Techniques for Repatriation of Funds
Baker & McKenzie 11th Annual Latin American Tax Conference
March 10 and 11, 2010 | The Biltmore Hotel, Coral Gables | Florida
Martin Barreiro- (Buenos Aires)
Jaime Vargas (Bogotá)
Carmela Hernandez (Chicago)
Jaime Gonzalez-Bendiksen (Juárez)
Alberto Maturana (Santiago) Sergio Corredor (Bogotá)
Marcos V. Prado (São Paulo) Jesus Alvarado-Nieto (Mexico City)
Ronald Evans (Caracas)
James H. Barrett ( Miami)
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used
in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly,
reference to an “office” means an office of any such law firm.
Why do we need Repatriation Techniques in
Latin America?
– Inbound investment dominates in LA countries
– Tax rates in LA countries – several are high-tax
jurisdictions
– Corporate objectives to redeploy cash to other countries or
other regions
– Barriers imposed by high Withholding Taxes
– Repatriation of profits often subject to restrictions
– Inflation is always an issue
– Legal, accounting and tax differences
Techniques for Repatriation of Funds from Latin American Operations
2
Agenda
– Objectives/Constraints of Multinational Companies In
Redeploying Cash from Latin American Operations
– Tax Rules Facilitating or Limiting Distribution of Earnings
from Latin American Subsidiaries
– Use of Intercompany Transactions – Ideas for Dealing with
Issues in Each Jurisdiction
– Planning for Redeployment of Funds from Latin American
Jurisdictions
– Use of Holding Company Structures
Techniques for Repatriation of Funds from Latin American Operations
3
Common Objectives and Constraints
of Multinational Companies
– Get Access to Cash
– Redeploy Cash To Other Countries / Regions Without
Paying U.S. Tax
– Preserve U.S. Foreign Tax Credits
– Timing and source of dividends from high tax or low tax pools
Techniques for Repatriation of Funds from Latin American Operations
4
Common Objectives and Constraints
of Multinational Companies
– Maximize Foreign Tax Credit Under U.S. Source Rules
– Payments for services performed in the U.S. are U.S. source
– Potential for no foreign tax credit for LA withholding tax
– Get Cash Back to the U.S. Without WHT and Without
Triggering Dividend or Subpart F Income
Techniques for Repatriation of Funds from Latin American Operations
5
Common Objectives and Constraints
of Multinational Companies
– Strategies Depend on Tax Situation of Parent Company
– Companies with Overall Foreign Losses or Losses in the
U.S.:
– Care required to avoid loss of U.S. foreign tax credits
– May want to avoid payments characterized as dividends
– Companies That Are Profitable in the U.S.:
– Often want payments characterized as dividends for U.S. tax
purposes
Techniques for Repatriation of Funds from Latin American Operations
6
Alternatives for Getting Funds Out – Planning
in Advance
– Dividends
– Need for book earnings to declare a dividend
– Obtaining the necessary funds
– Redemptions of Shares
– Characterization issues
– Interest Payments / Royalties / Payments for Services
Techniques for Repatriation of Funds from Latin American Operations
7
Alternatives for Getting Funds Out – Planning
in Advance
– Consider
– Likely future situation of parent company and the LA
subsidiary
– Tax Issues – withholding taxes, transfer pricing, limits on
deductions
– Hybrid instruments to manage characterization of the
payments
– Exchange controls
Techniques for Repatriation of Funds from Latin American Operations
8
Alternatives for Getting Funds Out – Planning
in Advance
– Potentially applicable Proposals from President Obama’s
2010 Greenbook
– Outbound transfers of foreign goodwill and going concerns
value
– New Subpart F rules for “excessive income shifting” relating
to transferred intellectual property
Techniques for Repatriation of Funds from Latin American Operations
9
Alternatives for Getting Funds Out – Planning
in Advance
– New foreign tax credit rules
– Pooling of all foreign taxes paid by foreign subsidiaries
– Matching creditable foreign taxes with associated foreign
income
– Deferral of interest deductions apportioned to U.S.
taxpayer’s foreign-sourced income that is not currently
subject to U. S. taxation
Techniques for Repatriation of Funds from Latin American Operations
10
Distribution of Earnings
from Latin American
Subsidiaries
Techniques for Repatriation of Funds from Latin American Operations
11
Local Tax Treatment of Dividend Distributions
– Exceptions to General Rule of No Dividend WHT in Latin
American Jurisdictions
– Peru – generally applicable dividend WHT of 4.1%
– Uruguay – new 7% dividend WHT effective July 1, 2007
– Other Exceptions Limited to Withholding Tax on
Distributions in Excess of Previously Taxed Income
– Argentina – 35% withholding tax
– Venezuela – 34% withholding tax
– Colombia – 33% withholding tax
– Mexico – extra corporate level tax of approximately 39%
Techniques for Repatriation of Funds from Latin American Operations
12
Local Tax Treatment of Dividend Distributions
– Chile – 35% Withholding Tax on Dividends – Part of
Integrated Tax System
– 17% Corporate Tax creditable against the 35% WHT on
dividends (total effective tax burden 35%)
– Application of 35% WHT to distributions in excess of
cumulative after-tax profits (FUT) depends on several
factors.
