Tax
Latin America
Latin American
Tax Transactions Guide
2012
Foreword
Dear Reader,
We are happy to present to you the first edition of Baker & McKenzie’s Latin
America Tax Transaction Guide.
The aim of this Guide is to provide you with basic information regarding the
taxation of transactions taking place in the region. The countries covered in
this edition are: Argentina, Brazil, Chile, Colombia, Mexico and Venezuela.
Each country chapter compares, in general terms, the tax consequences of
acquisitions through asset deals versus acquisitions through share deals.
Financing issues are also briefly addressed from a tax perspective, as well as
highlights and opportunities associated with goodwill deduction and debt
pushdown in the region.
Country chapters also address tax aspects relating to the holding of the
investment, as well as its future disposal (exit strategies). Finally, the basic
tax regime for restructuring operations is briefly described.
The Guide was prepared by tax lawyers in each of the relevant jurisdictions
who specialize in tax transactional work. The region has a network of
specialists that regularly assist clients involved in crossborder (or local)
transactions and with all tax aspects thereof (structuring, due diligence and
negotiation and drafting of contracts taking into account due diligence
findings).
Thanks to all the authors for their willingness to share their expertise in tax
transactional work and for the time they spent in preparing their respective
country chapters.
We trust that this 2012 Latin America Tax Transaction Guide will provide
you with useful information in determining your strategy for acquiring or
disposing of businesses in the jurisdictions concerned.
Editorial Coordination
Simone Dias Musa
Member of the Global Tax Planning and Transactions Steering Committee
Latin American Tax Transactions Guide 2012
Table of Contents
Argentina ............................................................................................. 1
Brazil ................................................................................................. 23
Chile .................................................................................................. 41
Colombia ........................................................................................... 59
Mexico............................................................................................... 75
Venezuela .......................................................................................... 97
Authors ............................................................................................ 112
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Latin American Tax Transactions Guide 2012
Argentina
Martín Barreiro, Pricipal
Martin Barreiro is experienced in various areas
of tax law. He is a member of the Buenos Aires
Bar Association, the American Chamber of
Commerce in Argentina, the Tax SubCommittee and the Argentine Association of
Taxation Studies. His extensive list of
publications include “New Argentine Social
Security System” for the International
Company and Commercial Law Review and “The S.R.L. in the tax
planning of US investors in Argentina” for the Economic and Tax
Journal.
Mr. Barreiro’s practice focuses on general tax planning, international
private banking, global tax minimization and transfer pricing. He also
provides sound tax advice for mergers and acquisitions transactions.
martin.barreiro@bakermckenzie.com
Tel: +54 11 4310 2230
Baker & McKenzie Argentina
Avenida Leandro N. Alem 1110, Piso 13
Buenos Aires C1001AAT
Argentina
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At a Glance
Corporate income and capital gains
tax (%)
35%
Minimum Presumed Income Tax (%)
1%
Personal Assets Tax (%)
0.5/2.5%
Tax losses carry forward (years)
5 years
Tax losses carry back (years)
N/A
Limitations to transfer of tax losses
Yes
Domestic withholding tax rate on
dividends (%)
Not subject to taxation, unless the
dividends or revenues distributed
exceed the taxable income of the
paying entity. In such case, the
amount paid exceeding such taxable
income will be subject to a 35%
withholding tax.
Withholding on interest
15.05% or 35%
Stamp tax (%)
From 0.8% to 4% depending on the
rates applicable in Argentine
provinces and in the City of Buenos
Aires
Gross Receipts Tax (%)
From 1 to 4% on certain assets
depending on the rates applicable in
Argentine provinces and in the City
of Buenos Aires
VAT (%)
21/10.5% on certain assets
Neutral tax regime for restructuring
operations
It is possible to implement tax-free
reorganizations in Argentina
Tax Consolidation
N/A for Stock corporations (SA) and
Limited Liability Companies (SRL)
VAT grouping
No
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I.
Acquiring the investment
As a preliminary comment, please note that sellers (“Seller”) normally
prefer to sell the shares of the legal entity than to sell the underlying
assets. This is because the sale of shares of an Argentine company
held by foreign shareholders is not subject to income tax in Argentina.
Buyers (“Buyer”), on the contrary, prefer to buy assets instead of
shares because (i) they could amortize the acquisition cost of certain
assets; (ii) they could step up the basis of all the purchased assets; and
(iii) they could apply a mechanism explained below to try to limit the
transfer of certain tax and social security liabilities.
1.
Acquisition through an asset deal
Legal effects of the transfer of an ongoing concern
1.1.
General effects
The general principle is that the Buyer faces certain liabilities arising
from the transferred ongoing concern unless the parties comply with
all the requirements established by the Bulk Transfer Law No. 11,867
(“BTL”). If the parties comply with the procedures established in the
BTL, the Buyer will have “perfect title” to the purchased assets, and
will not be liable for claims of the Seller’s creditors other than those
declared by the Seller.
However, Buyer and Seller will be jointly liable even if the procedure
of the BTL is followed only with respect to omissions or violations to
said procedure (e.g., if the amounts of the opposing creditors were not
retained or deposited). In this respect, if the transfer procedure is not
registered with the Public Registry of Commerce (“PRC”), such
transfer may not be enforced against third parties, including but not
limited to creditors of the Seller and thus allowing such creditors to
proceed with their claim against the assets so transferred.
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1.2.
Tax Liability
As regards federal taxes and local taxes of the City of Buenos Aires
(“Local Taxes”), the Tax Procedural Law No. 11,683, as amended,
and the Fiscal Code of the City of Buenos Aires, respectively, provide
that the Seller and Buyer would be jointly and severally liable for nonassessed taxes that the Seller may owe, unless the appropriate
notification to the Tax Authorities is made prior to the transfer of the
assets and if the Tax Authorities do not make an assessment
afterwards within a certain period of time. In particular, such tax
liability shall cease:
a.
Three (3) months after the transfer as regards federal taxes
and Local Taxes (120 days for liabilities arising from the
Gross Receipt Tax), if such transfer is reported to the
corresponding Tax Authorities at least fifteen (15) working
days prior to its effective date, or
b.
If the Tax Authorities admit the solvency of the Seller or
consider that the security offered by the latter is sufficient.
Once the notice has been given to the Tax Authorities with the
required advance, the transfer takes place, and if 3 months ( or 120
days, as it may correspond) have elapsed since then with no action
from the authorities, the Buyer will be free from any non-assessed
liability for the past taxes that the Seller may have owed the Buyer.
If jurisdictions other than the City of Buenos Aires are involved, the
termination of local tax liabilities should be analyzed on a case-bycase basis.
1.3.
Taxes applicable to transfer of assets
The general principle is that there must be an arm’s length allocation
of the purchase price to the different assets included in the transaction
(e.g., real property, inventories, fixed assets, intangibles, goodwill and
non-competition payments).
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The final income tax to be declared by Seller shall result at the end of
the fiscal year by applying the 35% corporate income tax rate to the
result of the fiscal year in which the transfer of assets takes place. The
result of such fiscal year arises from the aggregate of the taxable
profits deriving from the transfer of the different assets included in the
assets transfer (e.g., real property, inventories, fixed assets,
intangibles, goodwill and non-competition payments) less the
applicable losses and deductions incurred in the same fiscal year.
Losses can be carried forward for 5 years.
1.4.
Real estate transfer taxation

Stamp tax. City of Buenos Aires: 2.5% 1 . In other provinces,
rates may be different.

The stamp tax is a local documentary tax that normally
applies with regard to the value of the transaction or exchange
of documents implementing the creation, amendment and/or
extinction of rights and/or obligations.

Notary fees and costs. Negotiable. Fees and costs may be
raised to a maximum of 2.3% approximately.

Income tax. Upon execution of the public deed of transfer,
the intervening public notary must withhold the income tax
from the purchase price. The rate varies depending on
whether the seller is Argentine or foreign, an individual or a
legal entity. In case of an Argentine corporate Seller, the
applicable rate is 3% 2 .
1
Unless otherwise expressed, all the percentages mentioned in this memorandum
apply with regard to the amount of the transaction.
2
This withholding is on account of the annual tax liability of the taxpayer. If at the
time of execution of the public deed, the purchaser pays 50% or less of the purchase
price and the balance is payable within a period exceeding five years, the 3%
withholding rate shall be reduced to a 1.5% rate.
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
Value-Added Tax (“VAT”). In general, real property
transfers are not subject to VAT. However, VAT is
applicable on construction activities carried on within real
estate property and the transfer of such constructions at the
rate of 21%. Exemptions may apply depending on the
construction’s purpose and ownership term.
1.5.
Inventories transfer taxation

Stamp tax. The stamp tax rate applicable to the transfer of
industrial businesses is 0.8% in the City of Buenos Aires; In
the provinces, rates may be different.

Gross receipts tax. This local tax will generally apply with
regard to the transfer of inventories which are the Seller’s
current business. In the City of Buenos Aires, the gross
receipts tax applicable on wholesales is 3% (this rate may be
increased up to 4% depending on the annual gross receipts
obtained by the taxpayer during the fiscal year). However, if
certain requirements are met, it is possible to qualify for
certain exemptions. In other provinces, rates may be
different.

Income tax. The procedure to determine the taxable profits
arising from the sale of inventories is as follows: From the net
value of the sale of such inventories the following items
should be deducted: (i) discounts or similar items, generally
granted for similar operations in a fair market context; and (ii)
the cost of acquisition of such assets. This cost should be
established, for tax purposes, at the price of the last purchase
made in the last two months prior to the end of the fiscal year;
if there have not been purchases in such period, the cost of the
assets should be determined according to the price of the last
purchase performed in the fiscal year.
In addition, income tax withholdings will apply as regards the
purchase price corresponding to inventories. Income tax
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withholding must apply at the time of the payment and must
be paid to the Tax Authorities. The amounts withheld are
creditable against the annual tax liability of the Seller. The
withholding tax applies at the rate of 2%.

VAT. The VAT applies on the net price of the good, at the
current rate of 21%.
1.6.
Fixed assets transfer taxation

Stamp tax. In the City of Buenos Aires this tax applies at a
rate of 0.8%. In the provinces, rates may be different.

Income tax.
a.
Taxable profits arising from the sale of fixed assets
(except real property). The procedure to determine
the taxable profits arising from the sale of fixed assets
should be as follows: The acquisition cost, reduced in
the total value of the annual depreciation amounts is
deducted from the transaction price.
b.
Depreciation. Fixed assets may be depreciated on a
straight-line basis. The usual annual depreciation rate
for machinery and equipment is 10%; and for dies,
tools and vehicles, 20%. In special cases, the Tax
Authorities may authorize higher depreciation rates.
The withholding income tax applies with regard to the transfer of
personal properties at the rate of 2%.

VAT. The VAT applies as regards the net price of the goods,
at the current rate of 21%.

Gross Receipts Tax: This local tax will only apply on the
transfer of assets which are the seller’s current business.
Assuming that the seller’s current business is not the sale of
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fixed assets, Gross Receipts Tax will not apply to the transfer
of fixed assets.
1.7.
Intangibles transfer taxation

Stamp tax. See the comments made above for the transfer of
fixed assets

Income tax. The Seller will pay income tax on its taxable
profits. The procedure to determine the taxable profits
arising from the sale of intangibles should be as follows: The
acquisition cost, reduced in the total value of the annual
depreciation amounts, if applicable, may be deducted from the
transaction price. If the intangibles have not been purchased
by the seller, there is no acquisition cost to be deducted from
the transaction price. In this case, the taxable profit will be
the transaction price. The income tax withholding applies
with regard to the transfer of intellectual property rights at the
rate of 2% .

The transfer of intangibles is not subject to VAT provided that
the parties to the transaction do not enter into a contract to
carry out provisions subject to VAT. In effect, according to
the VAT Law, the performance of provisions subject to VAT
makes that any transfer or license for the use of intellectual,
industrial and commercial rights entered into by the same
parties is also subject to VAT.
Gross Receipts Tax: See the comments made above in
connection to the transfer of fixed assets.
1.8.
Tax treatment applicable to the goodwill

Stamp tax. See the comments made above for the transfer of
fixed assets
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
Income tax. The taxable profit is equal to the portion of the
purchase price which exceeds the fair market value of the
other items included in the transfer of assets (e.g., real estate
properties, inventories, fixed assets, intangibles and noncompetition payments). Goodwill is not subject to tax
deductions in Argentina as amortization expense.

VAT. The transfer of goodwill is subject to the same VAT
treatment applicable to the transfer of intangibles. Then, it is
not subject to VAT provided that the parties to the transaction
do not enter into a contract for the provision of services or
works subject to VAT.

