Investment Models in Latina America - globaltaxevent.com · Typical Investment Structures - Brazil...

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Investment Models in Latina America2016 Latin America Tax Summit, Rio de Janeiro29 February to 2 March

Brazil, Chile, Mexico, Spain, The Netherlands


Investor tax considerations in investing in Latin AmericaAgenda:

GENERAL CONSIDERATIONS

CONSIDERATIONS FOR AI INVESTORS

CONSIDERATIONS FOR STRATEGIC AND TAX EXEMPT

INVESTORS


Brazil – The investment case & tax update impacting foreign investors

LARGEST COUNTRY IN SOUTH AMERICA IN TERMS OF GDP (BRL 4.4 TRILLION IN

2014)

CHALLENGING MACROECONOMIC ENVIRONMENT A CONVOLUTION OF ECONOMIC, POLITICAL AND SOCIAL EVENTS

DIVERSE INDUSTRIAL BASE, YOUNG POPULATION, RECEPTIVE TO NEW TECHNOLOGIES


Typical Investment Structures - Brazil— Example of FDI structure:

- Direct investment -through a regular Brazilian legal entity (Ltda or S.A.);- Investment Fund (FIP)

— Each structure has a specific tax treatment, costs and regulatory issues (e.g. FIP require registrations and audit)

Holding

Hold Co Hold Co

FIP

Brazilian Co

Direct Investment FIP – Investment Fund

Brazilian Co


Key tax considerationsDirect Investment

5

Brazilian Co

Hold Co • Domestic share deal involving a Brazilian holding company could generate goodwill and step up in the basis of assets provided:

– Upstream or downstream merger is executed

– A purchase price allocation is executed to allocate price

– A domestic share deal transaction is implemented

• Under IFRS, there are new regulations in force which would require more detailed analysis as well as tax compliance (e.g. filling of appraisal/valuation)

Brazilian Co(SA)

Interests

on

equity


Key tax considerationsInvestment Fund – FIP

— FIP is a sort of investment fund that can invest in securities issued by Brazilian Corporations (S.A.).

— Tax benefits:– FIP is not a legal entity in Brazil and not

subject to taxation. – Distributions and capital gains are

exempted provided portfolio and shareholder requirements are met (e.g. investor not located in a “tax haven”, one quotaholder should not hold more than 40% participation).

— FIP could not hold assets or real estate directly.

FIP

Brazilian Co(SA)

Hold Co


Chile – The investment case & tax update impacting foreign investors

ONE OF SOUTH AMERICA'S MOST STABLE AND

PROSPEROUS NATIONS

LEADS LATIN AMERICAN NATIONS IN RANKINGS OF HUMAN DEVELOPMENT, COMPETITIVENESS, INCOME PER CAPITA, GLOBALIZATION, STATE OF PEACE, ECONOMIC FREEDOM, AND LOW PERCEPTION OF CORRUPTION

DYNAMIC ECONOMY, ATTRACTIVE INVESTMENT OPENINGS IN SECTORS THAT INCLUDE MINING, SERVICES, THE FOOD INDUSTRY, INFRASTRUCTURE, TOURISM AND ENERGY


Comparing Structures

8

Often it is potentially attractive to set up a Chilean acquisition vehicle to acquire Chile Co if a premium is being paid for the target. Through execution of post acquisition steps it may be possible to get a step up in the tax value of the assets of the target.