– Double Taxation Treaties Do Not reduce WHT on
dividends
Techniques for Repatriation of Funds from Latin American Operations
13
Reducing or Avoiding Local Tax on Cash
Distributions
– Consider Owning LA Subsidiary from a Treaty Jurisdiction
(or Transfer of LA Subsidiary to Treaty Jurisdiction)
– Not useful in:
– Chile – tax treaties don’t reduce the dividend tax
– Mexico – tax on “excess distributions” is at the corporate
level
– Peru – Generally applicable local rates lower than treaty
rates
Techniques for Repatriation of Funds from Latin American Operations
14
Reducing or Avoiding Local Tax on Cash
Distributions
– Mexico, Venezuela, Argentina – take care in timing of
distributions
– In Chile – Find an Alternative to Dividends
– Consider Making a Capital Reduction
– Generally tax free locally
– Note pitfalls in Mexico
– Treated as a dividend in the United States
Techniques for Repatriation of Funds from Latin American Operations
15
Use of Hybrid Instruments
– Objective - Get Dividend Characterization in Foreign
Jurisdiction For Interest Payments
– Useful if interest is deductible and WHT on interest is low
– Mexico – impact of new single rate tax
– No deduction for interest other than interest paid to a
seller of goods
Techniques for Repatriation of Funds from Latin American Operations
16
Dealing with Limits on Ability to Pay Dividends
– Lack of Book Earnings
– Lack of Funds
– Limits or Doubts on Ability to Deduct Interest on Debt
Incurred to Fund Dividend Payments
– Specific limitations
– Mexico –income tax and new single-rate tax
– Some questions on implications of generally applicable rules
– Argentina, Brazil, Chile, Colombia, Peru, Venezuela
Techniques for Repatriation of Funds from Latin American Operations
17
Dealing with Limits on Ability to Pay Dividends
– Planning Ideas
– Transfer of Shares
– Sale of the Usufruct
– Financial Factoring
Techniques for Repatriation of Funds from Latin American Operations
18
Loaning Money to the U.S. Parent Company
– Usually Treated as a Dividend for U.S. Tax Purposes
– Potential Recharacterization of Loan to Parent as a
Dividend
– Specific recharacterization in Mexico
– Some risk of recharacterization – Chile, Colombia, Peru,
Venezuela
– Transfer Pricing Rules on Interest
Techniques for Repatriation of Funds from Latin American Operations
19
Dealing With Exchange Controls Issues In
Distributions of Dividends
– Limited to Registered Foreign Equity Interest
– Brazil, Colombia, Venezuela
– Documentary burdens and formalities vary
– Chile – now more of a reporting mechanism
– Need to Obtain the Foreign Currency
– Venezuela –
– Special CADIVI rules on providing foreign currency for
dividends
– Alternatives may be available at a less favorable
exchange rate
Techniques for Repatriation of Funds from Latin American Operations
20
Planning for Other
Intercompany
Payments from Latin
American Affiliates
Techniques for Repatriation of Funds from Latin American Operations
21
Intercompany Transactions with Latin
American Subsidiaries
– Dealing with High Local Withholding Taxes
– Minimizing Tax Costs on Cross-Border Interest Payments
– Other Planning Opportunities
– Will depend on composition of the global group and
capabilities of different group members
– Transfer Pricing Objectives / Requirements
– Establish tax objectives based on overall tax costs, including
withholding tax and anticipated tax position of parent
company
– Transfer pricing rules allow flexibility in pricing
Techniques for Repatriation of Funds from Latin American Operations
22
Comparison – WHT in LA Countries
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
Argentina
0% if pre-tax profits,
35% generally;
35% WHT on excess over
pretaxed profits
15.05% Financial
Institution;
Brazil
0% Generally;
15% Generally;
15% Generally;
15% Generally;
25% Tax Haven
25% Tax Haven
25% Tax Haven
Chile
35%:
35% generally;
CIT (first level tax of 17%)
may be credited
4% Financial Institutions
15% / 30%
Exempt / 17% / 35%
Mexico
0% WHT;
4.9% FI,
25% Generally;
Corp Level Tax on dividends
in excess CUFIN (1.3889% x
div x 28% CIT rate in 2006)
40% tax haven, 10%, 15%,
21%, and 28%
40% - Tax Haven
25% WHT on Proceeds
or 30% of Net gain
(Exempt if over Stock
Exchange)
Techniques for Repatriation of Funds from Latin American Operations
21% / 28%
Tax on
Capital Gains
/ 31.5%
Exempt for shares.
Taxable for quotas sold
to an Argentine party.
23
Comparison – WHT in LA Countries
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
0% generally;
4.9%Financial Institution;
34% WHT on excess over
pretaxed profits
otherwise
Colombia
0%
0% Financial Institution
(CONPES) (Art 25 CTC)
33%
33%
Peru
4.1%
1% foreign credit
30%
5% / 30%
Venezuela
33% WHT on excess over
pretaxed profits
34% on 90% of
Tax on
Capital Gains
payment
34% on 95% of payment
1% if over Stock
Exchange; Otherwise
34%
lines of Financial
Institutions
4.99% Financial Institution
30 % General
Techniques for Repatriation of Funds from Latin American Operations
24
Corporate & Withholding Tax Rates in Latin
America
Country
VAT
Corporate
IT
Capital
Gains
Branch
Tax
Dividends
WT
Interest
WT
Royalties
WT
Technical
Assistance
WT
21
35
35 / 17.5
35
0(3)
15.05/35
21/28/31.5
21 / 28
Brazil
0-25
34 (1)
34 (2)
34
0
0-25
15 / 25
15 / 25
Chile
19
17
17
17
18
35 / 4
30 / 15
20 / 15
Colombia
16
33
33
33
0(3)
33 / 0
33/26.4
10
Ecuador
12
25
0
25
0
0
235
25
Mexico
15
28
25
28
0
4.9/10/15/
21/28
25
25
Peru
19
30
5 / 30
30
4.1
30 / 4.99 / 1
30
15/30
Venezuela
14
34
34
34
0(3)
4.95 / 34
30.6
17 / 10.2
Argentina
(1)
Combined rate (Corporate Income Tax at 25% plus Social Contribution on Net income at 9%)
(2)
Rate applicable to Brazilian entities. In case of foreign entities the capital gain tax rate is 15% (or 25% if the
seller is domiciled in a low tax jurisdiction)
(3)
Withholding applies on dividends in excess of the distributing company’s previously taxed income - at 35%
in Argentina, 33% in Colombia, and 34, 50 or 60% in Venezuela.
Techniques for Repatriation of Funds from Latin American Operations
25
Argentina
Brazil
1. Bolivia
2. Chile
3. Germany
4. Austria
5. Italy
6. France
7. Brazil
8. Spain
9. Canada
10. Finland
11. Sweden
12. Denmark
13. Holland
14. UK
15. Belgium
16. Swiss
17. Norway
18. Russia
1. Argentine
1. Argentina
1. Argentina
1. Spain
2. Austria
2. Brazil
2. Canada
2. Andino
3. Canada
3. Chile
3. Chile
3. Mexico
4. Chile
4. Switzerland* 4. United States
4. Brazil
5. China
5. Mexico
5. Mexico*
5.