Gross Receipts Tax: See the comments made above in
connection to the transfer of fixed assets.
Rates
Income Tax: 35%
Stamp Tax: From 0.8% to 4% depending on the
rates applicable in Argentine provinces and in
the City of Buenos Aires
Notary fees: Negotiable up to a maximum of
2.3%
VAT: 21%/10.5% on certain assets
Gross Receipts Tax: From 1% to 4% on certain
assets depending on the rates applicable in
Argentine provinces and in the City of Buenos
Aires
Basis
Transaction price
Liable person
Seller
Recoverability
Yes in the case of VAT. The recoverability of
the other taxes will depend on their negotiation
with the buyer.
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2.
Acquisition through a share deal
The analysis in this topic is made taking into account that the
Argentine target companies, when owned by foreign legal entities or
other type of vehicles, are not organized in low-tax jurisdictions 3 . If
the shareholding of the Argentine company is located in low-tax
jurisdictions, adverse tax consequences may arise.
Stock Corporations (“SA”)
The sale of shares of an SA is exempt from income tax when it is
performed by a non-Argentine shareholder (either whether the nonArgentine shareholder is an individual or a legal entity).
On the contrary, the sale of shares of an SA is subject to income tax
when it is made by an Argentine corporate shareholder or by an
Argentine individual shareholder involved in the habitual trading of
shares.
3
Low-tax jurisdictions for Argentine tax purposes are: Albania, Andorra, Angola,
Anguilla (U.K. Territory), Antigua and Barbuda, Aruba, Ascencion, Azores Islands,
Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Brunei
Darussalam, Campione D’Italia, Cape Verde, Cayman Islands, Channel Islands
(Jersey; Guernsey, Alderney, Great Sark Island, Herm, Little Stark, Brechou, Jethou,
Lihou), Christmas Island, Cook Islands, Cyprus, Djibouti, Dominica, Free zone of
Ostrava, French Polynesia, Gibraltar, Greenland, Grenada, Guam, Guyana, Hong
Kong, Isle of Man, Jordan, Keeling Islands, Kiribati, Labuan, Liberia, Liechtenstein,
Luxembourg (only with respect to 1929 Holding Companies), Macao, Madeira,
Maldives, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru,
Netherlands Antilles, Niue, Norfolk Island, Oman, Pacific Island, Panama, Patau,
Pitcairn Island, Puerto Rico, Qeshm Island, Samoa (American), Samoa (Western), San
Marino, Seychelles, Solomon Islands, Sri Lanka, St. Christopher Federation, St.
Helena, St. Lucia, St. Pierre and Miquelon Isles, St. Vincent and the Grenadines, State
of Kuwait, State of Qatar, Svalbard Archipelago, Swaziland, Tokelau Islands, Tonga,
Trieste, Trinidad and Tobago, Tristan da Cunha, Tunisia, Turks and Caicos Islands,
Tuvalu, U.S. Virgin Islands, United Arab Emirates, Uruguay (only with respect to the
offshore companies under the regime of Law 11,073 of Uruguay), Vanuatu, Yemen.
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Limited Liability Companies (“SRL”)
The use of an S.R.L. as a fund vehicle is not always tax efficient or is
more controversial in certain specific cases than the use of an SA.
The sale of quotas of an SRL is subject to income tax when it is made
by an Argentine corporate quotaholder and by an Argentine individual
quotaholder involved in the habitual trading of quotas.
The sale of quotas of SRL companies made by a non-Argentine
corporate quotaholder to Argentine purchasers is subject to a 17.5%
withholding capital gains tax applicable on the gross purchase price
or, at the option of the seller, a 35% withholding capital gains tax
applies on the gross purchase price less the costs incurred in Argentina
to keep maintain and preserve the source of income. The sale of
quotas of SRL companies made by a non-Argentine corporate
quotaholder to non-Argentine purchasers is in principle also subject to
the same tax but no mechanism has been implemented to make such
withholding and to pay such tax to the Argentine Tax Authorities.
Stamp tax. The purchase of stock with effects within the jurisdiction
of the City of Buenos Aires is subject to stamp tax at the rate of 0.8%
on the ‘economic value’ of the transaction. Purchase of stock with
effects in other Provinces, would be subject to an approximately 1.5%
stamp tax (the rate varies depending on each jurisdiction).
VAT. The purchase and sale of stock is not subject to the 21% VAT.
Gross Receipts Tax. The sale of stock is generally not subject to this
tax.
No other tax applies as regards the transfer of stock.
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3.
Financing the investment
3.1.
Withholding Income Tax
Interest to be paid by an Argentine borrower to a non-Argentine
lender are subject to withholding income tax at a 15.05% or 35% rate.
The 15.05% rate applies if the borrower is an Argentine financial
entity.
The 15.05% rate also applies if the borrower is an Argentine
individual or legal entity (not a financial entity) and the lender is a
banking or financial entity, subject to supervision by a specific
banking supervising authority, which is not incorporated in a low tax
jurisdiction or is incorporated in a country which has executed a treaty
to exchange information with Argentina. In addition, banking
secrecy, exchange secrecy or the like should not be opposed to a
request for information by the respective tax authorities.
The 35% rate applies in all other cases.
Tax rates may be reduced under the specific benefits granted by the
Tax Treaties executed by Argentina with other countries to avoid
double taxation.
3.2.
Deductibility
The general principle is that all expenses necessary to keep, maintain
and preserve the source of income are deductible for tax purposes.
However, thin capitalization rules limit the deduction of certain
categories of financial interest – arising from loans granted by nonArgentine related parties- paid by companies other than banks and
financial institutions and by unincorporated business.
In accordance with Section 81 of the Income Tax Law, the following
categories of financial interest are fully deductible: (i) financial
interest paid to resident estates and individuals and (ii) financial
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interest paid to a foreign party, also other than banks and financial
institutions, as long as that interest payment is subject to a 35%
withholding tax. Therefore, thin capitalization rules do not apply to
disallow the deductibility of interest accrued on intercompany
financing that has been subject to a 35% withholding income tax.
In order for the other financial interest to be fully deductible, the
taxpayer paying the financial interest must pass the following thin
capitalization test:
The total of the taxpayer’s indebtedness giving rise to financial
interest, other than loans generating financial interest in categories (i)
and (ii) above, which does not exceed 2 times the taxpayer’s equity.
If the taxpayer fails the test, then the portion of interest accrued on the
excess of the taxpayer’s indebtedness giving rise to financial interest,
other than loan generating financial interest in categories (i) and (ii)
above mentioned, which exceeds 2 times the taxpayer’s equity will be
treated as a dividend and, consequently, will not be deductible for
income tax purposes.
3.3.
Debt pushdown
The Tax Authorities have consistently rejected the deduction of
interest deriving from loans granted to an Argentine borrower to fund
the acquisition of an Argentine company.
3.4.
VAT
Law No. 25,063 has introduced a new taxable event: financing by
foreign parties to Argentine taxpayers whose activities are subject to
VAT and are registered as VAT-responsible.
Law No. 25,063 has also amended the VAT tax rate in relation to
certain activities. In effect, although the general tax rate remains at
21%, a new reduced 10.5% tax rate has been included.
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The reduced 10.5% tax rate applies with regard to the following
financial transactions:
a.
Interest on loans granted by Argentine financial entities
provided borrower is a VAT registered taxpayer;
b.
Interest on loans obtained abroad, provided lender is a
financial entity incorporated in countries that have adopted the
Basle Banking Standards;
3.5.
Stamp tax.
Loans with effects within the jurisdiction of the City of Buenos Aires
are subject to stamp tax at the rate of 0.8% on the ‘economic value’ of
the transaction.
Loans with effects in other Provinces, would be subject to an
approximately 1.5% stamp tax. (The rate varies depending on each
jurisdiction.)
Thin capitalization rules
Application of a 2:1 debt/equity ratio on
transactions where the related-party creditor is
not subject to a 35% withholding tax on interest
payments
Arm’s length principle
The thin capitalization ratios do not change
based on the arm’s length principle
Other limitations to the
deductibility
Expenses must be necessary to keep, maintain
and preserve the source of income in order to be
deductible
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II.
Holding the investment
1.
Main tax costs to be modeled
1.1.
Income Tax:
Legal entities domiciled or incorporated in Argentina are subject to
income tax on all their income, whether sourced in Argentina or in a
foreign country (worldwide source income).
The tax rate for corporations and branches or subsidiaries of foreign
companies located in Argentina is 35%.
Company income is taxed on an accrued basis during the company’s
business year.
Fixed assets may be depreciated on a straight-line basis. The usual
annual depreciation rate for machinery and equipment is 10%; and for
dies, tools and vehicles, 20%. In special cases, the Tax Authorities
may authorize higher depreciation rates.
Losses can be carried forward for 5 years and capital losses can only
be offset against capital gains.
Dividends are not subject to taxation, unless the dividends or revenues
distributed exceed the taxable income of the paying entity. In such
case, the amount paid exceeding such taxable income will be subject
to a 35% withholding tax.
1.2.
Minimum Presumed Income Tax:
The Minimum Presumed Income Tax (“MPIT”) is levied at a national
level and is applied at the rate of 1% to assets located in Argentina and
abroad. It is a tax generated on a presumption of income obtained by
the taxpayer; this presumption is assessed in relation to the taxpayer’s
assets at the end of the calendar year or the fiscal year for individuals
and corporations, respectively.
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Income tax paid in a given fiscal year shall be credited against the tax
liability arising from MPIT for the same fiscal year. If there is no
income tax to pay, the payment on account of the MPIT may be
carried forward against the income tax liability corresponding to the
succeeding 10 fiscal years.
1.3.
Personal Assets Tax:
Certain assets (i.e., certain securities, unexploited real estate property,
etc) located in Argentina and owned by foreign companies are deemed
to belong to individuals and are subject to a personal assets tax at the
rate of 2.5%.
Shareholders of an Argentine company who reside in foreign
countries are liable to pay personal assets tax. The tax liability is not
assessed directly but is paid by the Argentine company on behalf of its
shareholders. This is because shares whose holders are foreign
resident companies are deemed to belong to foreign resident
individuals and the tax is levied on those shares. The taxable base is
the Argentine company’s proportional net worth assessed in the
company’s last financial statements. The tax rate is 0.5%. The
company is allowed to claim the tax paid to the shareholders.
For foreign companies’ shareholders of an Argentine company who
reside in Treaty Countries (for the avoidance of double taxation), it is
important to analyze each Tax Treaty to understand whether shares are
levied in Argentina or in the country where the holders have their
fiscal residence.
1.4.
Value-Added Tax:
This tax is applied to all stages of the production and selling processes
(output tax), and the tax amount of the immediately preceding stage is
deductible (input tax).
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The tax is imposed on the following transactions:

leases and services, including financial and insurance
services;

real estate leases;

work performed on third-party real property;

work performed on owned real property, in the case of
constructors;

permanent import of goods;