ChileanTarget

Treaty CountrySpain / UK – 16% WHT CG

Top HoldCo

Foreign FinCoBank

Foreign FinCoTreaty Country

Foreign FinCoNO - Treaty Country

4% WHT

35% WHT

44.45% WHTInterests

SUBSTANCE

GAARNO – Treaty Country

44.45% WHT35% WHT


Mexico– The investment case & tax update impacting foreign investors

ONE OF THE PREFERRED LOCATION IN LATIN

AMERICA FOR FOREIGN INVESTMENT

SEVERAL REFORMS ATTRACTING FOREIGN INVESTMENT MAINLY IN THE ENERGY SECTOR, STABLE POLITICAL ENVIRONMENT

LOW COST MANUFACTURING, YOUNG POPULATION, PROXIMITY TO LARGEST MARKETS IN THE WORLD


Tax structuring – previous scheme

Foreign Top HoldCo

CountryX

CountryX

MexicanTarget

PECountry Y

Interests

Royalties

Dividends

General comments:- No withholding tax on dividends under

domestic law (up to 2013)- Withholding tax on royalties – generally

10% by application of a tax treaty- Withholding tax on interest payments –

generally 10% or 15% under a tax treaty- Deduction in Mexico of interest and

royalties at 30% CIT- Exit at the level of country X generally

not taxed in Mexico (real property investments require a case-by-case review)

Considerations- Arm’s length principle- Thin capitalization rules- General deductibility requirements

Typical Investment Structures – Previous scheme


Tax structuring – current scheme

ForeignTop HoldCo

CountryX

CountryX

MexicanTarget

PECountry Y

Interests

Royalties

Dividends

Country XCountry X

MexicanFinance Co

General comments:- No withholding tax on dividends by application of a

DTT- Withholding tax on royalties – generally 10% by

application of a tax treaty- Withholding tax on interest payments – generally

10% or 15% under a tax treaty- Deduction in Mexico of interest and royalties at

30% CIT- Exit at the level of country X generally not taxed in

Mexico (real property investments require a case-by-case review)

Considerations- Arm’s length principle – ensure income is allocated

correctly in all countries based on functions, assets, risks (real versus assigned “legally”)

- Thin capitalization rules- General deductibility requirements and compliance

with new rules starting 2014- Substance requirements – business reasons –

support documentation

Typical Investment Structures – current scheme


Potential Holding Jurisdiction

TAX TREATY IN PLACE OPTIMAL WITHHOLDING TAX

EXIT

SPECIAL TAX REGIME APPLICABLE MAINLY ON DIVIDENDS AND CAPITAL

GAINS

SUBSTANCE REQUIREMENTS BEPS CONSIDERATIONSREPORTING


Comparative WHT TableCountry of Payment Type of Income DOMESTIC UK Spain Netherlands Luxembourg

Dividends 0% N/A 10% 15% 15%

Capital gains 15% N/AThe DTT does not provide any

exemptionThe DTT does not provide any

exemptionThe DTT does not provide any

exemption

Dividends 35% - 44.45% 5% 5% N/A N/A

Capital gainsThe tax shall not exceed 16%

of the net gain complying with requirements

The tax shall not exceed 16% of the net gain complying

with requirementsN/A N/A

Dividends* 10% Exempt / 15% Exempt / 10% Exempt / 5% / 15% 8% / 15%

Capital gains on direct sale or indirect if value derives from real property

25% on Gross or 35% on Net

25% of gross proceeds or 35% of the net gain, complying

with requirements

The tax shall not exceed 10% of the taxable gains

complying with requirements***

The tax shall not exceed 10% of the taxable gains

complying with requirements

25% of gross proceeds or 35% of the net gain, complying

with requirements

Brazil

Chile

Mexico


Spain as a Holding jurisdiction

CONSOLIDATED TAX REGIME, BEING IN PLACE SINCE 1977.

HORIZONTAL TAX CONSOLIDATION SINCE 2015.

WIDEST TAX TREATY NETWORK WITH LATAM. DTT WITH 17 COUNTRIES IN

THE REGION.

SPECIAL TAX REGIMES: • PATENT BOX• HOLDING ENTITIES• PRIVATE EQUITY & FUNDS• M&A NEUTRALITY



Foreign Top HoldCo

Spanish ETVE

LatAmTarget

Royalties

Dividends

General comments:- Widest DTT network with LatAm countries (MFN)- No withholding tax on interest paid to EU lenders- No taxation on foreign dividends and capital gains - No withholding taxes on on-distributed dividends

paid out of qualified foreign ones (no DTT required)- No capital gain tax in so far as linked to hidden

capital gains of qualified foreign subsidiaries- Tax deductible interests on acquisition debt.