Norway
6. Czech Republic/
6. Italy
6. Canada*
Slovakia
7. France
6. S. Korea
7. Germany**
7. Korea
8. Switzerland
7. Ecuador
8. Belgium**
8. Belgium
9. Netherlands** 9. Andino
8. Spain
9. Denmark
10. Luxembourg**
9. Poland
10.Ecuador
11. Korea**
10. Peru
11.Spain
12. U.S.A.**
12. Philippines
11. UK
13. India**
13. Finland
12.Denmark
14. Czech
14. France
Republic**
13. Croatia
15. Netherlands
14. Sweden
16. Hungary
*not yet
15. New Zealand
17. India
ratified
18. Italy
16. France
** Under negotiation
19. Japan
17. Sweden
20. Luxembourg
18. Paraguay
21. Norway
19. Portugal
22. Portugal
20. Ireland
23. Sweden
24. South Africa
21. Malaysia
25. Israel
26. Mexico
27.Ukraine
28. Paraguay (pending Decree)
29. Russia (pending Decree)1
Chile
Colombia
Techniques for Repatriation of Funds from Latin American Operations
Ecuador
México
Perú
1. Germany
1. Canada
2. Australia
2. Brazil
3. Argentina
3. Chile
4. Belgium
4. Andino
5. Canada
6. S. Korea
7. Chile
8. Denmark
9. Ecuador
10. Spain
11. U.S.A.
12. Finland
13. Italy
14. Israel
15. Ireland
16. Japan
17. Luxemburg
18. Norway
19. Netherlands
20. Poland
21. Portugal
22. UK
23. Czech Republic
24. Rumania
25. Singapore
26. Sweden
27. Switzerland
28. France
29. Austria
30. Brazil
31. China
32. Singapore
Venezuela
1. Germany
2. Belgium
3. Canada
4. US
5. France
6. Netherlands
7. Italy
8. Norway
9. Portugal
10. UK
11. Sweden
12. Spain
13.Switzerland
14. Trinidad and
Tobago
15. Czech Rep
16. Indonesia
17. Barbados
18. Denmark
19. Brazil
20. China
21. Cuba
22. Iran
23. Kuwait
24. Russia
25. Austria
26. Qatar*
*not in force
26
Argentina – Minimizing Tax on Other
Payments
– Withholding Tax of 35% on Specific Percentages of
Presumed Net Income
– Debt – Consider Borrowing from Financial Institutions or
Parties in Tax Treaty Jurisdictions – Otherwise Not Tax
Efficient
– 35% WHT on cross border interest payments
– 15.05% WHT on interest paid to Financial Institutions
– Possible use of back-to-back loans
Techniques for Repatriation of Funds from Latin American Operations
27
Argentina – Minimizing Tax on Other
Payments
– Use of Contracts with Parties in Tax Treaty Countries To
Avoid High Tax on Payments for Services and Use of
Intangibles
– 21% WHT for technical assistance agreements registered
with INPI
– 28% WHT for patent/trademark license agreements
registered with INPI
– 31.5% WHT for agreements not registered with INPI
Techniques for Repatriation of Funds from Latin American Operations
28
Argentina – Impact of Tax Treaties
Tax
Treaty
WHT on
Dividends
0% generally,
With No Tax
Treaty (e.g. US,
Luxembourg)
35% WHT on
excess over
pretaxed profits
WHT on
Interest
15.05% Financial
Institutions;
WHT on
Royalties
Tax on Capital Gains
21% / 28% / 31.5%
Exempt for shares. Taxable
for quotas sold to an
Argentine party.
35% generally
Netherlands
Yes
limited to 10%,
15%
o%, 12%
3%, 5%, 10%, 15%
Arg. Tax limited to 10% or
15% if not exempt under D
Law
Spain
Yes
limited to 10%,
15%
0%, 12.5%
3%, 5%, 10%, 15%
Arg. Tax limited to 10% or
15% if not exempt under D
Law
Switzerland
Yes
limited to 10%,
15%
0%, 12%
3%, 5%, 10%, 15%
Taxing rights Switzerland
only
Canada
Yes
limited to 10%,
15%
0%, 12.5%
3%, 5%, 10%, 15%
D Law
Techniques for Repatriation of Funds from Latin American Operations
29
Argentina – When Possible, Plan to Avoid
Limits on Deduction of Expenses
– General Limitations on Deductions:
– Payments for transfer of technology
– Deduction only if the agreements are registered with INPI
– Deduction up to: a) 3% of the sales or profits; b) 5% of the
investment effectively made as a consequence of the
advice.
– Payments made for license of trademarks and patents
under agreements registered with INPI
– Deduction limited to 80% of their amounts.
Techniques for Repatriation of Funds from Latin American Operations
30
Argentina – When Possible, Plan to Avoid
Limits on Deduction of Expenses
– Limitations on Interest Deductions:
– Expense must be necessary to obtain a taxable income or
preserve the source of income
– Thin cap rules
Techniques for Repatriation of Funds from Latin American Operations
31
Brazil – Tax on Interest Payments
– Interest on Debt – Generally Tax Efficient
– Deduction at 34% CIT rate and WHT at 15%
– 0% on interest/commissions on credits to finance exports
– On December, 2009, Federal Government created thin
capitalization rules. Debt equity ratio 2:1. For transactions
carried out under privileged tax regime or with parties
located in low-tax jurisdictions, ratio 0.3:1.
– Consider Using Capital Reductions
– Tax free up to the amount registered as foreign investment
with the Central Bank of Brazil
– Losses must be absorbed against capital
Techniques for Repatriation of Funds from Latin American Operations
32
Brazil – Interest on Equity
– A Brazilian Company Can Pay Interest on Equity to its
Equity Holders
– Amount payable each tax year is limited to 50% of current or
retained earnings
– Operates Like a Hybrid Loan – Often Attractive to Parent
Companies with an Appetite for Dividends from a High-Tax
Jurisdiction
– Deductible in Brazil at the full corporate rate of 34%
– Brings back deemed paid foreign tax credits for U.S. tax
purposes
Techniques for Repatriation of Funds from Latin American Operations
33
Brazil – Interest on Equity
– 15% WHT on payment or credit to equity holders
– Higher rate if equity holder is resident in a low tax jurisdiction
– Rate of Interest on Equity
– The government monitored long term interest rate (TJLP)
– Issue: whether the jurisdiction of beneficiary treats this
payment as “deemed” dividends, interest or other nature?
– Interest on equity is treated as interest in the Tax Treaties
executed with Chile, Israel, Mexico, Portugal, South Africa
and Ukraine.
Techniques for Repatriation of Funds from Latin American Operations
34
Brazil – Payments for Cross-Border Services
– Note Pitfall of High WHT or WHT+CIDE on Payments for
Services and Royalties
– High taxation applicable currently
– 25% total tax burden (WHT or WHT+CIDE)
– WHT applies whether services take place in Brazil or
offshore
Techniques for Repatriation of Funds from Latin American Operations
35
Brazil – Payments for Cross-Border Services
– CIDE
– 10% CIDE (“Contributions of Intervention in the Economy”)
levied on Brazilian residents on certain payments to
foreign parties
– Royalties
– Supply of technology
– Technical assistance
– Technical services, administrative assistance and other
similar services
– Trademark license and assignment, and
– Patent license and assignment
Techniques for Repatriation of Funds from Latin American Operations
36
Brazil – Payments for Cross-Border Services
– CIDE
– Application 10% CIDE To Software Payments
– CIDE does not apply to software licensing fees – except in
case where there is transfer of the source code (transfer of
technology).
– This provision has retroactive effects to January 1, 2006 –
Law No. 11,452/07
Techniques for Repatriation of Funds from Latin American Operations
37
Brazil – Payments for Cross-Border Services
– CIDE
– U.S. Tax Consequences of CIDE
– CIDE is a not a withholding income tax
– No foreign tax credit for the non-resident beneficiary
– CIDE is a tax on the payments (not the income) of the
company contracting services
– No deemed foreign tax credit
Techniques for Repatriation of Funds from Latin American Operations
38
Brazil – Payments for Cross-Border Services
– Withholding Tax on Royalties and Service Payments
– 15% on royalties / payments for services that were subject to
CIDE
– 25% on royalties / payments
– For services not subject to CIDE
– Or if the services provider is domiciled in a low-tax
jurisdiction
Techniques for Repatriation of Funds from Latin American Operations
39
Brazil – Tax Burden on Payments for
Technical Assistance, Technical Services
and Consulting Services
– Payments for Technology Transfer Agreements, Technical
Assistance and Technical Services
– Deduction limited to 5% of the associated revenues
– Transfer pricing rules not applicable for payments subject
to limitation of deductibility
– Registration with INPI and Brazilian Central Bank
Techniques for Repatriation of Funds from Latin American Operations
40
Brazil – Tax Burden on Payments for
Technical Assistance, Technical Services
and Consulting Services
– Payments for Technology Transfer Agreements, Technical
Assistance and Technical Services
– Summary of taxes:
– ISS (service tax) – 2% to 5%
– Withholding income tax - 15%
– CIDE - 10%
– PIS/COFINS - 9.25%
Techniques for Repatriation of Funds from Latin American Operations
41
Brazil – Tax Burden on Payments for
Technical Assistance, Technical Services
and Consulting Services
– Definitions
– Technology Transfer Agreements
– Imply transfer of technology
– Technical Assistance
– Permanent assistance furnished by the owner of a formula
or process
– Technical Services
– Specialized knowledge is required
Techniques for Repatriation of Funds from Latin American Operations
42
Brazil – Tax Burden on Payments for
Technical Assistance, Technical Services
and Consulting Services
– Payments for Professional, Consulting, Administrative,
Financial or Managerial services
– Not subject to registration with any Brazilian Governmental
authority
– Deductible provided that comply with general deductibility
rules (not subject to specific limitation)
– Summary of taxes:
– ISS (service tax – 2% to 5%), withholding income tax
(15%), CIDE (10%) and PIS/COFINS (9.25%)
Techniques for Repatriation of Funds from Latin American Operations
43
Brazil - Importation of Services
Import of Services
Net price of services
Grossed up amount
WTH
ISS
Amount net of taxes
CIDE
Tax basis PIS/COFINS
PIS/COFINS
IOF
Total Cost to Brazil Co.