services provided from abroad and used in Argentina
(including interest). In this case, input tax must be paid by the
Argentine resident and automatically becomes ‘input tax’ for
VAT purposes in the following month.
VAT is assessed on a monthly basis. The inception of the taxable
event is to issue the invoice, deliver the goods, and render the service
or the receipt, whichever occurs first.
The standard tax rate, currently 21%, is charged on the net price of the
transaction. Some goods and services are levied at 10.5%.
Exports are levied at zero rate. Exporters can apply input tax
(incurred in producing export goods) against output tax arising from
other taxable transactions. In case of a net input tax, exporters are
entitled to a refund, i.e., under a special procedure established by the
tax authority.
1.5.
Tax on Debits and Credits on Checking Accounts
This tax is levied on financial transactions. The taxable event is not
only each debit and credit in a checking account but also a large
variety of financial transactions (money remittances, money orders,
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check deposits in savings accounts, etc). The law sets out several
exceptions (i.e., savings accounts, stock exchange agents, nonprofit
associations, and the like), and provides for reduced rates for certain
transactions such as time deposits.
The tax rate applicable is 0.6% on each debit and 0.6% on each credit
on checking accounts. Thus the whole transaction is levied at a 1.2%
rate. For specific activities performed by taxpayers (who might use
checking accounts regularly), a 0.075% rate is applicable.
The tax amount paid is partially creditable against income tax or
MPIT. The remaining tax is a non-recoverable expense.
1.6.
Gross Receipts Income Tax:
This is a local tax levied on the various stages of business activities.
Generally, it applies on gross revenues accrued during each fiscal
period. The tax rate is approximately 3% to 4% for commercial
activities, 1.5% for industrial activities, and 1% to 1.5% for primary
activities, according to the regulations enforced by each provincial
Tax Code.
1.7.
Stamp Tax:
The stamp tax is a local documentary tax which normally applies at
rates ranging from 1% to 3% on any document or exchange of
documents implementing the creation, amendment and/or extinction
of rights and/or obligations with an economic content, depending upon
the nature of the transaction and the local jurisdiction involved.
In each of the provinces, this tax is payable upon local execution of
what is considered to be a “taxable document.” It also applies to a
document having “effects” in a given province (local effects would be
the acceptance, protest, or performance of the obligation or the filing
of the relevant document with an administrative or judicial local
authority for enforcement purposes), if such document was executed
in another province.
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Taxable income
Net income less deductible expenses is subject
to income at the standard rate of 35%
Depreciation
As a general rule, depreciation is allowed along
the useful life of goods. Land is not subject to
depreciation in Argentina.
capital losses on shares
Capital loss (non-operation loss) can only
compensate future profits of the same nature
VAT
As a general rule, all supplies of goods and
services are subject to VAT. The standard rate
varies from 10.5 to 21%. Reduced rates and
exemptions may apply.
Input VAT incurred on supplies generally
constitutes deductible cost if it is not creditable.
Other taxes
Stamp Tax: From 0.8% to 4% depending on the
rates applicable in Argentine provinces and in
the City of Buenos Aires
Gross Receipts Tax: From 1% to 4% on certain
assets depending on the rates applicable in
Argentine provinces and in the City of Buenos
Aires
Personal Assets Tax: 0.5% on the net worth of
the Argentine company
Tax on debits and credit in bank accounts: 0.6%
on credits and 0.6% on debits
Minimum Presumed
Income Tax
Applicable at the rate of 1% on assets. Income
tax paid in a given fiscal year shall be credited
against the tax liability arising from MPIT for
the same fiscal year. If there is no income tax to
pay, the payment on account of the MPIT may
be carried forward against the income tax
liability corresponding to the succeeding 10
fiscal years.
Social Security
Employees’ salaries are subject to social
security payments. Employer’s contributions
depend upon their activity: (a) 27% if the
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employer’s principal activity consists in the
provision of services or in commercial activities
and the invoiced amount exceeds
ARS$48,000,000; and (b) 23% for the rest of
the employers.
Employees’ contributions to the retirement
system amount to 17%, including Retirement
Fund, Medical Benefits for Retired Employees,
Health Care Insurance and Medical Coverage.
2.
Distribution of profits
Withholding tax on
dividends distributed by
a local company
Dividends are not subject to taxation, unless the
dividends or revenues distributed exceed the
taxable income of the paying entity. In such
case, the amount paid exceeding such taxable
income will be subject to a 35% withholding
tax.
Taxation of dividends
received by a local
company
The dividends received by a local company
from another local company are not subject to
income tax in Argentina
III.
Selling the investment
1.
Asset deal
Rates
20
Income Tax: 35% Stamp Tax: From 0.8% to
4% depending on the rates applicable in
Argentine provinces and in the City of Buenos
Aires
Notary fees: Negotiable up to a maximum of
2.3% VAT: 21%/10.5% on certain assets
Gross Receipts Tax: From 1% to 4% on certain
assets depending on the rates applicable in
Argentine provinces and in the City of Buenos
Aires
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Basis
Transaction price
Liable person
Seller
Recoverability
Yes in the case of VAT. The recoverability of
the other taxes will depend on their negotiation
with the buyer.
2.
Share deal
Income Tax
1.
2.
3.
4.
5.
6.
The sale of shares by a foreign seller is not
taxable
The sale of quotas by a foreign seller is
taxable but the Income Tax Law has not
established a mechanism to pay the
corresponding tax if the buyer is not an
Argentine party
The sale of quotas by a foreign seller is
taxable at a 17.5%/35% rate if the buyer is
an Argentine party
The sale of shares or quotas by an
Argentine corporate seller is taxable at a
35%
The sale of shares or quotas by an
Argentine individual seller that is not
habitually engaged in this kind of trade is
not taxable
The sale of shares or quotas by an
Argentine individual seller that is
habitually engaged in this kind of trade is
taxable at a rate that may range from 9% to
35%
Stamp Tax
From 0.8% to 1.5% depending on the rates
applicable in Argentine provinces and in the
City of Buenos Aires
VAT/Gross Receipts Tax
N/A
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Liable person
IV.
Seller
Tax regime for restructuring operations
Merger or demerger
It is generally regarded as a tax-free
reorganization if the transaction complies with
certain requirements.
Tax losses and credit can be transferred if
certain requirements are met.
Transfer of ongoing
concern
It is generally regarded as a tax-free
reorganization if the transaction complies with
certain requirements.
Tax losses and credit can be transferred if
certain requirements are met.
Swap of shares
If an Argentine company realizes a share-forshare exchange, the gain realized in that
occasion is subject to income tax under the
ordinary rules.
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Brazil
Simone Dias Musa, Partner
Simone Dias Musa has been recognized by the
Chambers Global Guide, Latin Lawyer and
IFLR as a leading tax lawyer. Frequently
praised for her practical advice, technical
knowledge and creativity, she has received
numerous awards for her professional
achievements. Ms. Musa worked on tax
matters as part of the Latin America desk of
Baker & McKenzie Chicago office, in 1997.
Ms. Musa concentrates on international tax planning, taxation of
financing transactions and transfer pricing. She also provides skillful
advice on international tax treaties, investments structuring, taxation
of reorganizations and mergers and acquisitions.
simone.musa@bakermckenzie.com
Tel: +55 11 3048 6814
Juliana Porchat de Assis, Associate
Graduated from the School of Law at
Faculdades Metropolitanas Unidas, SP in 1999.
Specialization course in Corporate Law from
the Pontifícia Universdade Católica de São
Paulo (PUC-SP), SP in 2001. MBA in Finance
in May 2004 from Millspas College in Jackson,
Mississippi (USA). Joined the firm in 2004.
Registered in the OAB-SP since 2000.
juliana.assis@bakermckenzie.com
Tel: + 55 11 3048 6800
Trench, Rossi e Watanabe Sao Paulo
Av. Dr. Chucri Zaidan, 920
Sao Paulo, Brazil
Baker & McKenzie
23
At a Glance
Corporate income tax rate (CIT) (%)
34% 4
Local income tax rate (%)
N/A
Capital gains tax rate (%)
34, 15 or 25% 5
Tax losses carry forward (years)
Indefinite
Tax losses carry back (years)
N/A
Limitations to transfer of tax losses
Yes
Domestic withholding tax rate on
dividends (%)
There is no withholding on
distribution of profits generated as
from 1996.
Withholding on interest
15 or 25% 6
Capital duty (%)
N/A
Transfer tax rates (%)
Sale of movable assets
N/A
Sale of real estate assets
ITBI – Real Estate Transfer Tax Variable rates from 1% to 3%
according to the Municipality 7 .
Sale of shares of real estate
oriented company
N/A
4
The 34% combined rate includes the corporate income tax (IRPJ) and the social
contribution on profits (CSLL). The IRPJ is computed at a fifteen percent (15%) rate
on adjusted net income. Annual net income in excess of R$240,000.00
(approximately USD 140,000) is also subject to a surtax of ten percent (10%). The
CSLL is a true corporate income tax surcharge, at the rate of nine percent (9%).
5
The 34% rate applies to legal entity sellers domiciled in Brazil; the 15% rate applies
to non-resident sellers located in regular tax jurisdictions or resident individuals. In
case of non-residents located in low tax jurisdictions, the tax rate is increased from
15% to 25%.
6
In case of non-residents located in low tax jurisdictions the tax rate is increased from
15% to 25%.
7
In the city of São Paulo, for instance, a 2% rate of ITBI applies on the transfer of
real estate.
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Standard VAT rate (%)
7 to 25% 8
Neutral tax regime for restructuring
operations
There is no specific regime but
normally it is possible to implement
tax-free reorganizations in Brazil
using book values.
Tax Consolidation
No
VAT grouping
No
I.
Acquiring the investment
1.
Acquisition through an asset deal
From a transactional point of view, an asset acquisition may be quite
complex, as each asset and liability to be included in the sale has to be
identified and transferred individually.
As far as real properties in Brazil are concerned, the transfer has to be
notarized to be effective, resulting notarial fees and transfer tax
depending on the value of the property concerned.
From a tax standpoint, asset acquisitions are generally unpopular in
Brazil because transactional taxes may be incurred in addition to
capital gains taxes. Although transactional taxes are usually
recoverable, this is not always true and they imply an upfront
disbursement of cash.
In addition, although a step-up in basis can be achieved in the
acquisition of fixed assets and inventory at market value, depending
on the case, the capital applied in the acquisition of rights or
8
The 7% to 25% rates apply with respect to the State Value-Added Tax (“ICMS”).
There are other Brazilian taxes that are classified as VAT taxes and that allow
taxpayers to register credits: the Federal Excise Tax (“IPI”), which has different rates
according to the product; the Contribution to the Social Security Financing
(“COFINS”) and the Contribution to the Social Integration Program (“PIS”), which
are usually charged at a combined 9.25% rate.
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intangibles, which do not have a validity term, is not deductible for
corporate income tax purposes, as detailed below.
From a legal standpoint, the parties do not need to transfer the whole
business and are, generally, free to select the assets and liabilities they
wish to transfer. This is important if the buyer is only interested in a
particular part of seller’s business.
In general, the buyer is liable only for obligations acquired, the
liability for which buyer undertakes expressly. There are, however,
certain exceptions where the buyer undertakes certain liabilities of
seller by operation of law, including tax, labor and environmental
liabilities.
A sale of assets may enable the acquisition of a business in cases
where a minority shareholder refuses to sell equity interest in the
company.
Also, the seller will not be automatically released from its liabilities
by transferring them to the buyer; the consent of each individual
creditor may be required for the seller to be effectively replaced by the
buyer. The same is true with respect to contracts or agreements to be
transferred to the buyer. The transfer of contracts with government
agencies requires special attention, as in many situations the transfer
of the agreement is a cause for immediate termination thereof.
Some public licenses and permits may not be transferred along with
the business, but have to be reapplied by the buyer.
1.1.
Corporate Income Taxes (CIT)
Capital gains incurred by legal entities domiciled in Brazil are taxed
as ordinary income. Therefore, the combined CIT rate applicable to
capital gains of corporations is currently 34%. CIT applicable on
capital gains can be fully offset with current losses, without any
limitation. Tax losses carry-forwards (NOLs), on the other hand,
although are of an unlimited duration in Brazil, can only offset up to
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thirty percent (30%) of the taxable income in any given tax period.
This means that at least seventy percent (70%) of the taxable income
or capital gains registered by the company in the period is subject to
taxation. In addition, the NOLs should be controlled in two different
baskets – one related to operating losses and the other to capital
losses, and the latter can offset only gains of the same nature.
1.2.
VAT
Value added taxes may be levied on the purchase and sale of assets.
As a general rule, this statement is valid for purchase and sale of
inventories (raw materials, intermediate products and finished
products) when there is the physical transference of the inventory and
under certain circumstances it is also applicable to the sale of fixed
assets.
Most of the so called transactional taxes are creditable for the buyer,
and therefore cannot be considered an actual cost to the acquisition,
although they represent a necessary upfront disbursement since they
are included in the price of such assets. Below is a brief description of
transactional taxes applicable in Brazil:
The excise tax on manufactured products (IPI) is a federal value added
tax levied on manufactured products as they leave the plant where
they are manufactured. The IPI is also due on imported manufactured
products, upon importation and resale by the importer. IPI rates may
vary depending on whether the type of product is regarded as essential
or not.
The Value-added on sales and services (ICMS) is another value added
tax, payable upon importation of a product into Brazil, or sale or
transfer within Brazil.
ICMS rates and tax benefits vary from State to State and they also
depend on the type of transaction. Currently, the ordinary rate in the
State of São Paulo is 18% on products imported, sold or transferred.
Similar to the IPI, the ICMS system permits a given taxpayer to offset
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27
ICMS paid in acquiring goods and services against the ICMS due on
subsequent taxable transactions (e.g., sale of goods and services
subject to ICMS tax).
Value-added taxes, ICMS and IPI, are computed by those plants,
facilities or branches of a company that engage in taxable transactions.
These units are considered separate taxpayers for the purpose of the
monthly tax computation. For both taxes, the amount due is
calculated based on the difference between credits for goods entering
the facility and debits for the goods sold or leaving the facility under
other taxable circumstances. These value-added taxes may be avoided
in an asset acquisition if the buyer acquires the business activity of an
individual branch as a going concern (called the acquisition of an
estabelecimento comercial). In this case, the transaction is considered
as a change in the ownership of the establishment and does not trigger
ICMS and IPI taxation.
The Corporate Contribution to Finance the Social Security (COFINS)
is levied over gross revenues at a rate of 7.6% under the noncumulative system, which entitles the taxpayer to offset the amount
paid in prior taxed operations against COFINS debts in the subsequent
operations (tax credit system). The Corporate Contribution to the
Social Integration Program (PIS) is levied over gross revenue at a rate
of 1.65% on the gross revenues of legal entities under the noncumulative system, which entitles the taxpayer to offset the amount
paid in prior taxed operations against PIS debts in the subsequent
operations. These rates for PIS and COFINS may vary under the
“One Time Levy” system applicable to pharmaceuticals and other
industries.
Rates
7 to 25% (ICMS). The rates applicable to the
IPI are variable. For (PIS/COFINS
contributions) the combined rate is 9.25% under
the non-cumulative regime.
Basis
Transaction price.
Date of payment
For the ICMS, the date of payment varies
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Latin American Tax Transactions Guide 2012
depending on the tariff classification of the
product sold and the State in which the taxpayer
is located. For the IPI and PIS/COFINS
contributions, as a general rule, the date of
payment is the 25th of the month following the
occurrence of the taxable event.
Liable person
Seller 9
Recoverability
As a general rule yes, if the product acquired
characterizes as input.
Exemption
There are exemptions provided by the applicable
legislation depending on the product or industry.
1.3.
Transfer tax
Transfer taxes may be triggered on the transfer of certain assets. The
ITBI is the tax due on the transfer of real estate. This way, this tax
may be charged on an asset deal which involves real estate
acquisition.
The information regarding the ITBI – applicable rates, for instance –
may differ according to the Municipality, considering that this is a
municipal tax, and in each city there may be the application of
different rules. The data below refers to the city of São Paulo.
Rate
Variable between 1 to 3%
Basis
Transaction value or the tax basis provided in
the applicable legislation.
Date of payment
If the transmission is made by means of a public
instrument, the tax must be paid before the
contract becomes effective; if it is made under a
private instrument, then the tax must be paid
within ten days counted as of the transmission.
Liable person
The acquirer
9
The legislation may establish different responsibility provisions.
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Tax deductibility for
CIT
1.4.
Yes. The deductibility of such expenses shall
follow the general rules for CIT deduction
(expenses that are normal, usual and necessary
to the activities of the company).
Other acquisition costs
Notary fees
Yes, variable
Mortgage registration
duties
No
Transfer of leases
No
Stamp duties
No
Tax deductibility for
CIT
The deductibility of such expenses shall follow
the general rules for CIT deduction (expenses
that are normal, usual and necessary to the
activities of the company)
1.5.
Tax credits
Reinvestment tax credit
No
Other tax credits
No
1.6.
Transfer of tax liabilities in the asset deal
The Brazilian Tax Code sets forth the basic rules for successor
liability under Articles 129 through 133. The rules for succession
apply for existing and future tax credits. Whoever acquires real estate
is a successor for taxes related to the asset. For asset deals, which
encompass business acquisitions, Article 133 sets forth the following:
“The individual or legal entity who, by any means, acquires the
business (fundo de comércio) or the commercial, industrial or
professional place of business (estabelecimento) of another person,
and continues to carry out seller’s business under the same or a
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different company name, or under the name of an individual or a sole
partnership, is liable for the taxes related to the acquired business due
up to the acquisition date. This liability is:
(i)
Primary, and equal to that of the seller, if seller ceases
its operations; and
(ii)
Secondary, if seller continues its operations or, within
six months from the sale date, initiates new activities,
whether in the same or another line of business.”
According to the foregoing, successor liability depends on one of two
factors: (1) the acquisition of the business (also referred to in the case
law as the acquisition of goodwill, meaning business’ intangibles), or
(2) the acquisition of the commercial, industrial or professional
establishment (meaning the elements which are essential, inherent and
irreplaceable in connection with the business).
This rule treats an acquisition of assets that constitute a business unit
similarly to the acquisition of shares of a company in case the seller
goes out of business as a consequence. If the seller stays in business
with another activity, then the buyer’s responsibility is secondary.
This means the tax authorities must first claim the existing seller’s
assets to satisfy the existing tax contingency.
In addition to the above, it is also important to point out that due to
changes in the Brazilian tax legislation introduced by Complementary
Law No. 118 of 9 February 2005, the successor’s liability may be
avoided if the business acquired is in bankruptcy or in judicial
recovery. In this case, however, there are some conditions set forth by
specific rules that must be met.
Other classic alternatives in order to obtain control over a business
reducing the risk of incurring successor liability are also generally
available. These contemplate the rental of facilities, contract
manufacturing and distribution agreements, as well as noncompetition
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agreements and options for the acquisition of the business after the
expiration of the applicable statute of limitations.
A relevant aspect in connection with succession is that as part of any
tax assessment, a tax agent is obliged to include penalties (generally
heavy), as defined under specific tax legislation. This must be
considered in any acquisition in Brazil for both known and hidden
liabilities. The statute of limitations for taxes is generally five (5)
years (in addition to the current year for income tax purposes).
Federal tax agents, for instance, are obliged under current legislation
to add a mandatory penalty of seventy-five percent (75%) over the
amount of the principal whenever they issue a tax assessment. The
penalty is due not only when there is an underpayment or a lack of
payment of taxes for any reason, but also when the difference is due to
error or because the taxpayer’s interpretation differs from that of the
tax authorities. In the event of fraud, the penalty can be increased to
one hundred and fifty percent (150%), and even further raised by an
extra fifty percent (50%) if a taxpayer who is requested to provide
information does not comply on a timely basis. A similar system of
penalties generally exists under state and municipal tax legislation.
If the taxpayer pays taxes in arrears voluntarily, then, under federal
legislation, the amount is increased by interest generally at market
(Selic index) rates and by late payment fines with a ceiling of twenty
percent (20%). State and municipal legislation have similar
provisions.
2.
Acquisition through a share deal
The acquisition of a business may be achieved by purchasing the
shares of the company. Share acquisitions are more common than
asset acquisitions in Brazil, as they are often less burdensome from a
transaction point of view and, depending on the circumstances, also
more tax efficient.
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2.1.
Corporate Income Tax (CIT)
Capital gains are subject to an applicable 15% rate to non-resident
sellers, or to a 25% rate if the non-resident seller is located in a low
tax jurisdiction. For individual residents, the applicable rate is 15%.
Legal entities domiciled in Brazil are subject to taxation under the
ordinary 34% rate.
Brazilian law allows the buyer to benefit from the tax amortization of
the goodwill paid in a direct share acquisition. The deduction of the
goodwill for corporate income tax purposes is allowed at a maximum
rate of 1/60 per month and is not subject to any maximum term.
Certain requirements apply to the said tax benefit, such as: (i) the
acquisition must be made through an existing company located in
Brazil or a vehicle company organized in Brazil for this purpose,
(although the latter alternative may give rise to challenges from the
tax authorities related to the substance of such transactions), and a
subsequent reorganization of the acquiring company and the target
must take place (downstream or upstream merger); and (ii) the
goodwill must be attributed to the future profitability of the target
company or to fair market value of assets (in this case deduction is
achieved through depreciation of the underlying assets) as supported
by a study.
The possibility to amortize goodwill in Brazil for CIT purposes should
be analyzed on a case by case basis considering the two main points of
attack by the tax authorities: the substance of the transaction (whether
there is an effective third-party acquisition and reason for the postacquisition restructuring) and the allocation of the goodwill for tax
purposes.
2.2.
VAT and transfer tax
Not applicable.
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2.3.
Tax Losses
Article 513 of the Income Tax Regulations provides for the mandatory
write-off of tax losses (NOLs) in case of a cumulative change of
corporate control and line of business occurred between the date in
which the NOLS were generated and the date of utilization.
2.4.
Transfer of tax liabilities
In case of a share deal, all tax liabilities of the past relating to the
purchased company remain in the company and are therefore taken
over by the purchaser together with the target entity. The tax debts of
the target entity may be demanded by the tax authorities within the
statutes of limitation period, which is generally of 5 years.
2.5.
Transaction costs
If the acquirer is a Brazilian company, transaction costs related to the
acquisition of shares will be deductible at the level of that company.
Nonetheless, if the acquirer is a pure holding company, which profits
are derived only from equity results subject to specific corporate
income tax exemption, the deduction of expenses is not relevant, as
these pure holding entities do not have taxable profits to be offset with
expenses.
3.
Financing the investment
3.1.
Deductibility of financing expenses
As a general rule, financing expenses will be fully tax-deductible in
the hands of a Brazilian purchaser, irrespective of whether the
transaction is structured as an asset deal or as a share deal. In the case
of a share deal, the purchaser needs of course to have sufficient
taxable income to offset the financing charges.
There are thin capitalization rules in Brazil in relation to related-party
debt. To this end, some specific thin capitalization ratios apply in
certain situations (see table below).
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In addition to the above, the financing expenses need to meet the
general deductibility conditions that apply for any expenses, which –
in a nutshell – require that such expenses are considered necessary,
normal and usual for the company deducting the expense.
Thin capitalization rules
2:1 debt/equity ratio - transactions where the
related-party creditor, individual or legal entity
is resident in a jurisdiction subject to regular
taxation. A 0.3:1 debt/equity ratio applies where
the creditor is domiciled in a low tax jurisdiction
or subject to a privileged tax regime.
Arm’s length principle
The thin capitalization ratios do not change
based on the arm’s length principle. In case of
intercompany loans registered with the Central
Bank, no transfer pricing rules apply.
Other limitations to the
deductibility
As a general rule, Article No. 299 of the Income
Tax Regulations determines that expenses must
be usual, normal and necessary to the activities
of the company in order to be deductible.
Article 26 of Law 12,249 provides for the nondeductibility of any costs or expenses (interests
included) paid or credited by Brazilian sources
to individuals or legal entities resident or
domiciled in low tax jurisdictions or subject to
privileged tax regimes, unless the following
facts are evidenced:
(i) identification of the effective beneficiary of
the payment abroad;
(ii) the operational capacity of the non-resident
individual or legal entity performing the
transaction; and,
(iii) the payment of the respective price and the
receipt of the goods, services or the
utilization of the right transacted.
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3.2.
Withholding tax on interest
In general, interest payments made to nonresidents are subject to
withholding income tax in Brazil under a 15% rate. The applicable
rate is increased to 25% if the foreign company is located in a low tax
jurisdiction.
3.3.
Debt pushdown
There are no restrictions applicable to privately held entities for the
debt pushdown upon the merger of the target entity into the acquiring
entity domiciled in Brazil, provided that the conditions related to the
thin capitalization rules and general deductibility requirements related
to the necessity of the expenses are met. The tax authorities may
challenge the interest deduction at the level of the target company
(after the merger) under the reasoning that such expenses are not
normal and usual for the operations of the target. However, there is
not yet case law consolidated on this matter.
On the other hand, publicly held companies are subject to restrictions
with respect to the debt pushdown, as provided by the Brazilian SEC
(“comissão de valores mobiliários”).
II.
Holding the investment
1.
Main tax costs to be modeled
Taxable income
Net income less deductible expenses is subject
to CIT at the standard rate of 34%.
Depreciation
As a general rule, depreciation is allowed along
the useful life of physical goods subject to
normal wear and tear. The Brazilian Revenue
Department has published a Normative
Instruction with the acceptable depreciation
rates for tax purposes in Brazil. Land is not
subject to depreciation in Brazil
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Write-offs or capital
losses on shares
Capital loss can be offset against current profits
of any nature, without limitation. Accumulated
losses derived from a capital loss (non-operation
loss) can only offset future profits of the same
nature.
VAT
As a general rule, all supplies of goods and
services are subject to VAT (ICMS). The
standard Brazilian VAT rate varies from 7 to
25%. Reduced rates and exemptions may apply.
Input VAT incurred on supplies generally
constitutes deductible cost if it is not creditable.
Other VAT-like taxes
There are other Brazilian taxes that are classified
as VAT taxes and that allow taxpayers to
register credits: the Federal Excise Tax (“IPI”),
which has different rates according to the
product; the Contribution to the Social Security
Financing (“COFINS”) and the Contribution to
the Social Integration Program (“PIS”), which
are usually charged on a combined 9.25% rate.
Service Tax
Levied on the rendering of services specifically
listed, and services are not subject to the State
value-added tax. This tax is also levied on the
importation of services. The tax rate may vary
from 2% to 5%, depending on the kind of
service and on the Municipality in which the
party rendering the services is located.
Social Security
In Brazil, the employer is required to contribute
to the Social Security Department on a monthly
basis in an amount equivalent to 20% of the
gross salary of each employee plus other social
costs. These social costs range from 6% to 12%,
depending on the company’s activities. The
employee must also pay an individual social
security contribution between seven and sixtyfive hundredths to eleven percent (7.65-11%)
over gross monthly salary (currently limited to
R$ 381.41), which is withheld by the employer
from the employee’s earnings.
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2.
Distribution of profits
Withholding tax on
dividends distributed by
a local company
Prior to 1996, any dividends and profits
distributed to nonresidents were subject to a
fifteen percent (15%) withholding income tax
(WHT).
According to Law No. 9,249, of 26 December
1995, profits realized after 1 January 1996 are
no longer subject to the WHT when distributed.
Profits and dividends realized prior to 1 January
1996 are still subject to the WHT at the rates
prevailing within the year the profits were
generated.
This rule applies both to resident and nonresidents, individual or legal entities.
Brazilian companies can also remunerate
shareholders through interest on equity.
According to Law No. 9,249/95, the interest on
net equity paid to shareholders or partners may
be deducted from the tax basis of the CIT, as
long as some requirements provided by the
legislation are met.
The interest on equity is subject to a WHT under
a 15% rate or 25% in case the beneficiary is
located in a low tax jurisdiction.
Taxation of dividends
received by a local
company
The dividends received by a local company from
another local company are exempted from
corporate income taxation in Brazil
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III.
Selling the investment
1.
Asset deal
Capital gain taxation
Ordinary 34% rate
Selling costs / Transfer
taxes
Upon sale of real estate there will be the levy of
the ITBI (real estate tax) or VAT taxes (if
inventory is sold as described above).
Sale by corporate nonresidents
N/A
2.
Share deal
Capital gain taxation
34% (local legal entity sellers), 15% (nonresident sellers) or 25% in case of low tax
jurisdictions.
Selling costs / Transfer
taxes
Upon sale of shares, there will not be the levy of
the ITBI (real estate tax) or VAT Taxes.
IV.
Tax regime for restructuring operations
Merger or demerger
Baker & McKenzie
Is generally regarded as a tax-free
reorganization if the transaction is carried out at
net book value.
NOLs of the absorbed company realized prior to
the merger should be written-off. In case of a
partial demerger (split), NOLs of the entity
subject to the split are written-off
proportionately to the percentage of equity
transferred upon the split.
Tax credits existing at the level of the absorbed
company at the time of the merger are
automatically transferred to the absorbing entity
(e.g., VAT credits, R&D and other temporary
differences).
39
Contribution of
universality or business
divisions or shares
Can be tax-neutral provided that:
(i) the assets and liabilities are transferred
based on the net book value
(ii) the transferred assets and liabilities
constitute a business as a going concern
Swap of shares
If a Brazilian company realizes a share-forshare exchange, the gain realized in that
occasion may, under certain conditions, be
rolled over until the future sale or actual
disposition of the shares. Any cash
compensation in the transaction is immediately
taxable.
