Private Equity Investments in Brazil KPMG’s Private Equity practice Brazil March 2011 With you today Roberto Haddad Tax Partner at KPMG Rio de Janeiro Contact details: T: +55 21 3515 9469 robertohaddad@kpmg.com.br Roberto is the lead international and M&A tax partner in the Rio de Janeiro office and the National tax lead partner for the Private Equity/ Energy and Oil & Gas areas. © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Country overview Country overview The facts you should know The seventh largest economy in the world Currency fluctuations and inflation have been under control for more than 10 years Strong financial and capital market systems Brazil became investment grade by Standard & Poor’s, Fitch Ratings and Moody’s Highly developed Industrial Park A stronger middle class is rapidly forming in Brazil avid to consume Brazil’s economy is riding the worldwide boom in raw material/commodities Significant new offshore oil discoveries (including deep water drilling - presalt) Local alternative energy technology (ethanol-based and others) Brazil will host the FIFA World Cup in 2014 and the Olympic Games in 2016 © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Country overview Main taxes in Brazil Income Tax Social Contribution PIS and COFINS 25% Variable 9% or 15% WHT 15% or 25% 9.25% or 3.65% CIDE 10% IPI (Federal VAT) Variable ICMS (State VAT) Variable © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Import Tax IOF tax ISS (Municipal tax) Variable (0.38%, 2%-6%) 2 to 5% Country overview The facts you should know Brazil is not an OECD-member Brazil has an extensive treaty network but no treaty with the UK, US, Germany and Switzerland Brazilian TP rules are not OECD-based Brazil has recently introduced thin-cap rules All reporting and invoices moving to electronic/online (SPED, e-invoice) No tax consolidation available © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5 How to structure your investment in Brazil? How to structure your investment in Brazil? Holding structure Main drivers Investor Offshore sale Premium opportunity when including a vehicle owned by the non resident investor to acquire target (genuine business purpose) Holding B Abroad Investment route through Law 4,131 Brazil Premium IOF tax (0.38%) Holding C Tax treaties Tax havens Downstream merger Opco © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Dividends Interest on net equity Capital gains 7 How to structure your investment in Brazil? FIP structure Investors Investors Investors Tax efficient vehicle No taxation at fund level (flow-through entity) A B C Income and capital gains received by the FIP are usually not subject to WHT in Brazil No WHT on disposal or amortization of FIP Abroad Brazil FIP Holding Shares and dividends must not exceed 40% limit Target Co. quotas for non-residents that hold up to 40% of interest and that are not located in a low tax jurisdiction Premium opportunity when including a vehicle owned by the FIP to acquire Target Investment route through Resolution 2,689 IOF tax (2% on the inflow of funds and 0% on capital repatriation) Just corporations (S/A) © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8 How to structure your investment in Brazil? Target – what to acquire? Main Drivers Assets Indirect taxes Inherited liabilities may result, if assets purchased be defined as commercial, industrial or professional establishment Main tax attributes not transferred to buyer Depreciation of acquired assets More complex from commercial, regulatory and legal standpoint © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Shares Avoid indirect taxes Tax and labor responsibility on past contingencies Possibility to utilize NOLs Model usually suggested by sellers Possibility to utilize tax-deductible amortization of Premium (PPA necessary) 9 How to structure your investment in Brazil? Capital repatriation Dividends No WHT on dividends IOF zero-rated No tax deduction in Brazil Trapped cash – no repatriation until sufficient earnings to pay dividends Interest on net equity Interest deduction for Corporate Income Tax in Brazil IOF zero-rated WHT of 15% on interest (25% to tax haven) Trapped cash / Limitation: 50% of current profits/ Profits reserve ± Treatment on beneficiary country © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Interest on loan Interest deduction for Corporate Income Tax in Brazil (subject to thin cap rules) WHT of 15% on interest (25% to tax haven) Exit Brazilian Fund (“FIP”) Disposal of Brazilian company: No WHT Disposal of FIP: No WHT (40% of minimum shares/ dividends) Non resident Investor Disposal of a Brazilian company: 15% of WHT (25% when paid to tax haven) Brazilian Holding Disposal of Brazilian company: 34% of CIT 10 How to structure your investment