Tax Cost to Brazil Co.
Cost of services
PIS/COFINS credit
Deductibility CIT
Total Cost of Services
(after tax recov)
– With PIS/COFINS credits
15%
5%
10%
9,25%
0,38%
34%
100,00
125,00
(18,75)
(6,25)
100,00
12,50
137,74
12,74
0,57
150,81
150,81
(12,74)
(46,94)
91,13
Techniques for Repatriation of Funds from Latin American Operations
Summary
Net amount payable abroad
Disbursement by Brazil Co.
Total Taxes
Recoverable Taxes
Total Cost
100,00
150,81
50,81
(59,69)
(8,87)
44
Brazil - Importation of Services
Import of Services
Net price of services
Grossed up amount
WTH
ISS
Amount net of taxes
CIDE
Tax basis PIS/COFINS
PIS/COFINS
IOF
Total Cost to Brazil Co.
Tax Cost to Brazil Co.
Cost of services
PIS/COFINS credit
Deductibility CIT
Total Cost of Services
(after tax recov)
– Without PIS/COFINS credits
15%
5%
10%
9,25%
0,38%
100,00
125,00
(18,75)
(6,25)
100,00
12,50
137,74
12,74
0,57
150,81
Summary
34%
150,81
0,00
(51,28)
99,54
Techniques for Repatriation of Funds from Latin American Operations
Net amount payable abroad
Disbursement by Brazil Co.
Total Taxes
Recoverable Taxes
Total Cost
100,00
150,81
50,81
(51,28)
(0,46)
45
Brazil – Impact of Tax Treaties
Tax
Treaty
0%
With No Tax
Treaty (e.g.,
Switzerland)
Netherlands
WHT on
Dividends
Yes
0%
WHT on
Interest
WHT on
Royalties
Tax on
Capital Gains
15% Generally;
15% Generally;
15% Generally; 25%
25% Tax Haven
25% Tax Haven
10% / 15%
15% / 25%
Tax Haven
Taxing right Both
No reduced rates
Spain
Yes
0%
10% / 15%
10% / 15%
Taxing right Both
No reduced rates
Luxembourg
Yes
0%
0% / 15%
15% / 25%
Taxing right Both
No reduced rates
Canada
Yes
0%
10 / 15%
15% / 25%
Taxing right Both
No reduced rates
Techniques for Repatriation of Funds from Latin American Operations
46
Brazil –Impact of Tax Treaties
– Specific cases: Tax treaties limit on royalties taxation
– Spain:
– 10% on royalties paid in consideration for the use or
concession of use of author’s right on literary, artistic and
scientific works
– 15% others
– Israel and South Africa:
– 15% on royalties in consideration for the use or
concession of use of industrial and commercial
trademarks
– 10% others
Techniques for Repatriation of Funds from Latin American Operations
47
Brazil –Impact of Tax Treaties
– Specific cases: Tax treaties limit on royalties taxation
– Austria, Belgium, Finland and France:
– 25% on royalties in consideration for the use or
concession of use of industrial and commercial
trademarks
– 10% on royalties paid in consideration for the use or
concession of use of author’s right on literary, artistic and
scientific works
– 15% others
– Japan:
– 10% on royalties in general
Techniques for Repatriation of Funds from Latin American Operations
48
Chile – Withholding Tax Issues
– High withholding tax rates on payments for services
– Generous” traditional concept of “Chilean source income”
including “source of payment”
– Example: Service rendered to Chilean company in Tokyo by
Japanese resident engineer, subject to WHT in Chile.
– Effect – Potential foreign tax credit issues abroad
– Use of Double Taxation Treaties To Reduce WHT on Royalties,
Interest and Services Income
– Chile’s Treaty Network completed 20+ treaties
– Chile / Argentina Treaty
Techniques for Repatriation of Funds from Latin American Operations
49
Chile – Cross Border Services
– 15% withholding tax on payments to unrelated foreign
parties not located in tax havens for:
– Technical or engineering works or professional or technical
services rendered in Chile or abroad
– 20% for payments to related parties or to parties in tax
havens
– Use of patents, utility models, industrial drawings and
designs, layout of integrated circuits, new vegetal varieties,
and computer programs
– 30% for payments to related parties or to parties in tax
havens
Techniques for Repatriation of Funds from Latin American Operations
50
Chile – Cross Border Services
– 30% withholding tax on other payments to nonresidents
for use of trademarks, formulas, know how or similar
concepts
– 20% withholding tax on payments :
– To foreign individuals for scientific, cultural or sport activities
performed in Chile
– To foreign producers or distributors for material to be
broadcast in television or cinema
– 1.75% - on payments to nonresidents for lease of capital
assets
Techniques for Repatriation of Funds from Latin American Operations
51
Chile – Payments for Technical Assistance,
Technical Services and Consulting Services
– Definition of Technical Assistance (Now in the Income Tax
Law) for purpose of getting the 15% withholding tax rate
– Technical assistance deals with “customized” or “tailor made”
advice, counseling or support based on experience and
knowledge
– Royalties deal with “the use or privileged to use” intangibles
Techniques for Repatriation of Funds from Latin American Operations
52
Chile – Payments for Technical Assistance,
Technical Services and Consulting Services
– Treaty Law
– Chile has not been able to retain right to tax payments for
services rendered abroad by non-resident taxpayers
– Therefore payments for technical assistance provided by
treaty residents are not subject to Chilean Tax
– Exception: Treaties with Brazil and Colombia, where
outgoing payments for technical and consulting services are
recharacterized as royalties.
Techniques for Repatriation of Funds from Latin American Operations
53
Chile – Impact of Tax Treaties
Tax
Treaty
With No Tax
Treaty (e.g. US*,
Netherlands,
Luxembourg,
Switzerland)
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
Tax on
Capital Gain
35%:
CIT may be
credited (first
level tax 17%)
35% generally;
4% Financial
Institutions.
15% / 30%
0 / 17 / 35%
5% / 15%;
4% Financial
Institutions
5% / 10%
Taxing rights
also Chile; 16%
if owner has
less than 20% of
equity otherwise
35%
Domestic Law
Spain
Yes
35%:
CIT (first level
tax of 17%) may
be credited
Canada
Yes
35%:
15% generally;
CIT (first level
4% Financial
tax of 17%) may
Institutions
be credited
15%
* The US-Chile Treaty is signed but not effective yet
Techniques for Repatriation of Funds from Latin American Operations
54
Peru – Cross Border Services
– Importance of Characterizing Services Carefully when
Drafting
– Payments to a Non-domiciled Taxpayer for Services
Performed Entirely in Peru
– 30% withholding tax
– Payments for Services Performed Entirely Outside of Peru
– Generally no withholding tax, except . . .