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Chile
Alberto Maturana, Partner
Alberto P. Maturana practices mainly in tax and
corporate law in Baker & McKenzie’s Santiago
office. He has actively participated as a speaker
in a wide variety of tax conferences, and has
also published numerous articles, including
“Cross-Border Contract Manufacturing Can
Have Costly Tax Consequences in Chile” for
Tax Analyst. He serves as a professor
of International Taxation in various postgraduate programs.
Mr. Maturana advises corporations and individuals from a broad
spectrum of industries. He is proficient in business structuring,
foreign inbound/outbound investment, offshore intercompany
transactions, as well as tax and estate planning. In addition, he
counsels on mergers and acquisitions and matters involving contracts.
Mr. Maturana is a permanent legal representative for various foreign
companies doing business in Chile.
alberto.maturana@bakermckenzie.com
Tel: +56 2 367 7006
Cruzat, Ortuzar y Mackenna Limitada
Nueva Tajamar 481
Torre Norte, Piso 21
Santiago
Chile
Baker & McKenzie
41
At a Glance
Corporate income tax rate (CIT) (%)
20% 10
Surtax (%)
0 to 40% on a progressive basis
Capital gains tax rate (%)
35%, 20% 11 , 17%, 16% 12
Tax losses carry forward (years)
Indefinite
Tax losses carry back (years)
Indefinite
Limitations to transfer of tax losses
Yes
Domestic withholding tax rate on
dividends (%)
35% (while giving the corporate
income tax paid as a credit)
Withholding on interest
35%, 15% 13 , 5% 14 , 4%
Capital duty (%)
0,05% annually on the tax equity
Transfer tax rates (%)
Sale of movable assets
N/A
Sale of real estate assets
N/A
Sale of shares of real estate
oriented company
N/A
Standard VAT rate (%)
19%
Neutral tax regime for restructuring
operations
Yes, such as: merger, divisive reorg
or demerger, certain capital
contributions, conversion. In these
cases the assets maintain their tax
book value.
10
The 20% rate applies for commercial year 2011. For year 2012, the tax rate will be
reduced to 18,5%. From year 2013 onwards the tax rate will be in 17%.
11
Under certain circumstances, the capital gain is subject to the corporate tax rate, as a
single tax. This rate will be reduced in the way described in footnote No. 1 above.
12
Tax rate that may be levied upon a double taxation treaty application.
13
Idem.
14
Idem.
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Tax Consolidation
No
VAT grouping
No
I.
Preliminary income tax considerations
In order to illustrate the pros and cons of an asset deal versus a share
deal, it is previously necessary to have a basic understanding of the
Chilean income tax system.
Chile has an integrated income tax system consisting in a two-tier
taxation: a) 20% Corporate Income Tax, applicable to the taxable net
income of the company calculated on an accrued basis; and b) Final
taxes: 0% to 40% Surtax for Chilean domiciled or resident individuals
or 35% withholding tax for non domiciled nor resident in Chile
individuals or entities. The corporate income tax paid on the
underlying profits may be used as a credit against the applicable final
tax.
1.
Corporate Income Taxes (“CIT”)
20 % CIT applies on an accrued basis at the level of the Chilean
entity, based on its taxable net income, calculated pursuant to articles
29 to 33 of the Income Tax Law (“ITL”).
According to the ITL, the taxable net income is calculated as follows:
Gross Revenues
(Direct Costs)
= Gross Income
(Deductible Expenses)
= Net Income
+/- Adjustment as for inflation
= Adjusted Net Income
+/- Adjustments
= Taxable Net Income
Baker & McKenzie
Art. 29
Art. 30
Art. 31
Arts. 32 and 41
Art. 33
43
In practice, however, the taxable net income is calculated starting
from the financial Profit / Loss, to which certain adjustments are made
in the form of add-backs and deductions.
1.1.
Gross Revenues
The ITL establishes cases in which certain items of income that are
non-taxable, and thus, should not be included as gross revenues.
1.2.
Direct Costs
Direct costs necessary to produce taxable income are deductible from
gross income. In case of products imported into Chile, the direct costs
include CIF value, custom duties paid (if any), expenses incurred to
nationalize products, and optionally (i.e., they may be alternatively
deducted as expenses) transport costs and insurance paid while the
product is on the way to the importer’s warehouse.
1.3.
Deductible Expenses
In general terms, an expense is deductible from net income when: a) it
is necessary (i.e., mandatory or inevitable) to produce the taxpayer’s
taxable income; b) it relates to the taxpayer’s line of business; c) it is
owed or paid; and d) it is fully supported in case of an audit by the SII
(legal requirements set forth in article 31 of the ITL).
1.4.
Adjustment for inflation
On December 31 of each commercial year, taxpayers must adjust their
non-monetary assets, liabilities and tax equity for inflation.
Subject to certain legal requirements, it is possible to request to the SII
an authorization to keep accounting records in foreign currency, in
which case no adjustment for Chilean inflation would be required.
Upon such authorization, it is also possible to request permission to
declare and pay Chilean income taxes in foreign currency.
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1.5.
Adjustments
Certain adjustments (add-backs and deductions) are performed to the
adjusted net income following tax criteria. For example, the financial
provisions regarding vacations or uncollectable receivables (that do
not comply with certain minimum requirements) must be added to the
adjusted net income, as they are not deductible expenses for tax
purposes.
1.6.
Tax compliance
Regarding tax compliance obligations, monthly income tax prepayments (known a “PPM”), based on a variable rate, must be made
as an advance payment of the annual CIT liability (Form No. 29).
On April of the year following commercial year, the income tax
declaration must be performed (Form No. 22).
2.
Dividends distributed abroad
In case of an SA, it is necessary to have financial profits in order to
distribute dividends. Also, accumulated financial losses must be
absorbed against financial profits prior to dividend distributions.
In case of a Ltda (limited liability company), there are no legal
limitations on profit distributions.
A 35% WHT is applicable to dividend distributions abroad, while the
20% CIT paid on the underlying accrued earnings may be used as a
credit. When remitting the dividend abroad you perform a gross up by
the CIT paid on the underlying income and then get a credit for such
CIT.
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45
Example:
Taxable Income
100
20% CIT
20
Net income for distribution
80
Gross-up
20
WHT tax base
100
35% WHT
35
20% CIT credit
20
Net WHT liability
15
Net dividend after taxes
65
The applicable withholding tax must be declared and paid within the
first 12 days of the month following that of the remittance. Provisory
withholdings may be applicable.
II.
Acquiring the investment
1.
Acquisition through an asset deal
From a transactional point of view, an asset acquisition may be quite
complex. The general approach is to perform an acquisition of assets
and liabilities identified individually, or make the acquisition as an ongoing concern (transfer of assets and liabilities as a whole).
The transfer of certain assets such as real property, trademarks,
vehicles, among others, must be recorded in dedicated registries.
From a tax standpoint, asset acquisitions may be an option, taking into
consideration that the acquirer company does not assume any past
liability of the vendor, as opposed to a share deal. However, any
capital gain arising from the transfer of assets – which must be
performed at fair market value - by a non-resident entity or individual
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is subject to a 35%, which may constitute a higher tax burden than a
share deal, depending on the specific circumstances of the operation.
Also, the seller will not be automatically released from its liabilities
by transferring them to the buyer; the consent of each individual
creditor may be required for the seller to be effectively replaced by the
buyer. The same is true with respect to contracts or agreements to be
transferred to the buyer. The transfer of contracts with government
agencies requires special attention, as in many situations the transfer
of the agreement is a cause for immediate termination thereof. In turn,
for the transfer of credits to be effective against the debtor, he must
accept the transfer or at least be notified of it.
From a VAT standpoint, the transfer of assets would be subject to
19% VAT, when consisting of tangible movable assets. The transfer
of real property assets will be subject to 19% only when made by a
construction company (entity that habitually sells real property fully
built by such entity, or partially built by a third party). Also, VAT
would apply in the transfer of fixed assets acquired before the
completion of a four-year period (one year in case or real property)
prior to selling or if they have not been completely depreciated at the
time of the sale.
1.1.
Capital gain taxes (“CGT”)
Capital gains are treated as ordinary business income, thereby subject
to an applicable 20% CIT, which may be used as a credit against final
taxes, this is 0% to 40% Surtax if the seller is a Chilean domiciled
individual; or 35% withholding if the vendor is a foreign taxpayer.
1.2.
VAT
19% value added tax may be levied on the customary sale of assets
and the provision of certain services (i.e., those described in article 20
Nos. 3 and 4 of the ITL).
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47
As a general rule, this statement is valid for the sale of inventories
(raw materials, intermediate products and finished products), and real
property to the extent the seller qualifies as a construction company
that fully or partially built the property. Under certain circumstances,
VAT is also applicable to the sale of fixed assets, i.e. those that have
not been fully depreciated or have not completed 4 years (from
acquisition) at the time of the sale, or 1 year for real property.
As a general rule, input VAT (i.e., VAT charged to the taxpayer by its
suppliers or service providers) may be offset against its output VAT
(i.e., VAT charged by taxpayer to its customers).
VAT credit incurred in the acquisition of fixed assets which has been
accumulated for 6 months or more (due to none or poor generation of
VAT debit) may be refunded in cash upon request by the taxpayer.
However, this mechanism involves the taxpayer’s commitment to
generate VAT debit in the future.
Thus, if the purchaser in the asset deal is a VAT taxpayer, the VAT
charged in the sale of assets may be offset against the VAT it charges
to its customers.
Also, local exporters may ask for early VAT refund to the extent
certain requirements are met.
Rates
19%
Basis
Transaction price
Date of payment
Within the 12 first days of the month following
that of the transaction subject to VAT
Liable person
Seller, as a general rule
Recoverability
As a general rule input VAT may be recovered
by offset against output VAT
Exemption
There are several exemptions provided by the
applicable legislation depending on the product
or industry
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1.3.
Transfer tax
Besides VAT, there is no transfer tax in Chile.
1.4.
Other acquisition costs
Notary fees
Yes, variable
Registration fees
Yes
Mortgage registration
duties
Yes
Transfer of leases
No
Stamp duties
No (except when the acquisition is financed
with debt)
Tax deductibility for
CIT
The deductibility of such expenses shall follow
the general rules for CIT deduction (see I.1.C
above).
1.5.
Transfer of tax liabilities in the asset deal
As a general rule, there is no transfer of tax liabilities in an asset deal,
with the exception of contingency related to real property tax which
follows the real property asset –and thus the new owner (purchaser)
thereof.
2.
Acquisition through a share deal
The acquisition of a business may be achieved by purchasing the
shares of the company. Share acquisitions are more common than
asset acquisitions in Chile, as they are often less burdensome from a
transaction point of view and, depending on the circumstances, also
more tax efficient.
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49
2.1.
Capital gain taxation
If the asset being transferred consists in participation (stock) in a
Chilean company, the capital gain calculation as well as applicable
taxes may vary depending on the kind of company stock being
transferred.
As a general rule, the gain realized in connection with the transfer of
quotas in a Chilean limited liability company, performed by a foreign
seller, should be subject to a combined 35% tax burden 15 . The tax
basis of the quotas will depend on whether the acquiring entity is a
related entity (i.e., downstream sale or contribution) or not. If the sale
is made to an unrelated party, the accumulated taxable earnings of the
target company integrate the tax cost basis of the quotas.
In turn, the gain realized in connection with the transfer of shares in a
stock corporation (SA) or stock company (SPA), performed by a
foreign seller, is subject to a combined 35% tax burden if: 1) the
transfer occurs within one year from the date of the acquisition of the
shares; 2) the transfer is made to a related party; or 3) the transferor
“habitually” sells shares. Otherwise, capital gain is exclusively
subject to the corporate tax rate as a single income tax. The tax basis
of the shares corresponds to their acquisition cost, adjusted for
inflation.
2.2.
Goodwill
When the target company is dissolved as a matter of law due to the
reunion of 100% participation in one hand, the Chilean IRS has
allowed the use of the goodwill (i.e., difference between the target’s
outside basis (i.e. the acquisition cost) and the target’s inside basis
(i.e., the tax equity), by proportionally assigning such goodwill to the
underlying non-monetary assets (those which auto protect from
inflation) received from the absorbed entity. Such step-up in the tax
15
The 35% tax burden reflects a 17% CIT plus a 35% nonresident income tax less a
credit against the nonresident income tax for the 17% CIT paid.
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cost basis of the assets will be later expensed by means of depreciation
or cost of goods sold.
Although this goodwill mechanism is not expressly regulated in our
legislation, it is contained in several rulings issued by the Chilean IRS.
Pursuant to article 26 of the Tax Code, the taxpayer may shelter in the
interpretations found in the Chilean IRS’ rulings, which are legally
binding against the IRS, without being questioned by the authority.
2.3.
VAT and transfer tax
There is no VAT nor transfer tax applicable on the transfer of
participation in a company, as stock (shares or quotas) is considered
an intangible asset.
2.4.
Tax Losses
Article 31 No. 3 of the Income Tax sets forth restrictions for the use of
NOLs recorded in the target company, based on a tax reform
introduced in year 2001 to prevent tax evasion.
Basically, NOLs may not be used against taxable earnings (whether
generated by the taxpayer or received from other company as dividend
income or reinvestment of profits), when the target suffers a change of
corporate control and one of the following circumstances are met:
a)
Change of business purpose performed 12 months before or
after the change of control, unless the main one is preserved;
b)
Target does not have enough assets to develop its business or
such assets have no similar value than the shares’ purchase
price; or
c)
Target will only receive passive income from other
companies.
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51
By change of corporate control it is understood the situation where the
new shareholders acquire or end up acquiring a 50% or more
ownership interest in the target.
2.5.
Transfer of tax liabilities
In case of a share deal, all past tax liabilities relating to the purchased
company remain in the company and are therefore taken over by the
purchaser together with the target entity. The tax liabilities of the
target entity may be audited and reassessed by the tax authorities
within the statute of limitations period, which is generally of 3 or 6
years, depending on the circumstances.
To the extent the acquisition deed contains a provision stating that the
acquiring company will assume responsibility for tax liabilities of the
absorbed entity it is possible to file a “simplified termination of
activities” before the Chilean IRS (which is less exposed to scrutiny
by the Chilean IRS).
3.
Financing the investment
3.1.
Deductibility of financing expenses
As a general rule, financing expenses will be fully tax-deductible in
the hands of a Chilean purchaser, irrespective of whether the
transaction is structured as an asset deal or as a share deal.
The financing expenses need to meet the general deductibility
conditions that apply for any expenses.
In the case of a share deal, however, there may be deductibility
inefficiencies in financing expenses for the acquisition of a stock
corporation (SA) or stock company (SpA). Such inefficiencies may
be cured by interposing a Limitada, which is financed by debt, and the
cash is later contributed by the Limitada into the Target or paid to the
vendor as purchase price.
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There are thin capitalization rules in Chile in relation to related-party
debt, when the interest payments are subject to a reduced 4%
withholding. The transaction is understood as related when it is an
intra-group transaction, or the back-to-back loan is guaranteed with a
cash or cash equivalent, or if the creditor is resident in a tax haven
country or low tax jurisdiction.
Thin capitalization rules
Application of a 3:1 debt/equity ratio. Relatedparty transactions which benefit from the 4%
withholding rate.
Arm’s length principle
The thin capitalization ratio does not change
based on the arm’s length principle.
Interest exceeding the 3:1 ratio will be subject
to an additional 31% income tax payable at the
level of the Chilean debtor. Such tax rate is not
limited by double taxation treaties.
Other limitations to the
deductibility
Excessive interest may still be tax deductible to
the extent it complies with the general legal
deductibility rules set forth in article 31 of the
Income Tax Law.
3.2.
Withholding tax on interest
In general, interest payments made to nonresidents are subject to
withholding income tax in Chile under a 35% rate. However,
outgoing interest payments on certain transactions are subject to a 4%
reduced WHT rate, such as interest derived from: a) loans from
foreign banks, insurance companies and financial institutions; b)
bonds issued by Chilean entities; c) outstanding sale price from
importation of goods under deferred payment conditions; d) deposits;
among others.
Interest subject to the 4% reduced WHT rate derived from transactions
between related parties are subject to thin capitalization rules, under a
3:1 debt-to-equity ratio.
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53
Double taxation treaties signed by Chile may limit the applicable
withholding rate to a 5% or 15%, depending on the circumstances.
3.3.
Debt pushdown
There are no restrictions applicable to privately held entities for the
debt pushdown upon the merger of the target entity into the acquiring
entity domiciled in Chile, provided that the conditions related to the
thin capitalization rules and general deductibility requirements are
met.
III.
Holding the investment
1.
Main tax costs to be modeled
Taxable income
Net income less deductible expenses is subject
to CIT at the standard rate of 20% 16 on an
accrued basis
Depreciation
As a general rule, depreciation is allowed to be
expensed along the expected useful life of fixed
assets. The Chilean IRS has published
Resolutions with the acceptable useful life of
assets.
Newly acquired or built fixed assets may be
depreciated on a third of their useful life
(accelerated depreciation) for tax purposes.
However, this depreciation only works for CIT
purposes (i.e., the 2/3 of additional depreciation
must be added when calculating second-level
taxation).
Land and intangibles are not subject to
depreciation in Chile.
Write-offs or capital
losses on shares
Capital loss can only be offset against profits of
the same regime. The referred losses can be
carried forward indefinitely, when the taxpayer
16
This rate will be reduced in the way described in footnote No. 1 above.
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carries full accounting records.
Capital loss incurred by a foreign entity may
only be offset against profits of the same regime
generated on the same year.
VAT
As a general rule, certain supplies of goods and
services are subject to 19% VAT. Exemptions
may apply.
Input VAT incurred on supplies generally
constitutes a deductible cost if it is not
creditable.
Other VAT-like taxes
There are other Chilean taxes contained in the VAT
Law, such as excises taxes to alcohol, jewelry, among
others.
Social Security
In Chile, dependent employees are required to
contribute to individual pension accounts on a
monthly basis in an amount equivalent to ten
percent (10%) of its gross salary, with a cap set
at approximately USD 2,900 (as of Nov 21,
2011). A 7% of the gross salary (with the same
cap above) must go to a Health Insurance
Institution. Mandatory SS contributions above
must be deducted from the employer and
remitted to pension managing institutions
(AFPs) on a monthly basis.
2.
Distribution of profits
Withholding tax on
dividends distributed by
a local company
Baker & McKenzie
35% WHT upon distribution of taxable profits,
minus the CIT paid in connection with such
profits. The CIT rate has changed over time
(e.g., 15%, 16%, 16,5%, 17%, 20%), thus the
Chilean company carries a “Taxable Earnings
Ledger” (aka FUT), to keep record of the CIT
paid and creditable in the future.
Dividend distributions must follow an
imputation order, which basically consists in
allocating the dividends to the taxable earnings
55
recorded in the FUT, prior allocation to e.g.
income not subject to final tax or non taxable
income.
Provisory withholdings may be applicable.
The applicable WHT is currently not reduced by
double taxation treaties signed by Chile, insofar
as the Chilean income tax system continues to
be an “integrated” system.
Taxation of dividends
received by a local
company
The dividends received by a local company
from another local company are exempted from
corporate income taxation in Chile (as it has
been already paid by the latter)
IV.
Selling the investment
1.
Asset deal
Capital gain taxation
20% 17 CIT plus final taxes (0% to 40% Surtax;
or 35 WHT), minus the CIT paid
Selling costs / Transfer
taxes
VAT
Sale by corporate nonresidents
35% overall tax burden over the capital gain
2.
Share deal
Capital gain taxation
17
18
Generally, 20% 18 CIT plus final taxes
The gain in the sale of shares in a Chilean stock
corporation may be subject to a sole CIT
(currently set at 20%), insofar as the following
requirements are complied:
a) Sale was performed to an unrelated
party
This rate will be reduced in the way described in footnote No. 1 above.
See footnote above.
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b) Sale is not habitual
c) Sale is made after at least one year
from acquiring the shares
The capital gain is calculated as the sale price
minus the acquisition price adjusted as for
inflation.
The gain in the sale of shares in a publicly listed
company is not subject to income tax, to the
extent certain requirements are met.
Selling costs / Transfer
taxes
None.
Sale by corporate nonresidents
Generally, 35% overall tax burden over the
gain, or CIT (currently set at 20%) as explained
above, or no income tax, as applicable.
The tax cost basis in a Chilean Limitada
(limited liability company), when the seller is a
foreign entity or individual, includes the taxable
retained earnings, to the extent the sale is not
made to a related party.
V.
Tax regime for restructuring operations
Merger or demerger
Baker & McKenzie
To the extent the merger and demerger maintain
the tax value of the assets, liabilities and equity
involved, the transactions would be considered
tax neutral (i.e., no capital gain taxation; no
challenge by the Chilean IRS).
NOLs of the absorbed company realized prior to
the merger should be written-off.
In case of a partial demerger, NOLs cannot be
assigned to the NewCo created as a result of the
demerger.
In general, any personal tax attributes existing at
the level of the absorbed company or demerged
company may not be transferred to the
absorbing entity or NewCo, respectively.
57
Transformation or
conversion
Generally tax-neutral
Contribution of shares
As a general rule, an equity contribution must
be performed at fair market value.
However, it can be tax-neutral (i.e. performed at
carry over basis) provided that:
(i) the assets are transferred based on their
tax value;
(ii) there is a legitimate business purpose;
(iii) the receiving entity is a Chilean entity
that performs a capital increase;
(iv) no cash flow is received by the
contributor; and
(v) Contributor must not disappear as a
result of the contribution.
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Colombia
Jaime Vargas Cifuentes, Partner
Jaime Vargas serves as head of the Firm’s Tax
Practice Group in Colombia. He also has
experience working in the Mexico office of
Baker & McKenzie, where he handled the
International and Corporate Tax Department of
Coca Cola FEMSA. Prior to this, Mr. Vargas
was the managing partner of the legal and tax
practices of Deloitte and Arthur Andersen. In
addition to his legal practice, Mr. Vargas has written several
publications on taxation matters and has worked as a professor of
international and corporate taxes in some of the most renowned
universities in Colombia. He has also been consistently
acknowledged as one of the best tax advisors in Colombia by leading
journals, including International Tax Review and Euromoney.
jaime.vargas@bakermckenzie.com
Tel: +57 1 634 1500
Baker & McKenzie
59
Martha Lucía Grazio, Associate
Martha Grazio has more than 10 years of
experience working in tax planning and she is a
member of the Firm’s Tax Practice Group in
Colombia. She has worked in law firms and
corporations handling tax advisory, litigation,
compliance, tax planning, related to corporate
and local taxes. Her main experience is in the
telecommunications business and in public
utilities. Ms. Grazio’s practice is focused on
tax planning and tax advisory services for local and foreign
companies. Her experience includes working on tax planning,
litigation, corporate restructurings, as well as several transactions
involving local and international jurisdictions. Mr. Grazio’s
experience covers a broad range of industries, including
telecommunications, public utilities, and consumer business, among
other sectors.
martha.grazio@bakermckenzie.com
Tel: + 57 1 634 1500
Baker & McKenzie Colombia S.A.
Avenida 82 No. 10-62 Piso 6
Bogotá
Colombia
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At a Glance
Corporate income tax rate (CIT) (%)
33%
Local income tax rate (%)
N/A
Capital gains tax rate (%)
33%
Tax losses carry forward (years)
Indefinite
Tax losses carry back (years)
N/A
Limitations to transfer of tax losses
Yes
Domestic withholding tax rate on
dividends (%)
0% if paid out from profits that were
taxed at the level of the company
that distributes them, 33% if not.
Withholding on interest
14% or 33% 19
Capital duty (%)
0,7% registration tax
Transfer tax rates (%)
Sale of movable assets
N/A
Sale of real estate assets
Registration Tax (0,7%), registration
rights (0.5%) and Notary Fees
(0.27%)
Sale of shares of real estate
oriented company
N/A
Standard VAT rate (%)
16%
Neutral tax regime for restructuring
operations
Mergers and spin-offs are tax free
reorganization mechanisms
Tax Consolidation
No
VAT grouping
No
19
The general withholding rate on interest is 14%, however if the loan is granted for a
period of less than one year, the withholding increases to 33%.
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61
I.
Acquiring the investment
1.
Acquisition through an asset deal
For tax purposes, in the acquisition made through an asset deal, each
asset must be duly identified and transferred individually to determine
applicable taxes pursuant to the kind of goods, intangibles or
liabilities.
Legally, the vendor may choose to transfer some selected assets or
liabilities depending also on the interest of the buyer. The vendor may
also sell an ongoing business, understood as a group of organized
assets that combined represent a business.
If the parties enter into a transaction to buy and sell individualized
assets the Tax Administration in Colombia will not expect to find any
goodwill as a result of the transaction. However, if the sale is
structured as a disposition of an ongoing concern, it could be expected
that goodwill 20 be transferred, which may result in additional tax
advantages for the seller, as it may increase the tax basis and thus,
reduce taxable profits. The Colombian Tax Code provides that the tax
basis of formed intangible goods, such as goodwill, among others, is
presumed to be equivalent to 30% of its sale price. For this treatment
to apply: (i) the intangible asset must be included in the taxpayer’s
income tax return which corresponds to the year prior to the sale and
(ii) it must be supported on a technical appraisal.
If the transfer of assets includes goods subject to depreciation, the
buyer may reasonably calculate their probable remaining useful life to
depreciate the acquisition cost. In any event, the estimated useful life
20
From an accounting perspective, acquired goodwill is the portion paid in the
acquisition of an ongoing business in excess of the net assets book value as
recognition of the entity’s good name, suitable personnel, reputation, prestige for
selling the best products and services and favorable location. Formed goodwill, on
the other hand, reflects the estimation of the future earnings in excess of the ordinary,
as well as the anticipated valorization of the business’s potential.
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plus the one elapsed in hands of the previous owners should not
exceed the useful life established for new assets.
The vendor and the buyer will be jointly and severally liable for all the
obligations due in the performance of the activities of the ongoing
concern, until the date of its transfer, with respect to obligations
recorded in the accounting books. With respect to such liabilities, the
vendor will remain liable for a period of two months after the
registration of the transfer, provided that (i) the notices to the creditors
were duly made and (ii) the creditors did not oppose to accept the
buyer as their debtor. Once this term has elapsed, the liability of the
vendor ceases.
1.1.
Income Tax
As per article 90 of the Colombian Tax Code, the profit or loss
derived from the sale of assets in Colombia is determined by the
difference between the sale price and the asset’s tax basis.
The sale price is the one agreed by the parties which may not
significantly differ from the asset’s fair market value at the time of
their disposal. A significant difference in the price occurs, when it
differs in more than 25% from the asset’s fair market value.
The tax basis is the acquisition price of the assets, plus improvements
and fiscal readjustments 21 , minus accumulated depreciations and/or
amortizations. The profit derived thereof will be subject to income tax
or capital gains tax at a 33% rate. If the assets that are going to be
disposed off have been held by the vendor for two or more years,
profits will be taxed with the capital gains tax. If assets have been
held for less than two years, profits derived from their sale would be
taxed as ordinary income.
21
Rates for fiscal readjustments are annually determined by the Government.
Taxpayers have the option of adjusting their fixed assets.
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In either case the applicable rate is equivalent to 33%; however to
determine the profit subject to capital gains tax, taxpayers are only
allowed to deduct the tax basis of the sold assets, no other expenses
would be deductible. Ordinary income may be offset with other tax
pools such as ordinary tax losses and excesses of presumptive
income 22
Under current legislation, tax losses (NOLs) can be carried forward
indefinitely. NOL’s do not expire and are not limited to any
percentage of taxable income on a yearly basis. However, capital
gains cannot be offset with NOLs.
1.2.
Value Added Tax (VAT)
Value Added Tax (VAT) is triggered in the sale of tangible movable
assets, the provision of services in the Colombian territory and the
importation of goods. Ordinary rate is equivalent to 16%. The sale of
intangible property is not subject to VAT.
As an exception, the sale of fixed assets is not subject to VAT.
However, the qualification of fixed assets must be determined in
hands of the vendor and not of the buyer. So, only if the goods are
considered as fixed assets for the vendor, the transaction would not be
levied with VAT.
VAT paid by the buyer for the acquisition of assets that would be
registered as fixed assets could not be credited, and must be
capitalized as a higher value of the asset. Thus, VAT may only be
recovered by the depreciation of the asset during its useful life.
22
A taxpayer may be required to pay the income tax based on the so-called
“presumptive income” -which is an alternate minimum taxable income- whenever it
exceeds regular net income in any given year. Presumptive income is equal to 3% of
the taxpayer’s net worth on December 31st of the preceding tax year. The excess of
presumptive income over net income may be carried forward to offset the ordinary net
income determined by the taxpayer within the following 5 years.
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VAT is generally accrued on the sale of inventories, unless such
inventories are expressly excluded from this burden.
As a general rule, VAT paid by the buyer may be used to offset its
output VAT 23 .
1.3.
Industry and Commerce Tax (ICT)
Industry and Commerce Tax (ICT) is triggered on the performance of
industrial, business or service activities within the jurisdiction of a
Colombian municipality. Maximum rate is 1.4% approximately and
rates may vary in each jurisdiction. The taxable base is equivalent to
the gross income perceived by the taxpayer.
This tax is not accrued on the sale of fixed assets whether tangible or
intangible. Therefore, ICT would be levied on the sale of inventories.
1.4.
Transfer Tax
Registration tax is a national levy that applies on the transfer of real
estate at a rate of 1% over the amount of the assets included in the
public deed. In addition, registration rights (0.5%) and notary fees
(0.27%) would be accrued in the proceedings of registration before the
public notary and the national registration office.
1.5.
Other acquisition costs
Notary fees
0,27%
Mortgage registration
duties
Yes
Transfer of leases
No
Stamp duties
No
23
If the buyer’s Business involves the sales of “excluded” assets or services, it will
not be entitled to offset VAT and will become a higher cost of the transaction.
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Tax deductibility for
CIT
1.6.
Such expenses are not deductible for income tax
purposes.
Tax credits
Reinvestment tax credit
No
Other tax credits
No
1.7.
Transfer of tax liabilities in the asset deal
As a general rule, in Colombia, the buyer would not be inheriting tax
contingencies or liabilities, by acquiring assets through an asset deal.
Pursuant to current regulations, the only two cases in which the buyer
would be sharing tax contingencies or liabilities with the vendor are:

