1. The Latin American Tax System and Foreign Investment
ABA Section of International Law Legal Challenges for Foreign Investment in Latin America May 8-9, São Paulo, Brazil
The Latin American Tax System and Foreign Investment
Mediator:
Dr. José Antônio Miguel Neto
Miguel Neto Advogados Associados
Speakers:
Dr. Roberto Márquez
Márquez Alonso Abogados
Dr. Jonas Bergstein
Estudio Bergstein
Dr. Marcio Neves
Veirano Advogados
Sam K. Kaywood, Jr.
Alston & Bird LLP

2. Overview Holding Company Jurisdictions Financing Structures
Other Structures

3. Holding Company Jurisdictions

4. 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

5. 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%

6. 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

7. 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)

8. 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

9. 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

10. 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

11. Financing Structures

12. 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

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

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

15. 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

16. 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

17. 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)

18. 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

19. 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

20. 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

21. Other Structures

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

23. 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)

24. 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