in Brazil? Low-tax jurisdictions & Privileged tax regimes Low-tax jurisdictions Andorra United Arab Emirates Panama Anguilla French Polynesia Pitcairn Island Ascension Island Gibraltar American Samoa Antigua and Barbuda Granada Samoa Netherlands Antilles Hong Kong San Marino Aruba Kiribati Islands of St. Helen Bahamas Labuan St. Kitts and Nevis Bahrain Lebanon St. Lucia Island Barbados Liberia St. Pierre and Miquelon Island Belize Liechtenstein St. Vincent and the Grenadines Bermuda Macau Seychelles Brunei Madeira Solomon Islands Campione d’Italia The Maldives Swaziland Channel Islands Isle of Man Oman Cayman Islands Marshall Islands Queshm Island Cyprus Mauritius Tonga Singapure Monaco Turks and Caicos Islands Cook Islands Montserrat Vanuatu Costa Rica Nauru American Virgin Islands Djibouti Niue Island British Virgin Islands Dominica Norfalk Island Privileged tax regimes Holding companies in Luxembourg and Denmark “Sociedad Anonima Financiera de Inversion (Safis)” in Uruguai International Trading Companies (ICTs) in Iceland Offshore KFTs in Hungary State Limited Liability Companies (LLCs) in the US “Entidad de Tenencia de Valores Extranjeros” (ETVEs) in Spain* International Holding Company (IHC) in Malta Holding companies in The Netherlands* * Effects suspended © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 11 How to structure your investment in Brazil? Low-tax jurisdictions & Privileged tax regimes Higher WHT rate / Stronger rules Type of transaction • Capital gain on disposal of investments (Route 4,131) • Royalties • Interest • Interest on equity • Transfer pricing • Thin capitalization • FIP • Capital gain on investment on Brazilian Financial and Stock markets (Res. 2,689) © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Low-tax jurisdiction Privileged tax regime ? ? ? 12 How to structure your investment in Brazil? Funding through debt Debt Thin Capitalization rules: debt/ equity ratio of Holding A 2:1, or reduced to only 30% if the lender is located in a tax haven or under a privileged tax regime Interest INE Abroad Foreign exchange gains or losses impact Brazil Interests payments are subject to withholding Premium income tax (WHT) at the rate of 15% (25% in case of tax havens) Holding B Debt Downstream Merger Opco Interest deductible for Corporate taxes (if related to company’s activities) Guarantee of foreign currency parameter IOF of 0% on inflow of loan (5.38% if less than 90 days) Debt pushdown: inherent risk Debt + Premium structure = Negative Net equity / NOLs? © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 13 How to structure your investment in Brazil? Funding through equity Equity Holding A No impact from exchange variations / no foreign currency parameter INE Increases capability to pay Interest on net Dividends Abroad equity Presents a more wealthy financial situation Brazil Premium Capital reduction – more complex (only if there Holding B Downstream Merger is capital in excess or to absorb retained losses; and need of 60 to 90 days to be implemented) IOF of 0.38% on inflow of capital Opco © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 14 Additional Comments Additional comments Tax planning • Debate on anti-avoidance regulations • Substance over form precedents • Business reason requirement •5-6 years statute of limitations © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 16 Additional comments Special tax incentives Some tax incentives available: For specific geographical locations – in the north and northeast of Brazil, a reduction of 75 per cent in corporate income tax may be allowed For strategic industrial sectors - ethanol, semiconductor devices, oil & gas, etc Local R&D investments Investments in infrastructure projects (Provisional Measure 517/2010) In general lines, income paid by special purpose entities (incorporated to implement infrastructure projects), arising from debentures previously issued, is exempt from withholding income tax when paid to Brazilian individuals. When the income is paid to Brazilian entities, the tax is reduced to 15 percent. Non-residents may benefit from a zero-rated withholding income tax on income received from investment funds, which have at least 85 per cent of their equity invested in debentures issued by entities involved in infrastructure projects (not applicable for investors located in low tax jurisdictions) REIDI Created to stimulate investment in infrastructure. REIDI grants a suspension of the PIS and Cofins (social contributions) for entities involved in infrastructure projects in the following sectors: transportation, ports, energy, sanitation, irrigation and for construction of ducts. © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The disclosure of this document to third parties is forbidden.