In Industry and Commerce Tax, the buyer of the ongoing
concern would be jointly and severally liable with the vendor
for the industry and commerce tax obligations, penalties and
delay interest accrued prior to the transfer of the ongoing
concern.

Regarding custom duties in the import of goods (tariff and
VAT), the risks are generally assumed by the importer.
Nonetheless, if the importer wrongfully paid less import taxes
or applied a tax exemption by describing inaccurately the
imported merchandise, the Customs Office would be entitled
to seize the merchandise, even after sold by the importer to
the buyer.
2.
Acquisition through a share deal
It is more frequent to acquire a business by means of a share deal by
which the buyer may obtain part or the totality of the shares of a
Colombian entity. In addition, this process may result less
troublesome than the asset deal from a practical point of view.
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2.1.
Income Tax
As a general rule, income obtained from the sale of shares of a
Colombian company is subject to capital gains tax at a 33% rate (if
shares were held for two years or more, otherwise it would be
considered taxable income). If part of the price paid for the shares is
originated from undistributed profits that were already taxed in the
hands of the company, that portion of the price would not be subject to
taxes.
The basis in which this tax is assessed is the difference between the
sale price and the tax basis of the shares. The sale price must be at
least 75% of the shares fair market value as detailed in index 1.1. The
tax basis is equal to acquisition or capitalization cost of the share plus
fiscal adjustments for inflation or readjustments.
Capital gains or taxable income obtained in the sale of the shares will
be subject to income tax at a 33% rate.
The Tax Office currently would allow the buyer to register the
acquisition goodwill paid in the share acquisition as an intangible
asset (complying some conditions established by the Tax Office) and,
thus, subject to amortization. Even that tax law does not have any
direct reference to the tax treatment for the acquisition of goodwill,
article 142 of the Colombian Tax Code states that investments made
for the purposes of a certain business or of an income producing
activity are amortizable for income tax purposes. In regards to the
period of amortization, article 143 establishes that intangible assets
should be amortized in a minimum term of five years, unless that due
to the nature of the intangible or of the business, the amortization must
be done in a shorter period.
It is important to bear in mind that for accounting purposes, the
acquisition goodwill should be amortized in the same term in which
the investment would be recovered in accordance with the technical
study that was prepared for the acquisition. If the term determined for
tax purposes differs from the term established for accounting
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purposes, the temporary differences that would arise may result in
double taxation situations in hands of the company and the
shareholders. Therefore, it would be recomendable to use the same
method and term for accounting and tax purposes.
2.2.
VAT and Transfer Tax
Neither VAT nor transfer taxes would be triggered in the share deal.
2.3.
Tax Losses
NOL’s would be preserved in hands of the entity subsequent to the
acquisition of shares, unless a reorganization process takes place, in
which case some limitations would apply.
2.4.
Transfer of tax liabilities
Whenever the buyer acquires part or the totality of the shares of a
Colombian entity, likewise he must assume all the tax contingencies
and liabilities of the purchased company. Hence, the buyer would be
liable for the payment of taxes, prepayments, withholdings, penalties
and delay interest and in general all tax obligations. This is of course
an obligation of the company acquired and not of the shareholder
directly. The statute of limitations for the Tax Office to demand the
payment of tax debts expires in 5 years since the debt became
enforceable.
3.
Financing the investment
3.1.
Deductibility of financing expenses
In any case, under the asset deal or share deal, the financing expenses
will be 100% tax deductible in hands of the Colombian buyer, as long
as said expenses comply with the general requirements for
deducibility, namely (i) necessity, (ii) proportionality and (iii) causeeffect relationship with the income generating activity.
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In case the financing expenses are paid abroad to non-residents, a
withholding income tax of 14% or 33% will apply (the latter for loans
granted for a period that does not exceed a year). The withholding is a
condition for the deductibility of the interest for corporate income tax
purposes.
Additionally, if loans are granted to the Colombian entity by foreign
related parties, the transaction would be under the scope of transfer
pricing rules in Colombia and thus, it should be demonstrated that the
transactions comply with the arm’s length principle.
There are no thin capitalization rules in Colombia for related party
debt. However, pursuant to article 287 of the Tax Code, liabilities
with foreign related parties cannot be excluded from the net equity
and, thus, are deemed as own equity for the taxpayer in Colombia. As
a result, such liabilities would be basis for presumptive income tax
purposes and equity tax.
3.2.
Withholding tax on interest
As previously mentioned, interest payment made to nonresidents
would be subject to income tax withholdings in Colombia at an
ordinary rate of 14%. But if the loan is granted for a period of less
than a year then the applicable rate would be increased up to a 33%.
3.3.
Debt pushdown
The acquisition debt may be subject to a pushdown into the
Colombian entity or an entity as a result of a reorganization process in
Colombia, with no restrictions. Financing expenses would be tax
deductible provided that the general conditions for the deductions of
expenses are met.
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II.
Holding the investment
1.
Main tax costs to be modeled
Taxable income
Net revenues less costs and deductible expenses
are subject to income tax at a rate of 33%.
Depreciation
Depreciation is allowed during the useful life of
the goods (fixed assets) according to the terms
determined by law:

Vehicles and computers, 5 years

Machinery, equipment and other movable
goods, 10 years.