Techniques for Repatriation of Funds from Latin American Operations
55
Peru – Payments for Technical Assistance,
Technical Services and Consulting Services
– Certain Services Performed Inside or Outside of Peru but
Economically Used in Peru
– 30% Tax - on payments for digital services rendered through
the internet, or through systems similar to the internet
Techniques for Repatriation of Funds from Latin American Operations
56
Peru – Payments for Technical Assistance,
Technical Services and Consulting Services
– Certain Services Performed Inside or Outside of Peru but
Economically Used in Peru
– 15% Tax - on payments for technical assistance
– Regardless of where performed
– If certification and reporting requirements met
– 30% if the conditions are not met
– Clarification of definition of technical assistance where
reduced withholding tax rate applies: engineering services,
project investigation and finance consulting
Techniques for Repatriation of Funds from Latin American Operations
57
Peru – Payments for Technical Assistance,
Technical Services and Consulting Services
– Definition of Technical Assistance
– “Service whereby provider undertakes to use its abilities by
means of certain methods or techniques to provide special
non-patented knowledge that the recipient of those services
requires”
– Definition has been narrowed through the regulations and
Tax rulings
Techniques for Repatriation of Funds from Latin American Operations
58
Peru – Payments for Technical Assistance,
Technical Services and Consulting Services
– Definition of when Services Are Economically Used in
Peru
– (For technical assistance and digital services)
– When services are used to develop activities or fulfill the
purpose of the domiciled taxpayer
– Presumption
– That services are economically used in Peru if Peruvian
taxpayer deducts the payment as an expense
Techniques for Repatriation of Funds from Latin American Operations
59
Peru – Payments for Technical Assistance,
Technical Services and Consulting Services
– Certification and reporting requirements to get reduced
15% rate for technical assistance
– Affidavit from the non-domiciled entity, stating that:
– It will render the services and
– It will register in its books the revenue from those
services; and
– Report from an audit firm with international prestige,
certifying that:
– The technical assistance was actually rendered.
Techniques for Repatriation of Funds from Latin American Operations
60
Peru – Impact of Tax Treaties
Tax
Treaty
With No Tax
Treaty (US,
Netherlands,
Spain,
Luxembourg,
Switzerland)
Canada
Yes
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
WHT on
Capital Gains
4.1%
4.99%, 30%
30%
Generally 30%
(unless tax
exempt)
Generally 15%
10% (recipient:
beneficiary
controlling not
less than 10% of
voting shares)
15%
15%
(Depends on
type of property)
Techniques for Repatriation of Funds from Latin American Operations
61
Peru – Impact of Tax Treaties
Chile
Tax
Treaty
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
WHT on
Capital Gains
Yes
Generally 15%
10% (recipient:
beneficiary
controlling not
less than 25% of
voting shares)
15%
15%
(Depends on
type of property)
Techniques for Repatriation of Funds from Latin American Operations
62
Colombia – Withholding Tax Issues
– Variable Withholding Tax on Payments to Foreign Parties
for Services – Carefully Consider and Document Character
of the Services
– 33% WHT
– On payments for services rendered in Colombia and
– On lease payments to foreign entities (0% Art. 25, CTC)
– 10% WHT
– On payments for technical services and technical assistance
services (includes consultancy services)
– No matter if rendered abroad or in Colombia
Techniques for Repatriation of Funds from Latin American Operations
63
Colombia – Withholding Tax Issues
– No WHT on Payments for Other Services Rendered
Abroad by a Foreign Party
– e.g. Management fees charges to a Colombian subsidiary
– Special Care Required in Defining Separately:
– Royalties (33% tax) and
– Payments for technical services or technical assistance (10%
tax)
– Can be in the same agreement
Techniques for Repatriation of Funds from Latin American Operations
64
Colombia – Payments for Cross Border
Services
– Payments for Technical Assistance, Technical Services,
Consulting, regardless where the services are rendered
– 10% income tax withholding
– Technical assistance services are defined as the consultancy given
by means of a services contract for the use of technical knowledge.
Includes training of personnel to apply such knowledge.
– Technical services are defined as the performance of a contract by
using technological knowledge. The difference with the technical
assistance is that no knowledge is transferred.
– Consulting does not have a legal definition for tax purposes, but
Tax Administration accept other legal definition.
Techniques for Repatriation of Funds from Latin American Operations
65
Colombia – Payments for Cross Border
Services
– Royalty payments for the use or exploitation of any type of
intellectual property
– 33% withholding tax regardless where the use or right of
exploitation is granted or the intellectual property is registered.
– Payments for the use of software
– 26.4% withholding tax regardless where the use or right of
exploitation is granted or the intellectual property is registered.
– Payments under film licenses
– 19.8% withholding tax regardless where the use or right of
exploitation is granted or the intellectual property is registered.
Techniques for Repatriation of Funds from Latin American Operations
66
Colombia – Payments for Cross Border
Services
– On any payment for other services rendered in Colombia
by a foreign party
– 33% withholding tax
– On other services rendered abroad by a foreign party
– No withholding taxes apply (Limitation for deductions in
Colombia may apply)
Techniques for Repatriation of Funds from Latin American Operations
67
Colombia – Impact of the Tax Treaties
Tax
Treaty
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
WHT on
Capital Gains
33% on nontaxed profits at
corporate level
0% (Conpes).
33%
33%
Spain
0% Generally;
5% excess of
pre-taxed profits
0% / 10%
10%
10%
Chile
0% Generally; 0% / 5% / 15%
7% excess of
pre-taxed profits
10%
17%
With No Tax
Treaty (US, UK,
Mexico, Brazil,
Venezuela)
Techniques for Repatriation of Funds from Latin American Operations
68
Colombia – Limitations on Deductions
– For Management Fees Charged to a Subsidiary in
Colombia – When Not Subject to Income Tax Withholding
– Deduction limited to 15% of the Colombian company’s net
taxable income.
– Limitation does not apply if fees are assessed according to
transfer pricing regulations
Techniques for Repatriation of Funds from Latin American Operations
69
Colombia – Limitations on Deductions
– Interest on loans from Foreign Parties
– Interest on loans granted by finance companies located
abroad – Fully deductible
– Foreign finance company must be recognized by the
Colombian Central Bank
– Interest on other loans from foreign parties – not deductible
unless agreed based on a transfer pricing study.
–
In any case will be considered as part of the equity for
income tax purposes ???
Techniques for Repatriation of Funds from Latin American Operations
70
Venezuela – Reducing Tax on Interest
Payments and Royalties
– Reducing Withholding Tax on Interest Payments
– Use of QFI to Get Lower WHT to 4.95%, instead of 30.32%
– Definition limited to foreign licensed bank or financial institutions.
– Consider use of back-to-back loans
– Use of Tax Treaties to Reduce WHT on Royalties
– From 30.6% to:
– 5% - France, Switzerland, Germany and Netherlands
– 5% and 10% - U.S.
– 10%, 12% - others
Techniques for Repatriation of Funds from Latin American Operations
71
Venezuela – Impact of Tax Treaties
Tax
Treaty
With No Tax
Treaty (e.g.