Specially relevant when Spanish operations- Financial goodwill facility available- Patent box (40% reduction) if requirements are met

Considerations- Transfer pricing considerations- Thin capitalization rules- General deductibility requirements- Substance requirements- Tax havens- LOB clauses

Typical Holding Structure – Previous scheme

Dividends

Capital

Gains

Interests

Capital

Gains

Spanish Operating subsidiaries

EU LendersHybrid

Instrument


Tax structuring – current scheme

General comments:- Same investment structure as before, basically,

however, more focus should be put on the following issues:

- Avoid hybrid instruments, directly and indirectly

- Avoid intragroup leveraged acquisitions- Carefully monitor the amount of debt that can

be effectively deductible at the level of the Spanish group/company

- Relevant -at least- holding functions at the level of the ETVE

- Hold associated risks - Adequate resources to carry on said functions- Same at the level of Foreign Top HoldCo- Use of existing carry forward tax losses- CFC rules (valid economic reasons in Target)

- Horizontal tax consolidation

Typical Investment Structures – current schemeForeign Top HoldCo

Spanish ETVE

LatAmTarget

Dividends

Dividends

Capital

Gains

Interests

Capital

Gains

Spanish Operating subsidiaries

EU LendersIntercompany

loans

Royalties


Spain as an investment jurisdiction

MEXICO, BRAZIL & COLOMBIA ARE THE MAIN COUNTRIES

WHERE THE SPANISH INVESTORS ARE FOCUSING

BANKING, TELECOMOUNICATIONS,

ENERGY AND INFRASTRUCTURES ARE THE

MAIN SECTORS

SPAIN IS THE SECOND MOST IMPORTANT INVESTOR IN

LATIN AMERICA



General goals:

- Tax efficient financing. o Avoid tax inefficient situations with non-tax deductible expenses and taxable income.o Avoid indirect taxation

- Tax efficient cash repatriation. o Tax leakage considerations. Interposing intermediate holding entities for different jurisdictions?o Avoid cash trapped situations

- Tax efficient divestmento Direct vs. Indirect divestmentso Asset deal vs. shares dealo DTT provisions regarding indirect sale of real estate properties located in Spain

- Flexibilityo Great changes in the region. Nine (9) new DTT are in process and other nine (9) are currently

renegotiated. Need flexible structures that allow tax efficiency upon the changes

Main tax considerations – Spanish industrial investors


Netherlands as a Holding jurisdiction

THE NETHERLANDS IS A FOUNDING MEMBER OF THE EU, EUROZONE, G-10, NATO,

OECD AND WTO, AND A PART OF THE TRILATERAL BENELUX

UNION

LARGE TAX TREATY NETWORK.

TAX CONSOLIDATION REGIMESPECIAL TAX REGIMES: • PARTICIPATION EXEMPTION• INNOVATION BOX• NO WHT ON INTEREST AND

ROYALTIES



NL Coop

General comments- Participation exemption (since 1918) exempts

dividends and capital gains derived from subsidiaries

- No subject to tax requirement as long as the subsidiary is active

- Netherlands has over 100 tax treaties

- No withholding on interest and royalties under domestic law

- Netherlands holding also often used as group financing/cash pooling vehicle

- No withholding on distribution of foreign or Dutch profits if a Coop is used in a corporate structure

Netherlands as outbound holding jurisdiction for LATAM Groups

LATAM Parent

ROWSubs

Dividends

Capital

Gains


Netherlands; Post- BEPS planning with Brazil INE• INE covered by Dutch anti-hybrid rules

• As of 2016 taxed at level of Dutch parent

• Brazil - NL DTT provides for sparing credit of 20% (interest) or 25% (dividends)

• Case can be made that INE should qualify as dividend under DTT

• Effectively no tax in Netherlands on INE due to sparing credit

NL BV

Brazil Sub

INE

Tax Sparing Credit

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