Immovable property (including pipelines),
20 years.
Land is not subject to depreciation.
Capital losses on shares
Pursuant to article 153 of the Colombian Tax
Code, losses generated in the transfer of shares
are not deductible for income tax purposes.
VAT
VAT is triggered on the sale of tangible
movable assets, the importation of goods or for
rendering services into Colombian territory.
The ordinary rate is of 16%, however there are
different rates and some services and goods
would be excluded or exempt from this tax.
As a general rule, Input VAT may be credited
against Output VAT, unless some goods or
services are considered as excluded from VAT,
in which case, such amount would constitute a
deductible cost for income tax purposes.
VAT paid on the acquisition or importation of
assets that are registered as fixed assets can not
be credited, and must be capitalized as a higher
value of the asset. Thus, the tax paid may only
be recovered by the depreciation of the asset
during its useful life.
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Industry and
Commerce Tax
This tax is levied on net receipts obtained from
industrial, commercial or services activities
carried out within the jurisdiction of a
Colombian municipality. Each municipality
may impose this tax at rates that range between
0.2% and 1.4%.
The taxable basis is the gross income perceived
by the taxpayer for industrial, commercial or
services activities.
This tax is not accrued on the sale of fixed
assets, whether tangible or intangible.
Industry and Commerce Tax paid during the
taxable year is a deductible expense for income
tax purposes.
Social Security
In Colombia, the employer and employee are
required to pay the following Social Security
Contributions on a monthly basis over gross
salary of each employee:
(i) Pensions, the employer pays 12% and the
employee 4%;
(ii) Health, the employer pays 8.5% and the
employee 4%;
(iii) Professional risks, the employee must
assume the total amount that may range
between 0.348% and 8.700% depending on
the risk of the employment.
Employees that earn more than 4 minimum legal
monthly salaries must contribute with the
solidarity pension fund.
In addition, the employer must liquidate and pay
the payroll taxes that are equivalent to 9% of the
payments deemed as salary.
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2.
Distribution of profits
Withholding tax on
dividends distributed by
a local company
Colombia eliminates double taxation between a
company and its shareholders at the company’s
level. This means that dividends paid out from
profits that were fully taxed in the hands of the
company that distributes them can be paid free
of taxes to the shareholders, while dividends
paid out from profits that were not taxed at the
company’s level are subject to taxes at the
corporate rate of 33% when distributed to the
shareholders.
Taxation of dividends
received by a local
company
Same as above.
III.
Selling the investment
1.
Asset deal
Capital gains taxation
33% rate, if assets have been held for two years
or more.
Ordinary income
taxation
33% rate, whenever assets disposed of have
been held for less than two years.
Selling costs / Transfer
taxes
The transfer of real estate will be subject to
Registration Tax. VAT may be accrued
according to the nature of the assets transferred.
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2.
Share deal
Capital gains taxation
Ordinary income
taxation
Selling costs / Transfer
taxes
IV.
33% rate, if the shares have been held for two
years or more.
33%, whenever the shares disposed of have
been held for less than two years.
The sale of shares does not trigger Registration
Tax, VAT or other transfer taxes.
Tax regime for restructuring operations
Merger
A merger is a tax free reorganization
mechanism in Colombia. Pursuant to Article
14-1 of the Colombian Tax Code in the event of
a merger, it would not be considered that a
transfer has occurred between the merged
entities.
In Colombia there are no restrictions or special
requirements such as a holding period for a
merger to be tax free.
The entity resulting from the merger will be
liable for the taxes, tax prepayments,
withholding taxes, penalties and interest and
any other tax obligation of merged entities.
The absorbing entity, or the entity that is created
through a merger may compensate the NOL’s of
the absorbed entities, up to a limit equivalent to
the participation of the equity of the absorbed
entities in the equity of the absorbing entity or
the equity that was created through the merger.
In any merger, the compensation of NOL’s with
income obtained by the absorbing entity or by
the entity created through the merger can only
operate if the economical activity of the entities
that participated in the merger was the same
prior to the merger.
Spin-off
A Spin-off is a tax free reorganization in
Colombia. Article 14-2 of the Colombian Tax
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Code states that in the event of a spin-off it is
not considered that a transfer has occurred
between the spun-off entity and the entities
resulting from the spin-off.
A spin-off occurs when a company, without
being dissolved, transfers in block a portion of
its equity to an existing or a new company
(beneficiary). Another type of spin- off is when
a company, without being dissolved, divides its
equity in two or more parts, which are
transferred to existing companies or destined to
the creation of new ones.
The entities resulting from the spin-off will be
jointly and severally liable with the spun-off
company for the taxes, tax prepayments,
withholding taxes, penalties and interest and
any other tax obligation of the spun-off
company, owed at the time of the spin-off or
that result afterwards in connection to tax
periods elapsed before the spin-off.
The entity that results from the spin-off may
offset the NOL’s of the spun-off entity, up to a
limit equivalent to the participation of the equity
of the resulting entity in the equity of the spunoff entity.
In a spin-off, the use of NOL’s against income
from the absorbing entity can only operate if the
economical activity of the entities that
participated in the spin-off was the same prior to
the spin-off.
Swap of shares
74
According to Colombian regulations, if a
Colombian taxpayer swaps its shares in a
Colombian company for shares of another
company, said transaction is subject to taxes.
The gain would be the difference between the
tax basis of the swapped shares and the fair
market value of the shares received in exchange.
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Mexico
Héctor Reyes Freaner, Tax Director
Héctor Reyes Freaner serves as coordinator of
Mexico’s Tax Practice Group and head of the
Tax Compliance Practice of the Firm’s Mexican
offices. He also sits on Baker & McKenzie’s
Tax Committee for Latin America. Mr. Reyes
Freaner has 20 years of experience advising
multinational companies on tax planning, M&A
transactions and corporate taxes. A member of
the Certified Public Accountants’ Association, Mr. Reyes Freaner is
well-regarded as one of Mexico’s best tax lawyers.
hector.reyes@bakermckenzie.com
Tel: +52 55 5351 4120
Javier Ordoñez, Associate
Javier Ordoñez-Namihira joined Baker &
McKenzie’s Mexico City office in 2004 as a
law clerk and became an associate in 2010. He
is a frequent speaker at national and
international seminars and a guest member of
the Committee on Fiscal Affairs of the Mexican
College of Certified Public Accountants. He
recently contributed to the local adaptation of a
model act drafted by the International Federation of Red Cross and
Red Crescent Societies to help states address legal issues arising in the
course of international assistance and relief during disasters.
javier.ordonez-namihira@bakermckenzie.com
Tel: +52 55 5351 4120
Baker & McKenzie S.C.
Edificio Scotiabank Inverlat, Piso 12
Blvd. M. Avila Camacho 1
México, D.F. 11009, Mexico
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At a Glance
Corporate income tax rate (CIT) (%)
30% 24
Alternative minimum tax rate
(IETU) (%)
17.5%
Local income tax rate (%)
N/A
Capital gains tax rate (%)
20%, 25%, 30% and 40% 25
Tax losses carry forward (years)
Ten years
Tax losses carry back (years)
N/A
Limitations to transfer of tax losses
Yes
Domestic withholding tax rate on
dividends (%)
N/A
Withholding on interest
4.9% to 30% 26
Capital duty (%)
N/A
Transfer tax rates (%)
Sale of movable assets
N/A
Sale of real estate assets
ISAI applies as a local tax at variable
24
This rate will be progressively reduced to 29% in 2013 and to 28% in 2014
onwards.
25
For Mexican resident companies capital gains are taxed as regular income. The
20% rate applies upon the transfer of Mexican shares by a resident individual,
whereas the 25% and 30% rates apply to resident corporations and non-residents
(whether individuals or corporations). A 40% WHT applies to income generated by a
resident in a tax haven jurisdiction, subject to a Preferential Tax Regime –i.e. where
the effective tax rate in such jurisdiction is less than 75% percent of the CIT triggered
and payable in Mexico.
26
A 10% WHT applies under most double tax treaties executed by Mexico. Under
domestic law, a general 10% WHT applies on interest paid to foreign banks registered
with the Treasury, provided that they are the beneficial owners. A reduced WHT of
4.9% may apply pursuant to the Federal Revenue Law, provided that the registered
foreign bank is the beneficial owner and a resident of a country with a tax treaty in
force with Mexico. A 15% rate applies on interest paid to reinsurance companies and
30% in all other cases.
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rates according to the Municipality
Sale of shares of real estate oriented
company
N/A
Standard VAT rate (%)
16%, and 11% (in the border zone).
0% applicable to some products and
exportations.
Neutral tax regime for restructuring
operations
Legally feasible to implement taxfree reorganizations in Mexico,
provided that specific requirements
are met
Tax Consolidation
Yes, under specific rules
VAT grouping
No
I.
Acquiring the investment
1.
Acquisition through an asset deal
At the outset, the Federal Fiscal Code sets forth basic rules for
purposes of considering a given transaction a transfer of assets for tax
purposes. According to Article 14 of said Code, a transfer of goods is
deemed to occur in the following cases: i) any and all property
transfers even in cases where the transferor reserves the right to use
the asset, ii) allocation of assets, iii) contributions made to
corporations or associations, iv) financial leasing, v) the establishment
of an irrevocable trust, vi) transfer of rights in a trust, vii) transfer of
tangible property or the right to acquire it through securities or
negotiable instruments, viii) transfer of crediting rights, and ix)
mergers and spin-offs,.
From a transactional point of view, an asset acquisition may be quite
complex, as each asset and liability to be included in the sale has to be
identified and transferred individually.
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Real estate property transfers conducted in Mexico have to be
notarized to be effective, resulting notarial fees and transfer tax
depending on the value of the property concerned.
Pursuant to the Mexican Income Tax Law (“MITL”), specific items
may be deducted from income generated from transfer of real estate
assets, such as the acquisition costs, updated for inflation, any
investment or improvements made on buildings, any notarial fees,
acquisition taxes and rights, as well as local property tax paid by the
transferor and any appraisal costs. As a general rule, the difference
between the acquisition cost and the transfer value will be the profit
tax basis. In order to determine the acquisition cost, taxpayers must
consider the amount paid to acquire the good as reduced by interest
and other expenses such as losses.
Regarding movable assets the acquisition cost will generally be
reduced on a 10% rate per year (this is the average annual depreciation
rate although the specific rate would be considered according to the
type of asset), and the cost shall be updated considering the date of the
transfer and the acquisition date.
Corporate taxpayers which deduct the abovementioned expenses and
carry on losses derived from the transfer of assets, are able to deduct
them in the same year from the gains derived from other activities.
Loss carry forwards are allowed for a maximum ten-year period.
From a legal standpoint, the parties do not need to transfer the whole
business and are, generally, free to select the assets and liabilities they
wish to transfer. This is important if the buyer is only interested in a
particular part of seller’s business.
However, the transfer of selected assets that are key to a company’s
on-going business poses the risks for the transaction to be deemed an
acquisition of an on-going business, and as such, joint liability could
arise for the transferee, as further discussed below.
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In general, the buyer is liable only for obligations acquired, the
liability for which buyer undertakes expressly. A sale of assets may
enable the acquisition of a business in cases where a minority
shareholder refuses to sell equity interest in the company.
Also, the seller will not be automatically released from its liabilities
by transferring them to the buyer; the consent of each individual
creditor may be required for the seller to be effectively replaced by the
buyer. The same is true with respect to contracts or agreements to be
transferred to the buyer. The transfer of contracts with government
agencies requires special attention, as in many situations the transfer
of the agreement is a cause for immediate termination thereof.
In most cases the value of a business is not only represented by the
company’s assets and liabilities, but also by intangible and
quantifiable characteristics of the ongoing business, known as
Goodwill. When transferring assets of an ongoing business with a
considerable amount of Goodwill, the transaction will be valued at
more than the market value of the net assets of the business.
Under Mexican tax legislation, Goodwill-related expenses are not
deductible for income tax purposes. Consequently, any amount of
(input) Value Added Tax (“VAT”) paid upon the transfer of assets and
attributable to Goodwill cannot be creditable, since in order for VAT
to be credited, the item on which VAT is triggered must be deductible
for income tax purposes.
From a tax standpoint, asset acquisitions are popular in Mexico for
buyers because they allow a step-up in the basis, although there is
VAT implications generally this tax is recoverable when the buyer is a
tax resident in Mexico.
1.1.
Corporate Income Taxes (CIT)
Pursuant to the MITL, a company resident in Mexico is subject to
income tax at the rate of 30% on its worldwide net income, that is, its
gross income reduced by authorized deductions. Taxable income
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includes income in cash, in-kind, services, credit (i.e., when accrued),
or any other form. The basis of the tax is equal to the taxable income
minus allowable deductions and the previous years’ net operating
losses.
Authorized deductions include returns, discounts, and rebates; cost of
goods sold; expenses net of discounts, bonuses, or returns;
depreciation and amortization; bad debts; certain losses; accrued
ordinary interest, and penalty interest with certain requirements;
annual inflationary adjustment and others.
Mexico is a formalistic country and, consequently, several
requirements apply for the deductions to be allowed. All deductions
must be strictly indispensable for the activities carried out by the
taxpayer, supported by invoices that meet specific requirements,
recorded in the accounting books of taxpayer, and paid with check or
credit/debit/service card, or wire transfer. In addition, the taxpayer
must comply with withholding and reporting obligations, if applicable,
and other obligations. Other deductions must meet the specific
requirements established under the MITL.
Some expenses are not allowed as deductions. Such is the case, for
example, of some taxes, conventional penalties, and goodwill.
Based on the foregoing, capital gains realized by legal entities in
Mexico upon the transfer of assets are taxed as ordinary income at the
30% general corporate income tax rate. The gains realized can be
fully offset with current losses, without any limitation and tax loss
carry-forwards are allowed for a ten-year period.
1.2.
Alternative Single Rate Tax
The single rate tax (“IETU” for its acronym in the Spanish language)
entered into effect on January 1, 2008 and replaced the assets tax.
The IETU is an alternative minimum tax, payable only if it exceeds
the income tax. The IETU is imposed on a cash basis, that is,
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inasmuch as the price or consideration agreed upon in a given
transaction has been paid. The applicable tax rate is 17.5%.
The income to be recognized is the price or consideration obtained by
the taxpayer and any other amounts payable by the acquirer for taxes
(excluding indirect taxes, such as VAT), governmental fees, interests,
penalties, or the like. The taxable income also includes income in
goods or services, determined considering the market value or the
appraisal value of the good or service received. When the transaction
is for no consideration also the market value or the appraised value
has to be considered.
The taxable income is the recognizable income minus allowable
deductions. The deductions are limited and include acquisition of
goods, independent services or temporary use of goods, used to carry
out the IETU taxable activities; expenses for the administration of said
activities; expenses for the production, commercialization or
distribution of goods or services subject to IETU; taxes, except
income tax, IETU, tax on cash deposits and social security; value
added tax if not creditable; returns and discounts received on sales
already paid; damages and penalties; and others.
The following deductions are not allowed for IETU; salaries and
social security payments, interest payments and royalties paid to
related parties.
Certain credits may be applied against the tax to be paid, such as
income tax, taxable salaries and social security contributions, and
income tax paid abroad for IETU taxable activities.
When the allowable deductions exceed the taxable income, the
taxpayer may credit against the IETU in the 10 following years the
excess of the deductions times the IETU rate. Certain rules apply for
a 10-year carry forward.
IETU is an important consideration for the seller of assets because in
many cases the assets have no tax basis and an important gain may be
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created for this tax, in many cases the seller prefers a shares deal. For
the same reason buyers tend to prefer an assets deal.
1.3.
VAT
Mexico imposes a VAT on all transfers, rentals, and services in the
country. The general rate is 16% of the value of the product, rental or
service. An 11% rate applies for most transactions in the border
zones. 0% rates apply in certain limited cases, mainly related to food,
medicines and agricultural products as well as exportation of goods
and some services. The VAT is levied on a cash flow basis.
In the case of exporters of goods, since they do not charge the tax to
their customers, they may request a refund from the government of the
full amount of the tax that they paid in respect of the production of the
exported goods.
Imports are also subject to VAT at the rate of 16%. This tax is
assessed on the customs value of the import plus the import duty.
Because the importer is entitled to credit all VAT paid against VAT
collected from its customers, the ultimate burden of the VAT
effectively is passed along to the importer’s customers and from there
to the end consumer.
Rates
16% on a national basis excepting borderline
which is taxed under an 11%, 0% in some cases
Basis
Transaction price
Date of payment
On a monthly basis. Tax return must be filed on
the 17th day of the month following the month in
which the taxable event took place.
Liable person
Seller
Recoverability
As a general rule yes. Via credit mechanism,
refund or compensation.
Exemption
There are exemptions provided by the
applicable legislation depending on the product
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or industry. In these cases there is no
recoverability.
1.4.
Transfer tax
Transfer taxes may be triggered on the transfer of certain assets. The
Real Estate Acquisition Tax (“ISAI”, for its acronym in Spanish) is
the local tax due on the transfer of real estate. This way, this tax may
be charged on an asset deal which involves real estate acquisition.
The information regarding the ISAI – applicable rates, for instance –
may differ according to the Municipality, considering that this is a
municipal tax, and in each city there may be the application of
different rules.
Rate
From 2 to 4%
Basis
Transaction value or the tax basis provided in
the applicable legislation as outcome of the
appraisal done
Date of payment
In general, if the transfer is made by means of a
public instrument, the tax return must be filed
within 15 days following that of the execution
of the public deed or registration of the transfer
before the Public Registry of Commerce and
Property
Liable person
The acquirer
Tax deductibility for
CIT
Yes. The deductibility of such expenses shall
follow the general rules for CIT deduction.
1.5.
Other acquisition costs
Notary fees
Yes, variable. Applicable for real estate
properties.
Mortgage registration
duties
In case the mortgage takes place
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Transfer of leases
No
Stamp duties
No
Tax deductibility for
CIT
Yes. The deductibility of such expenses shall
follow the general rules for CIT deduction.
1.6.
Tax credits
Reinvestment tax credit
Taxpayers investing in new fixed assets have an
immediate deduction tax incentive that allow
them to deduct such investment in the same
fiscal year the investment is made, in the fiscal
year in which the assets are first used or in the
following year.
For purposes of the above, certain deduction
percentages must be applied to the asset’s cost
of acquisition. Such percentages vary
depending on the kind of asset and the business
activity in which the taxpayer is engaged. If the
taxpayer is engaged in more than two business
activities for which a deduction percentage is
expressly established, the applicable percentage
will be that set forth in connection with the
business activity from which higher revenues
were obtained by the taxpayer in the fiscal year
immediately before the fiscal year of
investment.
Other tax credits
No
1.7.
Transfer of Tax Liabilities in the Asset Deal
According to Article 26, Section IV of the Federal Fiscal Code, joint
liability would arise for the acquirer with respect to past tax liabilities
triggered upon the course of activities carried out in the business of
the target entity, throughout all the time that it belonged to the
transferor. This joint liability may not exceed the value of said
ongoing business. In practice, the Mexican tax authorities may first
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seek to audit the target entity and to collect omitted taxes from it, as
this company is the taxpayer that triggered the concerned omitted
taxes during the course of its operations.
The tax authorities could also initiate an audit process and seek
remedy from the new acquirer of the target’s ongoing business.
Therefore, in these types of deals it is advisable to review and ensure
the adequate compliance of the target entity’s tax reporting
responsibilities, by conducting a due diligence process where tax and
legal documentation corresponding to (at least) the last five fiscal
years is furnished. Alternatively, such transactions may be structured
in a way not to fall under the assumption of “acquisition of an ongoing
business”, and as such, to prevent the triggering of joint liability in
terms of Article 26, Section IV of the Federal Fiscal Code.
2.
Sale of Shares
Generally, the sale of shares of a Mexican company is subject to
Mexican income tax, regardless of the country where the sale takes
place.
According to the MITL, gains derived from the transfer of shares by a
non-resident shareholder are treated as Mexican source income in
cases where the issuer of the shares is a legal entity resident of Mexico
for tax purposes or the stock value derives in more than 50% from
immovable property located in Mexico.
As such, foreign residents who sell shares of Mexican companies are
subject to a 25% tax on the gross proceeds from the sale, or, at the
option of the foreign resident if it has a local representative in Mexico,
to a 30% tax on the net gain derived from the sale. This option is not
available to foreign sellers domiciled in tax haven jurisdictions.
Under certain conditions, tax rulings may be available to defer
payment of taxes in transfers of shares in reorganizations between
members of the same group of companies.
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The net gain is determined by subtracting from the gross sale proceeds
the seller’s tax basis in the shares sold, adjusted for inflation and other
factors as determined in the ITL. Under this alternative, the party
transferring the shares or quotas is required to appoint a representative
in Mexico. It is also required to file a tax return with respect to the
sale or exchange shortly after the transaction and to obtain a fiscal
certification (dictamen fiscal) from a Mexican Certified Public
Accountant to the effect that the gain as reported on the tax return is
correctly calculated. If transactions are made between related parties,
the Certified Public Accountant will need to certify in the dictamen
fiscal that the adjusted tax cost of the shares has been calculated
correctly and that the shares have been properly valued in accordance
with the arm’s-length principles set forth in Mexican law for purposes
of determining the shareholder’s gain or loss on the exchange.
Transfer of shares of public traded companies
In connection with the transfer of public-traded shares, the tax
triggered shall be computed at a 5% rate on the total amount income
obtained with no deductions, or, alternatively, Taxpayers are allowed
in this scenario to apply a 20% withholding tax rate on the total profit
amount, and for that purpose this profit will be determined by
subtracting from the total profit amount the average share cost of the
shares transferred.
Income Tax Exemption
Gains derived form certain transfer of shares may be entitled to a tax
exemption, namely in the case of transfers of stock meeting the
requirements for tax-free transfer of stock set forth under Article 109,
Section XXVI of the MITL (i.e. which applies only for individuals
transferring stock through the Mexican Stock Exchange) and also in
cases where provisions of a Double Taxation Treaty executed with
Mexico establishes such exemption.
With regard to the sale of shares carried out by resident individuals,
pursuant to the MITL capital gains realised from the transfer of shares
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to a resident or non-resident transferee would be subject to a 20%
income tax rate on the gross consideration (i.e. total purchase price of
the shares) which must be withheld by the resident acquirer or
remitted by the individual shareholder within the following 15 days
from that in which income is obtained, unless the transferor elects to
apply the optional net basis tax treatment by securing a tax opinion
(“dictamen fiscal”) prepared by a registered CPA.