Luxembourg)
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
Tax on
Capital Gains
0% Generally;
4.95% F
34% on 90% of
Institution
payment
34% on excess
over pre-taxed 34% on 95% of
profits
payment
U.S.
Yes
0% Generally;
10% excess of
pre-taxed profits
5%
5%, 7%, 10% Taxing rights NL
only
Netherlands
Yes
0% Generally;
10% excess of
pre-taxed profits
5%
5%, 7%, 10% Taxing rights NL
only
Spain
Yes
0% Generally;
10% excess of
pre-taxed profits
4.95% /10%
Techniques for Repatriation of Funds from Latin American Operations
5%
Taxing rights
Spain only
72
Venezuela – Impact of Tax Treaties
Tax
Treaty
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
Tax on
Capital Gains
Switzerland
Yes
0% Generally;
10% excess of
pre-taxed profits
0% / 5%
5%
Taxing rights
Swiss only
Canada
Yes
0% Generally; 4.95% FI 34% 34% on 90% of
34% excess of
on 95% of
payment
pre-taxed profits
payment
Techniques for Repatriation of Funds from Latin American Operations
Domestic Law
73
Venezuela – Payments for Services
– Payments for technical assistance from abroad
– 10.2% withholding tax
– Payments for technical services
– 17% withholding tax
– Payments for technical assistance and technical services
partially rendered outside Venezuela:
– 60% rendered abroad and therefore subject to the tax
treatment provided before
– 40% rendered in Venezuela and hence taxed on a net
income basis (admitting deduction of costs and expenses)
Techniques for Repatriation of Funds from Latin American Operations
74
Venezuela – Payments for Services
– Use of Tax Treaties to Eliminate WHT on Payments for
Technical Assistance and Technological Services
– Exempt if provider does not have PE in Venezuela – US,
Netherlands, U.K., Germany, France, Italy, etc).
– Statutory Rates are High:
– Technological services: 17%
– 50% of income is deemed net income subject to 34%
rate
– Technical assistance fees: 10.20%
– 30% of income is deemed net income subject to 34%
rate
Techniques for Repatriation of Funds from Latin American Operations
75
Venezuela – Branch Tax
– Transferring Seat of Management of Company With the
Branch to a Treaty Jurisdiction
– May provide exemption from Branch Tax
– Most treaties do not authorize Venezuela’s branch profits
tax
– US treaty establishes a 5% limit on the tax
Techniques for Repatriation of Funds from Latin American Operations
76
Mexico – Repatriation Issues
– Integrated Income Tax System
– Differences between Accounting and Tax
– Lack of CUFIN
– Thin Cap Rules
– Tax Heaven Rules (CFC)
– Mexico as a Low-Tax Jurisdiction
– Business Flat Tax (“IETU”)
Techniques for Repatriation of Funds from Latin American Operations
77
Mexico – Planning Ideas
– Extensive Tax Treaty network
– Definition of Mexican Source of Income on
– Services
– Technical Assistance
– Usufruct on non Mexican shares
– EP Rules
– Maquiladora Regime
– Asset Tax Carry Forward
– Asset Tax Law is already repealed; however there are certain rules in the
IETU Law that provide its carry forward
– Tax Credit on Dividend
– Supply Chain and IP Migration
Techniques for Repatriation of Funds from Latin American Operations
78
Mexico – Impact of Income Tax Treaties
– Amendments to Mexico-Netherlands Tax Treaty
– New tax residence rules for corporations with double
residence
– Reduction of Withholding Rate on interests (10%)
– “Wide” definition of interests
– Reduction of Withholding Rate on capital gains (10%)
– Capital gains: Exemption in cases of reorganizations is
eliminated; original cost will be maintained
Techniques for Repatriation of Funds from Latin American Operations
79
Mexico – Impact of Income Tax Treaties
– Amendments to Mexico-Switzerland Tax Treaty
– New protocol and new rules regarding double residence
– Significant rules to prevent amusements that will impact
financing schedules and royalty structures; very wide
definition of “anti conduit”
– Interests
– “Wider” definition of the term “interest”
– The rate upon interest is reduced to 10%
– Capital Gains
– Exemption is eliminated; they will be taxed at a10% rate
– New rules on reorganization, which are limited and allow
maintaining original cost
Techniques for Repatriation of Funds from Latin American Operations
80
Mexico – Impact of Income Tax Treaties
– Amendments to other Treaties
– Germany
– Barbados
– Colombia
Techniques for Repatriation of Funds from Latin American Operations
81
Mexico – Impact of Income Tax Treaties
Tax
Treaty
With no Tax
Treaty
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
Tax on
Capital Gains
0%
4.9% FI, 40%
25% general, Mex 25% (or tax
Tax Heaven 40% Tax Heaven on net gain)
U.S.
Yes
0%
0%, 10%, 15%
10%
U.S.; and Mex
tax on sale of
shares with 25%
of equity
Netherlands
Yes
0%
10%
10%
NL; and Mex tax
on sale of shares
with 25% of
equity
Spain
Yes
0%
15%
10%
Spain; and Mex
tax on sale of
shares with 25%
of equity
Techniques for Repatriation of Funds from Latin American Operations
82
Mexico – Impact of Income Tax Treaties
Tax
Treaty
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
Tax on
Capital Gains
Luxembourg
Yes
0%
10%
10%
Mex. Only on
sale of if shares
represent at
least 25 of equity
of if Capital Gain
is exempt in
LUX; otherwise
LUX only
Canada
Yes
0%
0%, 10%, 15%
10%
Canada only
Switzerland
Yes
0%
10%
10%
Swiss.; and Mex
10% tax on sale
of shares
Techniques for Repatriation of Funds from Latin American Operations
83
Mexico – Payments for Cross Border
Services
Description
% Withholding TaxIncome Tax Law
% Withholding Tax – Us
– Tax Treaty
Professional
Services
25%
Business Profits
Technical
Assistance
25%
Business Profits
Lease M&E
25%
Business Profits/10%
Techniques for Repatriation of Funds from Latin American Operations
84
Mexico – Payments for Cross Border
Services
– Timing of Withholding Tax
– Payable when the payment is due or made, whichever
occurs first
– Payment = act of fulfilling or extinguishing , by whatever
means
Techniques for Repatriation of Funds from Latin American Operations
85
Mexico – Payments for Cross Border
Services
– Withholding Tax on Payments for:
– Independent personal services performed in Mexico
– Presumed taxable if partly performed in Mexico
– Technical assistance performed in or out Mexico
– Leasing of personal property
– Construction services
– Financial operations
Techniques for Repatriation of Funds from Latin American Operations
86
Mexico – Payments for Technical Assistance,
Technical Services and Consulting Services
– Professional Services
– Service deemed provided in Mexico, if payment is made
to a non-resident which is a related party
– Subject to proof to the contrary
– The place where the service is provided is not
acknowledged
– Legal status of taxpayer’s is not taken into consideration
Techniques for Repatriation of Funds from Latin American Operations
87
Mexico – Payments for Technical Assistance,
Technical Services and Consulting Services
– Technical Assistance
– Defined as independent personal services, in which the
provider of such services is compelled to provide, and
directly participate in the application of knowledge that can't
be protected by a patent and that doesn’t imply the
transmission of confidential information related to industrial,
commercial or scientific experiences
– Payments made for technical assistance are not considered
royalties
– Technical Services and Consulting Services
– Not expressively defined in Mexican Law
Techniques for Repatriation of Funds from Latin American Operations
88
Mexico – Business Flat Tax (“IETU”)
– Entered in force on 2008 as a control Tax
– Substituted Asset Tax
– Coexistence with Income Tax
– Very criticized
– High tax collection purposes from the Tax Authorities
– Increase of administrative expenses (2 tax basis
computation)
– Certain expenses are not deductible
– Important amount of Law suits
– The Supreme Court has already confirmed the
constitutional nature of the tax for matters of
proportionality
Techniques for Repatriation of Funds from Latin American Operations
89
Mexico – Business Flat Tax (“IETU”)
– The IETU is paid when it exceeds Income Tax
– Rate: 17.5% on 2010
– Subject to pay the IETU:
