital duty Contribute significant participation in one or more companies No dividend withholding tax under Luxembourg-Switzerland Tax Treaty Need substance in Luxembourg

Financing Structures Use of Hybrid Debt LatAm Companies Loans Holdco (Lux) PEF (US) Interest PECs CPECs Lux Hold Co accrues “interest” on PECs/CPECs to offset against interest income from LatAm Companies Can defer paying interest as long as desired When paid, interest can be treated as dividend for U.S. purposes, carrying out foreign tax credits APB 23 considerations

Financing Structures Swiss Finance Branch Loans Hold Co (Lux) Swiss Finance Branch Interest LatAm Companies Pay corporate tax in Switzerland and Luxembourg on a small spread Need $100 million of debt for Swiss purposes

Other Structures

Other Structures Tax Haven Problems Mex Target PEF Seller Tax Haven Beware! Embedded 40% tax on entire value

Other Structures Carbon Energy Trading Loans Offshore Co London Market Power Plant LatAm Hydro Co Hedge Fund CERs $ LatAm Hydro Co produces carbon emission reduction credits (“CERs”) that are tradable Offshore Co pays discounted price in advance for CERs that eventually become available once the power plant is operating Capture profits in Offshore Co, subject to local transfer pricing Tax planning needed for subpart F issues if Hedge Fund is in U.S. (many hedge funds are offshore)

Other Structures Offshore Leasing Co. - Chile Lease Equipment Offshore Co Opco (Chile) Hold Co Rent 4% Chilean withholding on rental payments to Offshore Co. Chilean transfer pricing Tax planning needed (e.g., check-the-box) for U.S. subpart issues