If the optional tax regime is applied, the Transaction would be
subject to a net tax treatment, at the rate of 20% on the taxable
gain, which is in general terms obtained by subtracting the
original cost of acquisition (adjusted for inflation) from the sales
price. This must be supported by the referred tax opinion, which
must be provided to the tax authorities under the following
procedure:
(i) Filing of a tax report notice (“Aviso de Presentación de
Dictamen”) in the tax authorities office corresponding to the
taxpayer’s tax domicile, no later than the 10th day of the
following calendar month from the date of the transfer of
shares. This tax report notice must be signed by the taxpayer
and the registered CPA who will prepare such tax report.
(ii) Filing the tax report (“Dictamen Fiscal”) prepared by the
authorized certified public accountant indicating the actual tax
basis of the shares to be transferred and the gain on the
transaction. This tax report has to be filed within 30 business
days as of the date in which the tax return filing is due (i.e.
within the following 15-days from that in which the income is
obtained). This tax report must be issued according to the
rules set forth in the MITL and its Regulations.
The acquisition of a business may be achieved by purchasing the
shares of the company. Share acquisitions are common in Mexico, as
they are often less burdensome from a transaction point of view and,
depending on the circumstances, also more tax efficient for the seller.
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2.1.
Corporate Income Tax (CIT)
Capital gains are subject to an applicable 25% rate to non-resident
sellers. For individual residents, the applicable rate is 20% on the
gross amount, which is payable through withholding that constitutes
an estimated payment. In order to compute and pay the annual tax
liability derived upon the transfer, progressive tax rates (according to
article 177 of the MITL) apply depending on the amount of income
derived. Legal entities domiciled in Mexico are subject to taxation
under the ordinary 30% CIT rate.
As noted, Goodwill is a non-deductible expense. In the case of shares
acquisition, the Goodwill paid (if any) will not be considered as
normal deduction subject to amortization but it will be part of the tax
basis for future sales of the shares.
2.2.
VAT and transfer tax
Not applicable.
2.3.
Tax Losses
Losses cannot be transferred to another entity even under a merger. In
this regard, the disappearing company would forfeit the ability to
transfer the losses it had to the surviving entity. However, the
surviving entity could use the losses generated previous to the merger,
provided they are used against profits perceived in the same line of
business.
In the case of a substantial change of control in a legal entity (i.e.
where the controlling shareholders or partners change) with losses
generated in previous fiscal years which are pending to be offset, and
where the sum of the entity’s total income derived in the last three
fiscal years is lower than the amount of such losses (as updated for
inflation as of the end of the last fiscal year prior to said substantial
change), such losses may only be offset against profits derived in the
same line of business in which the losses where generated. To this
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end, income that must be taken into account shall be that reflected in
the financial statements of said period as approved by the
corresponding shareholders meeting.
2.4.
Transfer of tax liabilities
In case of a share deal, all tax liabilities of the past relating to the
purchased company remain in the company and are therefore taken
over by the purchaser together with the target entity. The tax debts of
the target entity may be demanded by the tax authorities within the
statute of limitations period, which is generally of 5 years.
Additionally, according to Article 26, Section XI of the Federal Fiscal
Code, joint liability arises for the payment of taxes due in the sale of
stock, for a legal entity (i.e. the target entity) that is required to
register a new shareholder in its shareholders registry book due to a
stock acquisition (i.e. the transferees), if the new shareholder provides
no evidence to said legal entity as to compliance with income tax
withholding and payment obligations triggered upon the transfer and
owed by the transferor or if the new shareholder does not furnish the
legal entity the corresponding tax opinion (“dictamen fiscal”) and/or a
copy of the tax return as proof of payment of the tax triggered in such
a transfer.
2.5.
Transaction costs
If the acquirer is a Mexican company, transaction costs related to the
acquisition of shares will be deductible at the level of that company.
Nonetheless, if the acquirer is a pure holding company, which profits
are derived only from dividends subject to specific corporate income
tax exemption, the deduction of expenses is not relevant, as these pure
holding entities do not have taxable profits to be offset with expenses.
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3.
Financing the investment
3.1.
Deductibility of financing expenses
As a general rule, financing expenses will be fully tax-deductible in
the hands of a Mexican purchaser, irrespective of whether the
transaction is structured as an asset deal or as a share deal. In the case
of a share deal, the purchaser needs of course to have sufficient
taxable income to offset the financing charges.
Thin capitalization rules
There are thin capitalization rules in Mexico. In
essence, the rules disallow the deduction of
interest corresponding to debts with nonresident
related parties, when the total amount of all
debts generating interest exceeds three times the
taxpayer’s book net worth. These rules,
however, do not apply to entities that comprise
the financial system, provided that such debts
are contracted to carry out their business
activities.
Arm’s length principle
Interest must be established at arm’s length.
Interests might be re-characterized as dividends
and deduction will be disallowed if they derive
from back-to-back loans. Mexican law has a
very broad concept of back-to-back loans.
Other limitations to the
deductibility
In addition to the above, the financing expenses
need to be considered necessary, normal and
usual for the company deducting the expense.
3.2.
Withholding tax on interest
Interest payments to nonresidents are subject to withholding tax at the
rates of 4.9%, 10%, 15%, 21% or 30%, depending on the type of
payee or payor.
Under Mexican law in general, if the payee is a foreign bank or other
financial institution registered with the Ministry of Finance, the
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interest payments will be subject to withholding tax at the rate of 10%.
According to the Mexican Revenue Law in force for the 2012 tax
year, this percentage could be reduced to 4.9% in case the beneficial
owner is a financial institution resident for tax purposes in a country
that has executed a Double Taxation Treaty with Mexico and that the
special requirements set forth for interest in such treaty are fulfilled.
If (i) the payor is a credit institution (and the payee is other than a
bank or financial institution registered with the Ministry of Finance to
which the 10% tax rate applies), (ii) the payee is either a foreign
supplier of machinery and equipment that form part of the fixed assets
of the payor, or (iii) the payee is a foreign entity that finances the
purchase of such machinery and equipment or provides certain
working capital financing pursuant to an agreement that sets forth
these circumstances and the entity is registered with the Ministry of
Finance, the interest payments will be subject to withholding at the
rate of 21%.
In most other cases, interest is subject to withholding tax at the rate of
30%. These rates may be lower in the case of countries with which
Mexico has tax treaties. For example, under the U.S. - Mexico Tax
Treaty, the rates may be 4.9%, 10% or 15%.
3.3.
Debt pushdown
There are no restrictions applicable to privately or publicly held
entities for the debt pushdown upon the merger of the target entity into
the acquiring entity domiciled in Mexico, provided that the conditions
related to the thin capitalization rules and general deductibility
requirements related to the necessity of the expenses are met.
The Mexican tax authorities, when auditing companies, normally
disallow this business practice, as it is interpreted as a tax avoidance
scheme, treating these expenses, which in normal situations are
deductible, as non-deductible and prohibited for Mexican tax
purposes.
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II.
Holding the investment
1.
Main tax costs to be modeled
Taxable income
Net income less deductible expenses is subject to
CIT at the standard rate of 30%. IETU, the
alternative single rate tax will also be triggered at
the 17.5% rate.
Depreciation
As a general rule, depreciation is allowed along
the useful life of physical goods subject to normal
wear and tear. The acceptable depreciation rates
for tax purposes in Mexico are set forth expressly
under the MITL for each type of good. Land is
not subject to depreciation in Mexico.
Write-offs or capital
losses on shares
Pursuant to article 149 of the MITL, capital
losses derived from the sale of shares can only be
offset against profits of the same nature in the
same year in which the sale took place or in the
following three years
VAT
As a general rule, all supplies of goods and
services are subject to VAT. The standard
Mexican VAT rate is 16%. Reduced rates (11%
and 0%) and exemptions may apply.
Input VAT incurred on supplies may generally be
creditable against output VAT.
Excess VAT credit generates a favorable balance
subject to refund or compensation against other
federal taxes.
Other VAT-like taxes
Another indirect Mexican tax is the Federal
Excise Tax (“IEPS”), applicable at different
rates depending on the product being produced
and sold in Mexico. Products subject to this tax
are:
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
Tobacco

Alcohol

Gas and Diesel
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
Telecom services through telecom public
networks, except for Internet access and
rural phone services.
Unlike VAT, IEPS is not creditable except in
the case of alcohol.
Services Tax
N/A
Social Security
In Mexico, social security contributions are
calculated on an employee’s Quotation Base
Salary (“QBS”). In this regard, employers are
required by the Mexican Social Security
Institute (“IMSS”) to pay for the following
liabilities:
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
An occupational risk premium calculated in
the range of 0.5 to 15% of the QBS taking
into consideration the activity of the
employer;

5% on the salary as contribution to the
National Institute for employee’s Housing
(“INFONAVIT”);

10.75% as contribution for the retirement
premium, sickness, maternity, nursery,
social provisions and life and disability
insurance;