– Individuals
– Entities
– Foreign residents with permanent establishment in Mexico
– Activities for which the Tax must be paid:
– Alienation of goods
– Render of independent services
– Grant the use or temporary use of goods
Techniques for Repatriation of Funds from Latin American Operations
90
Mexico – Business Flat Tax (“IETU”)
– Deductible expenses shall be related to the obtaining of
incomes taxed by IETU
– Not deductible
– Interest payments derived from financings
– Royalties for the grant or use of goods between related
parties
– Wages and social security expenses
– In order to compensate the lack of the deductions certain
credits can be applied for reducing the tax to pay
– IETU losses of previous years
– Wages and salaries
– Investments (made from 1998 until 2007)
– Income Tax of the fiscal year
Techniques for Repatriation of Funds from Latin American Operations
91
Mexico – Credit of IETU for Non-Residents
– Taking the credit of the IETU paid in Mexico upon taxes
paid abroad is a key issue
– Indispensable in order to maintain good bilateral
relationships between nations and not to inhibit investment
in Mexico
– To avoid additional tax charges to foreign investors in
Mexico
– To avoid double taxation conflicts
Techniques for Repatriation of Funds from Latin American Operations
92
Mexico – Credit of IETU for Non-Residents
– Diverse countries have accepted the IETU on a temporary
basis as an “income tax” for purposes of crediting the tax
paid abroad. This acceptance is subject to the
accomplishment of certain rules
Techniques for Repatriation of Funds from Latin American Operations
93
Mexico – Credit of IETU for Non-Residents
– Tax credit in Spain
– There is not an official position of the Spanish Tax Authorities
regarding the nature of the IETU for purposes of applying the
deductions that result from double taxation in Spain to
income obtained in Mexico
– From a technical point of view, there are some arguments to
defend that the IETU is a Tax of similar nature to Spanish IS
Techniques for Repatriation of Funds from Latin American Operations
94
Mexico – Credit of IETU for Non-Residents
– Tax Credit in US
– The “foreign tax credit” procedure allows the credit in the US
of the income tax paid abroad
– Regulated by:
– Section 901 of the IRS
– Review of the possibility of taking a tax credit must be
evaluated upon a particular tax; this means, for
purposes of the IETU it cannot be related to other tax
– Principal concepts of IETU are different to other taxes
– Treasury regulation 1.901-2
– Conceptual requirements in order for a tax to be
creditable in the US
Techniques for Repatriation of Funds from Latin American Operations
95
Ideas for
Redeployment of Funds
from Latin American
Jurisdictions
Techniques for Repatriation of Funds from Latin American Operations
96
Transfer of Shares
Step 4
US Parent
Dividend
Step 3
LA Holdco
Payment of
Note
AR with A
Step 1
Bank
Step 2
Loan
Transfer of
shares
A
AP with LA Holdco
Techniques for Repatriation of Funds from Latin American Operations
B
97
Sale of the Usufruct
Step 2
Step 3
Sale of Usufruct of
Other Subs’ shares
Bank
US Parent
LA Holdco
Payment of Usufruct
Other Subs
Step 1
Loan
Other Subs
Techniques for Repatriation of Funds from Latin American Operations
98
Factoring
US Parent
Step 3
Dividend Distribution
LA Holdco
Dividend Distribution
Step 2
A
Bank
AR Factoring
Step 1
Techniques for Repatriation of Funds from Latin American Operations
99
Why a Holding
Company?
Techniques for Repatriation of Funds from Latin American Operations
100
Pros of a Holding Structure
– Tax benefits
– Reduction withholding taxes
– Avoidance taxation capital gains
– Insulate foreign activities from CFC rules home country
– Tax efficient (centralized) cash management
– Commercial benefits
– Non-EU companies get European ‘face’
– Spread of commercial risk
– Preparation for IPO or spin-off
Techniques for Repatriation of Funds from Latin American Operations
101
Pros of a Holding Structure
– Organizational benefits
– Legal structure may coincide with organizational structure
– Organization in business units (spin-off)
– Vertical integration
Techniques for Repatriation of Funds from Latin American Operations
102
Cons of a Holding Structure
– Tax disadvantages
– Restricted VAT deductibility
– Heightened scrutiny by local tax authorities
– (Need for substance)
– Costs
– Increased legal and compliance costs
– Need for substance
– Requires staff and management time
– Complexity
Techniques for Repatriation of Funds from Latin American Operations
103
Tax Features of Ideal Location for
Holding Company (I)
– No tax on dividends received
– No tax on capital gains on disposal
– No CFC rules
– Extensive treaty network
– No or low WHT on inbound dividend / interest / royalty
payments
– No source state taxation of capital gains
Techniques for Repatriation of Funds from Latin American Operations
104
Tax Features of Ideal Location for
Holding Company (II)
– No or low WHT on outbound dividends and liquidation
distributions
– No or low WHT on outbound interest or royalty payments
– Low effective rate on taxable (interest / royalty / service)
income
– Reasonable relations with local tax authorities:
– possibility to obtain advance tax rulings
– stable tax regime
Techniques for Repatriation of Funds from Latin American Operations
105
Other Features of Ideal Location for Holding
Company
– Legal and financial community used to accommodate
holding companies
– Holding company allowed to perform operating activities
– Reasonable cost of establishment and maintenance
– Reasonable compliance requirements
– Flexible corporate law
– M&A, de-mergers and spin-offs
– Joint ventures
– Corporate governance
Techniques for Repatriation of Funds from Latin American Operations
106
Dutch Tax Regime
Applicable to InterCompany Financing
and Licensing Activities
Techniques for Repatriation of Funds from Latin American Operations
107
Special regime for conduit companies
– Article 8c CITA: interest / royalties received and paid are
excluded from taxable base if:
– (deemed) received and paid within the same group, e.g. also
when guaranteed by group company; AND
– directly / indirectly related to closely connected
loan transactions; AND
– conduit company does not incur genuine risk
Techniques for Repatriation of Funds from Latin American Operations
108
Safe harbor rule conduit finance activities
– Genuine risk if:
– Equity is at least the lower of:
– * 1% nominal value outstanding loans; or
– * EUR 2,000,000
– AND
– Equity will be affected if the risks materializes
– Guarantee and Genuine Risk Agreement between
– Lender and Dutch finance company
Techniques for Repatriation of Funds from Latin American Operations
109
Documentation requirements
– Article 8b CITA: documentation requirements for
transactions between group companies
– Transfer Pricing Documentation:
– Inter company pricing arrangements
– Method to determine at arm’s length remuneration
– Terms and conditions are at arm’s length
Techniques for Repatriation of Funds from Latin American Operations
110
Minimum Substance Requirements
– At least 50% Dutch resident Board Members;
– Board Members have sufficient level of education and
experience to fulfil tasks;
– Finance company employs its own personnel or hires or
uses personnel of another company for the implementation
of the transactions that it is engaged in;
– Most important Board decisions are made in the
Netherlands;
Techniques for Repatriation of Funds from Latin American Operations
111
Minimum Substance Requirements
– Most important bank accounts are held in the Netherlands;
– Books and records are kept and updated in the
Netherlands;
– Finance company has a business address (office) in the
Netherlands
Techniques for Repatriation of Funds from Latin American Operations
112
Planning Idea – Holding companies
Argentina
• Deduction Arg @ 35%
•
•
•
•
•
Wht Arg @ 12% (dom rate 35%)
Taxation NL on spread @ 25.5%
Full credit Arg wht
Taxation Tax Haven @ 0%
Tax rate arbitrage +/- 20%
US/EU
BV
loan
loan
Tax Haven
Switzerland
• Avoidance personal asset tax?