2.75% on the salary as payment of
retirement, sickness, maternity, nursery, and
life and disability insurance’s quotas.
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2.
Dividends distribution (Profits)
Withholding tax on
dividends distributed by
a local company
Dividends distributed by Mexican companies
are not subject to withholding tax. If the
dividends are distributed from the company’s
“net after-tax profit account (CUFIN),” the
company distributing the dividends will not be
subject to tax on their payment. The “net aftertax profit account” is comprised of the
company’s net after-tax profit for each fiscal
year, plus the dividends received by the
company from other companies resident in
Mexico, minus the dividends distributed in cash
or in kind from that account.
Conversely, if a dividend is distributed from a
source other than the “net after-tax profit
account,” the company distributing the dividend
will be subject to tax at a rate of 30% applied to
the amount of the dividend multiplied by a
factor of 1.4286 27 .
Taxation of dividends
received by a local
company
If the dividend is received by a corporate
taxpayer that is a resident of Mexico, said
taxpayer must not consider such dividend as
taxable income for income tax purposes, since
the profits are taxed only once at the level of the
distributing entity.
27
Factor 1.4286 will be applicable during FY 2012 at a 30% CIT rate; factor 1.4085
during FY 2013 at a 29% CIT rate and factor 1.3889 will apply during FY 2014
onwards at a 28% CIT rate.
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III.
Selling the investment
1.
Asset deal
Capital gain taxation
Ordinary 30% rate
Selling costs / Transfer
taxes
Upon sale of real estate there will be the levy of
the ISAI (real estate tax) or VAT and Income
Tax under the conditions met before
Sale by corporate nonresidents
No Mexican taxation will arise upon the sale of
assets by non-residents without a Permanent
Establishment (“PE”) in Mexico; whereas nonresidents with a PE in Mexico are subject to the
general corporate tax rate (30%) on any gain
derived.
2.
Share deal
Capital gain taxation
25%, 30% and 40% 28
Selling costs / Transfer
taxes
Upon sale of shares, no ISAI or VAT will be
levied
IV.
Tax regime for restructuring operations
Merger
Is generally regarded as a tax-free transaction 29
if certain formal requirements are properly and
timely met, namely: i) tax notice must be filed
by the surviving entity within the month
following the merger, ii) subsequently to the
merger, and during a minimum one-year period
28
The 25% and 30% rates apply to resident corporations and non-residents (whether
individuals or corporations); whereas a 40% WHT applies to income generated by a
resident of a tax haven jurisdiction, subject to a Preferential Tax Regime –i.e. where
the effective tax rate in such jurisdiction is less than 75% percent of the CIT triggered
and payable in Mexico.
29
Prior authorization from the Treasury would be needed if the proposed merger is
conducted during a five-year period subsequent to a previous merger.
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Spin-offs
Contribution of
universality or business
divisions or shares
Swap of shares
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following the date of merger, the surviving
entity must continue carrying out the activities
in which it and the disappearing entity were
engaged prior to the merger, and iii) the
surviving entity or the newly created entity,
must timely file the income tax return and tax
informative return corresponding to the
disappearing entity, for the tax year of the
merger.
Losses cannot be transferred to another entity
even under a merger. In this regard, the
disappearing company would forfeit the ability
to transfer the losses it had to the surviving
entity. However, the surviving entity could use
the losses generated previous to the merger,
provided they are used against profits perceived
in the same line of business.
A spin-off is also considered as a transfer of
assets, and as such, it is deemed a taxable event.
However, no taxation would be triggered upon
the transfer of assets through a spin-off process
if certain formal requirements are properly and
timely met, namely: i) the shareholders, owners
of at least 51% of voting stock of the companies
involved, must be remain the same during one
year prior to the spin-off and two years after
said process is finished.
Such transfer is deemed a transfer of assets,
ongoing business or shares subject to all the
Mexican tax consequences described above.
If a Mexican company or individual realizes a
share-for-share exchange, the tax triggered on
the gain realized in that transaction may, under
certain conditions, be rolled over until the future
sale or actual disposition of the shares. Any
cash compensation in the transaction is
immediately taxable.
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Venezuela
Ronald Evans, Partner
Ronald Evans is a partner in Baker &
McKenzie’s Caracas office, and coordinates the
Latin America Tax Practice Group. He is
currently co-chair of the Wealth Management
Practice Group and a member of the Firm’s
Global Tax Steering Committee. He is a highly
recommended tax lawyer by various legal
directories, including Chambers Latin America,
PLC Which lawyer?, Latin Lawyer and The International Who’s Who
of Corporate Tax Lawyers. He served as the first chief of the
Venezuelan tax administration’s (SENIAT) international affairs
division, and as Venezuela’s official negotiator for double taxation
treaties from 1994 to1996, and was an advisor to the minister of
foreign affairs on double taxation issues from 1997 to 1999.
ronald.evans@bakermckenzie.com
Tel: +58 212 276 5093
Baker & McKenzie
97
Jorge Jraige, Partner
Jorge Jraige is a partner in the Firm’s Caracas
office and is recognized as one of Venezuela’s
leading tax lawyers by various directories and
league tables, including Chambers Latin
America 2009. He is a member of the
Venezuelan Chapter of the International Fiscal
Association and Venezuelan Association on
Tax and Financial Law. Mr. Jraige also teaches
income tax law at the CIAP-Universidad
Católica Andrés Bello. He joined Baker & McKenzie in 2005. Mr.
Jraige routinely advises on the areas of international, federal and
municipal taxation. He works with clients on matters relating to tax
planning, income tax, VAT and international taxation matters. His
practice also covers wealth management, probate and estate planning,
as well as tax issues related to oil and gas projects. In addition, Mr.
Jraige has extensive experience representing clients before the
Venezuelan Tax Courts and the Supreme Court of Justice. His client
base includes Venezuela’s largest oil services, mining, beverages,
construction and telecommunications companies.
jorge.jraige@bakermckenzie.com
Tel: +58 212 276 5072
Baker & McKenzie S.C.
Centro Bancaribe, Intersección
Avenida Principal de Las Mercedes
con inicio de Calle París,
Urbanización Las Mercedes
Caracas 1060
Venezuela
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At a Glance
Corporate income tax rate (%)
Progressive rates of 15, 22 or 34% 30
Local income tax rate (%)
N/A
Capital gains tax rate (%)
Same as corporate tax rates
Tax losses carry forward (years)
3 for operating losses and 1 for
adjustment for inflation losses
Tax losses carry back (years)
N/A
Limitations to transfer of tax losses
Yes
Domestic withholding tax rate on
dividends (%)
34%. Higher rates apply for
dividends distributed by oil and
mining companies.
Withholding on interest
4.95% (financial institutions) and
32.3% (other foreign lenders)
Capital duty (%)
N/A
Transfer tax rates (%)
N/A
Sale of movable assets
N/A
Sale of real estate assets
0,5% (advance payment to be
credited against the final tax
liability)
Sale of shares of real estate
oriented company
N/A
Standard VAT rate (%)
12% (Reduced or increased rates
and exemptions may apply)
30
The 34% rate applies on income exceeding 3,000 Tax Units or approximately USD
53,023.25 (at the current tax unit value of USD 17.67 and official exchange rate of
BsF. 4.3 per USD). The Tax Unit value is adjusted annually within the first two
months of each calendar year. Oil and mining companies are subject to higher tax
rates.
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Neutral tax regime for restructuring
operations
Other than statutory mergers, there
are no express regimes allowing taxfree reorganizations. Nonetheless
there are techniques to achieve the
same.
Tax Consolidation
N/A
VAT grouping
N/A
I.
Acquiring the investment
1.
Acquisition through an asset deal
From a transactional point of view, an asset acquisition may be quite
complex, as each asset and liability to be included in the sale has to be
identified and transferred individually.
A sale of assets can be characterized as a bulk sale (“fondo de
comercio”), that is, the sale of a business establishment in such a
manner that the original owner ceases to be engaged in such business
(i.e., a sale of a substantial portion of the assets of a business).
As long as real properties in Venezuela are concerned, the transfer
must be registered with the real estate registry to become effective.
The registration will give rise to register fees and transfer taxes
determined on the value of the property concerned.
From a tax standpoint, asset acquisitions are generally unpopular in
Venezuela because transactional taxes may be incurred in addition to
capital gains taxes. Although transactional taxes are usually
recoverable, this is not always true and they imply an upfront
disbursement of cash.
From a legal standpoint, the parties are not required to transfer the
whole business and then are free to select the assets and liabilities they
wish to transfer. This is important if the buyer is only interested in
acquiring a particular part of the seller’s business.
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In general, the buyer is liable only for obligations acquired, the
liability for which buyer undertakes expressly. There are, however,
certain exceptions where the buyer undertakes certain liabilities of the
seller by operation of law, including tax, labor and environmental
liabilities.
Seller and buyer may enter into a Bulk Sales Agreement (the “BSA”).
An inventory of the assets to be sold to the purchaser in the BSA must
be prepared (the “Inventory”). The Inventory shall be structured as
follows: (i) classify the assets in categories (real estate, hardware,
equipment, telecommunication systems, goodwill, etc.); (ii) indicate
the total amount of each category of assets in Bolivars, as well as the
lump sum of the transfer; (iii) list and detail the assets comprising
each category, including their unitary prices, if possible. The BSA
must be filed with the Commercial Registry for registration.
A sale of assets may enable the acquisition of a business in cases
where a minority shareholder refuses to sell equity interest in the
company.
Also, the seller will not be automatically released from its liabilities
by transferring them to the buyer; the bulk sale must be published in a
notice informing about it three times, every ten days, with a local
newspaper, before delivery of the business to the purchaser. Failure to
publish the notice will cause the joint liability of seller and purchaser
in respect to seller’s creditors. The transfer of contracts with
government agencies requires special attention, as in many situations
the transfer of the agreement is a cause for immediate termination
thereof.
Some public licenses and permits may not be transferred along with
the business, but have to be reapplied by the buyer.
1.1.
Corporate Income Tax and Withholding
Gains arising out of the sale of assets located in Venezuela or abroad
are subject to Venezuelan income tax liability. The applicable tax will
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be determined on the difference between the sales price and the tax
cost basis of the assets disposed off. The capital gain is subject to the
corporate rate, which is basically 34%. Any regular annual inflation
adjustment would be included in the tax cost basis.
In a bulk sale, the purchase price is subject to a 5% back-up tax
withholding to be applied by the buyer upon the payment or
constructive payment (“abono en cuenta”). The seller would be
entitled to offset the amount withheld against the income tax liability
determined in its year-end tax return. The buyer should pay the
amounts withheld to the Treasury within the three working days
following the closing of the sale. In case the purchaser were a special
taxpayer appointed as such by the Venezuelan Tax Administration, the
purchaser should pay the amounts withheld according to the dates set
out in the taxpayer’s special calendar published annually by that
Administration. As with the purchase of shares, if the purchase price
is paid in in kind consideration (i.e., with assets other than cash), no
withholding tax applies.
1.2.
VAT
The sale of intangible assets (e.g., shares) is not subject to VAT
liability. However, the sale of the assets that are characterized as
movable tangible property is subject to VAT liability at the general
current 12% rate. The seller must charge the applicable VAT on the
purchase price.
Rates
12% (lower or higher tax rates may apply).
Basis
Transaction price
Date of payment
General rule: the date of payment is the 15th of
the month following the occurrence of the
taxable event.
Importations of goods and services: when the
taxable event takes place.
Liable person
The seller is required to declare and pay the
VAT collected from the buyer.
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Recoverability
1.3.
The VAT paid upon the acquisition (if any)
generally qualifies as input VAT that the buyer
may offset against its output VAT.
Stamp taxes
Bulk sales registered with Commercial Registries located in the
Capital District are subject to (i) a 20% registration tax. The tax is
determined on the basis of the purchase price; and (ii) a 0.5 Tax Units
stamp tax (currently USD 8.84). The registration of the bulk sale with
Commercial Registries located outside of Capital District is subject to
a 2% registration tax, also determined on the purchase price.
Rate
(2% or 20%, depending on the Commercial
Registry where the bulk sale is registered).
Basis
Sales price.
Date of payment
Before the registration of the BSA.
Liable person
The buyer.
Tax deductibility for
income tax
Yes. The deductibility is subject to the general
rules applicable to any expense. In this regard,
the expense: (i) must be actually paid; (ii) must
qualify as normal (ordinary) and necessary; (iii)
is not imputable to cost; (iv) is made in the
country; and (v) incurred for the purposes of
producing Venezuelan-source income).
1.4.
Business Activities Tax (“BAT”)
The BAT is a gross turnover tax imposed by municipalities. The sale
of fixed assets is not subject to the BAT. In this regard, the
Venezuelan tax courts have held that the BAT (previously called
Municipal Business License Tax) can only apply to gross income
derived from habitual or usual activities and, therefore, does not apply
to the sale of fixed assets, exchange gains and any gross income
derived from activities other than the habitual activities of the
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taxpayer (2° Tax Court, decision of July 25, 1997, Cevecería Polar del
Centro, C.A., 1st Superior Civil and Administrative Court of the
Capital Region, decision of January 14, 1992; and 2d. Tax Court,
decision of March 30, 1998, Forwest de Venezuela, C.A.; Organic
Law of the Municipal Power, Article 216[4]).
1.5.
Other costs
Publicity Tax
N/A
Mortgage registration
fees
N/A
Land registrar fee
N/A
Tax deductibility
N/A
Municipal Registry Tax
Between 1 and 5 Tax Units.
Registry Services Tax
Progressive tax rates between 0.01 and 6 tax
Units.
Notary fees
Yes, variable
1.6.
Transfer of tax liabilities in the asset deal
A notice must be filed to the National Tax Administration informing
the bulk sale. The purchaser would not be deemed to assume any tax
liabilities generated by the seller’s prior activities during the normal
course of its business if such liabilities are not asserted within one
year following the notice of the sale of the assets to the National Tax
Administration.
2.
Acquisition through a share deal
The acquisition of a business may also be achieved by purchasing the
shares of the company. A share deal basically comprises two (2)
phases: (i) the preparation and execution of a Share Purchase
Agreement and (ii) make the proper entries in the Stockholders
Registry Book of the target entity. In share deals, once the entries are
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made in the Stockholders Registry Book, the purchaser becomes the
owner of the shares of the target entity. Nevertheless, the Supreme
Court of Justice in a recent decision held that the shareholder change
shall be recognized by a shareholder meeting that must be registered
with the Commercial Registry in order to become effective before
third parties.
2.1.
Corporate Income Tax and Withholding
Shares of a Venezuelan corporation are deemed to be Venezuelan
situs intangible assets and, therefore, the sale thereof is subject to
Venezuelan income tax rules on capital gains. As a result, any gain
derived by the seller upon the disposition of the shares is considered to
be Venezuelan-source income subject to income tax liability,
regardless of where the sales contract is executed, the share
certificates are delivered or the purchase price is paid.
As previously mentioned, capital gains is subject to the corporate rate
(generally 34%). The payment is subject to a 5% withholding tax. If
the seller is a Venezuelan resident individual, the gain would be
subject to income tax liability according to Tariff N° 1, providing for
several tax brackets ranging between 6% and 34%. The payment of
the purchase price would be subject to a 3% advance withholding tax.
In both cases, the seller is entitled to credit the amounts withheld
against the final income tax liability as determined in a year-end tax
return. The buyer must pay the amounts withheld to the Treasury
within the three working days following the closing of the sale. In
case the purchaser is a special taxpayer appointed as such by the
Venezuelan tax Administration, the buyer must pay the amounts
withheld according to the dates set out in the taxpayer’s special
calendar published annually by the Venezuelan Tax Administration.
This withholding will only apply to the extent that the purchase price
is being paid in cash. If the purchase price is paid in kind, there will
be no tax withholding.
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2.2.
VAT
The sale of shares is not subject to VAT liability.
2.3.
Stamp tax
The acquisition of shares in any Venezuelan company is subject to
Registry Services Tax (1 Tax Unit plus 0.05 for each page of the
document to be registered in the Capital District or 5 Tax Units plus
0.5 Tax Units for each page of the document to be registered outside
of the Capital District). Currently the Tax Unit is equivalent to USD
17.67 at the official rate of exchange.
2.4.
Transfer of tax liabilities
The buyer acquires the target entity as it is. This means that any
liability of the target entity will be borne by the buyer. In this respect,
all labor and tax contingencies will stay in the target entity, therefore,
the new shareholder, i.e. the buyer, will be liable for any labor or tax
matter that might arise from the current or past activities of the target
entity.
Statute of limitation for tax matters ranges from four to six years. For
labor matters the statute of limitations is one year for claims regarding
severance payments and two years for labor related accidents.
3.
Financing the investment
3.1.
Deductibility of financing expenses
Besides the limitations imposed by the thin capitalization rules, the
deduction of interest is subject to the general deductibility
requirements set forth in the Venezuelan Income Tax Law. In
summary, an expense is deductible insofar as the following concurrent
requirements are met: (i) it corresponds to caused expenses; (ii) it
qualifies as normal (ordinary) and necessary; (iii) it is not imputable to
cost; (iv) it is made in the country; and (v) it is incurred for the
purposes of producing Venezuelan-source income.
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Thin capitalization rules
In Venezuela the debt/equity ratio is 1:1.
Arm’s length principle
The thin capitalization ratio does not change on
the basis of the arm’s length principle. In case
of intercompany loans registered with the
Central Bank, no transfer pricing rules apply.
Other limitations to the
deductibility
As a general rule, expenses must be normal and
necessary to the activities of the company in
order to be deductible.
3.2.
Thin capitalization rules
The Income Tax Law, as amended in 2007, included thin
capitalization rules in order to limit the amount of deductions derived
from financing transactions carried out between Venezuelan taxpayers
and their related parties. According to this rule, deductions of
interests owed to related parties shall not exceed the value of the net
worth of the taxpayer (1:1 debt-capital ratio). This is the most
restrictive limit in Latin American countries, where taxpayers are
generally allowed to maintain a higher debt-equity ratio.
3.3.
Withholding tax on interest
Domestic Law: The withholding tax rates applied to interest paid on
capital invested in income producing activities in Venezuela vary
depending on the nature of the lender deriving the interest income. In
this respect: (i) non-resident individuals are subject to a 32.3%
effective withholding tax rate; (ii) non-domiciled entities are subject
to withholding based upon the corporate progressive tax rate (15%,
22% or 34%). The 34% withholding rate applies on cumulative
payments of interest exceeding USD 50,023.25 (calculated at the
current official rate of exchange of VEF 4.30/USD and the current tax
unit value of VEF 76/Tax Unit). The withholding must be applied on
the basis of 95% of the amount paid, giving rise to the following
effective tax rates: 14.25%, 20.9% and 32.3%; (iii) foreign financial
institutions are subject to a 4.95% effective tax rate; and (iv) interest
paid to local financial institutions are not subject to withholding tax.
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Interest other than those paid on capital invested in income-producing
activities and paid by legal entities are subject to the following
withholding rates: (i) resident individuals 3%; (ii) non-resident
individuals 34%; (iii) domiciled entities (other than local financial
institutions) 5%; and (iv) non-domiciled entities (other than foreign
financial institutions) 15%, 22% or 34% depending on the amount of
the interest income derived.
Tax Treaties: Venezuela has entered into double taxation treaties with
the following countries (all of them currently in force): Austria,
Barbados, Belarus, Belgium, Brazil, Canada, China, Cuba, Czech
Republic, Denmark, France, Germany, Indonesia, Iran, Italy, Korea,
Kuwait, Malaysia, Norway, Portugal, Qatar, Russia, Spain, Sweden,
Switzerland, the Netherlands, Trinidad & Tobago, United Kingdom,
United Arab Emirates, United States of America and Vietnam. The
applicable interest tax rates vary depending on the relevant treaty,
being the lower tax rate 5% (e.g., Switzerland, the Netherlands;
United Kingdom, among others) and the higher tax rate 15% (e.g.,
Barbados, Norway and Malaysia).
3.4.
Debt pushdown
There are no restrictions applicable to privately held entities for the
debt pushdown upon the merger of the target entity into the acquiring
entity domiciled in Venezuela, provided that the conditions related to
the thin capitalization rules and general deductibility requirements
related to the necessity and normality of the expenses are met. The
tax authorities may challenge the interest deduction at the level of the
target company (after the merger) under the reasoning that such
expenses are not normal and necessary for the operations of the target.
However, there is not yet case law dealing with this matter.
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II.
Holding the investment
1.
Main tax costs to be modeled
Taxable income
Venezuelan companies are subject to income tax
on a net taxable income basis, at the progressive
corporate rates (i.e., 15, 22 or 34%). The higher
rate applies on income exceeding 3,000 Tax
Units or USD 53,023.25. Oil and mining
companies are subject to higher tax rates.
Depreciation
As a general rule, depreciation is allowed along
the useful life of physical goods subject to
normal wear and tear.
Write-offs or capital
losses on shares
3 years to carry forward the operating losses and
1 year to carry forward the adjustment for
inflation losses.
VAT
As a general rule, all supplies of goods and
services are subject to the general VAT rate of
12%. Reduced or increased rates and
exemptions may apply.
VAT paid upon the purchase of goods or
services received may be offset against output
VAT. The VAT, however, becomes a
deductible expense for income tax purposes if
the taxpayer is unable to credit the input VAT.
Social Security
In Venezuela, the employer is required to
contribute to the Social Security Department on
a monthly basis in an amount equivalent to 9%,
10% and 11% of the gross salary of each
employee plus other social costs. The employee
must also pay an individual social security
contribution of 2% over gross monthly salary,
which is withheld by the employer from the
employee’s earnings.
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2.
Distribution of profits
Withholding tax on
dividends distributed by
a local company
Dividends and profits distributed are subject to a
34% income withholding tax. The tax may be
reduced or fully exempted under the provisions
of a double taxation treaty. The taxable base is
the amount of the earnings and profits
distributed exceeding the net taxable income at
the level of the distributing company.
Taxation of dividends
received by a local
company
Dividends paid to local companies is subject to
a 34% withholding income tax.
III.
Selling the investment
1.
Asset deal
Capital gain taxation
Progressive rates of 15%, 22% or 34%. The
34% rate applies on income in excess of USD
53,023.25 (oil and mining companies are subject
to higher tax rates)
Selling costs / Transfer
taxes
Notary fees, stamp tax and municipal tax, VAT.
Sale by corporate nonresidents
Same as domiciled entities.
2.
Share deal
Capital gain taxation
Progressive rates of 15%, 22% or 34%. The
34% rate applies on income in excess of USD
53,023.25 (oil and mining companies are subject
to higher tax rates). A capital gain exemption
may apply under the provisions of a double
taxation treaty.
Selling costs / Transfer
taxes
Notary fees, stamp tax.
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IV.
Tax regime for restructuring operations
No special tax regimes are available under Venezuela’s tax statutes for
restructuring transactions.
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