•
Avoidance Arg capital gains tax?
Techniques for Repatriation of Funds from Latin American Operations
Argentina
113
Planning Idea – Holding companies
Brazil
US/EU
Interest
on equity
• Deduction Bra @ 34%
•
•
•
Interest
on loan
equity
BV
• Deduction Bra @ 34%
•
Wht Bra @ 15% (dom rate 15%)
Participation exemption NL
Tax rate arbitrage +/- 13.5%
loan
Brazil
Techniques for Repatriation of Funds from Latin American Operations
Wht Bra @ 15% (dom rate
15%)
• Taxation NL @ 25.5%
• Tax sparing credit @ 20%
• Tax rate arbitrage +/- 13.5%
114
Planning Idea – Holding companies
Chile
US/EU
• Deduction Chile @ 17%
•
•
Wht Chile @ 0% (dom rate 15-30%)
Taxation Spain on spread
BV
Technical
assistance &
Technical Service
&
Consulting Service
Assistance
Chile
Spain
Services
Techniques for Repatriation of Funds from Latin American Operations
115
Planning Idea – Holding companies
Mexico
• Deduction Mex @ 28%
US Fund
EU Fund
NANV
Loan
NANV
COOP
•
•
•
•
•
•
•
< 25%
•
Luxembourg
Loan
Mexico
Techniques for Repatriation of Funds from Latin American Operations
Wht Mex @ 10% (dom rate 28%)
Taxation Lux on spread
Dutch COOP subject to CIT
Participation exemption for
dividends / gains from Mex & Lux
No Mex capital gains tax
Dividend distributions Dutch
COOP not subject to wht under
dom law (no treaty protection
required)
Participation exemption for
dividends / gains from Dutch
COOP
Dividend distributions NANV
subject to 0% wht
116
Planning Idea – Holding companies
Venezuela
• Deduction Ven @ 34%
•
US/EU
• Deduction Ven @ 34%
•
•
•
•
•
Wht Ven @ 5% (dom rate 32.3%)
Taxation NL on spread @ 25.5%
Full credit Ven wht
Taxation Cyprus @ 10%
Tax rate arbitrage +/- 17%
loan
BV
loan
Cyprus
Techniques for Repatriation of Funds from Latin American Operations
Wht Ven @ 0% or 5% (dom rate
10.2% to 30.6%)
• Taxation NL on spread @ 25.5%
• Full credit Ven wht
Technical assistance
& Technical Service
&
License
Venezuela
117
Argentina
1. Bolivia
2. Chile
3. Germany
4. Austria
5. Italy
6. France
7. Brazil
8. Spain
9. Canada
10. Finland
11. Sweden
12. Denmark
13. Holland
14. UK
15. Belgium
16. Swiss
17. Norway
18. Russia
Brazil
Chile
Colombia
1. Argentine
2. Austria
3. Canada
4. Chile
5. China
6. Czech Republic/
Slovakia
7. Korea
8. Belgium
9. Denmark
10.Ecuador
11.Spain
12. Philippines
13. Finland
14. France
15. Netherlands
16. Hungary
17. India
18. Italy
19. Japan
20. Luxembourg
21. Norway
22. Portugal
23. Sweden
24. South Africa
25. Israel
26. Mexico
27.Ukraine
28. Paraguay (pending
Decree)
1. Argentina
2. Canada
1. Spain
2. Andino
3. Chile
4. Switzerland*
5. Mexico*
6. Canada*
3. Colombia
4. Mexico
5. Brazil
6. Norway
7. South Korea
8. Ecuador
7. Germany**
8. Belgium**
9. Netherlands**
10.Luxembourg**
11.Korea**
12.U.S.A.**
Ecuador
1. Argentina
2. Brazil
3. Chile
4. United States
5. Mexico
6. Italy
7. France
8. Switzerland
9. Andino
9. Spain
10. Poland
11. Peru
12. Croatia
13. Denmark
13.India**
14. New Zealand 14.Czech Republic**
15. UK
16. France
*not yet
17. Sweden
ratified
18. Paraguay
** Under negotiation
19. Portugal
20. Ireland
21. Malaysia
Techniques for Repatriation of Funds from Latin American Operations
México
Perú
1. Germany
1. Canada
2. Australia
2. Brazil
3. Argentina
3. Chile
4. Belgium
5. Canada
4. Andino
6. S. Korea
7. Chile
8. Denmark
9. Ecuador
10. Spain
11. U.S.A.
12. Finland
13. Italy
14. Israel
15. Ireland
16. Japan
17. Luxemburg
18. Norway
19. Netherlands
20. Poland
21. Portugal
22. UK
23. Czech Republic
24. Rumania
25. Singapore
26. Sweden
27. Switzerland
28. France 30. Brazil
29. Austria
31. China
32. Singapore
Venezuela
1. Germany
2. Belgium
3. Canada
4. US
5. France
6. Netherlands
7. Italy
8. Norway
9. Portugal
10. UK
11. Sweden
12. Spain
13.Switzerland
14. Trinidad and
Tobago
15. Czech Rep
16. Indonesia
17. Barbados
18. Denmark
19. Brazil*
20. China
21. Cuba
22. Iran
23. Kuwait
24. Russia*
25. Austria
26. Qatar*
*not in force
118
Peru – Impact of Tax Treaties
Tax
Treaty
With No Tax Treaty
(U.S.,
Netherlands, Spain
Luxembourg,
Switzerland)
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
WHT on
Capital Gains
4.1%
1%, 4.99%, 30%
30%
5%, 30%
Brazil
Yes
Generally 15%
10% (recipient:
beneficiary controlling
not less than 20% of
voting shares)
15%
15%
(Depends on type of
property)
Canada
Yes
Generally 15%
10% (recipient:
beneficiary controlling
not less than 10% of
voting shares)
15%
15%
(Depends on type of
property)
Chile
Yes
Generally 15%
10% (recipient:
beneficiary controlling
not less than 25% of
voting shares)
15%
15%
(Depends on type of
property)
Techniques for Repatriation of Funds from Latin American Operations
119
Corporate & Withholding Tax Rates in Latin
America
Country
VAT
Corporate
IT
Capital
Gains
Argentina
Brazil
21
35
35 / 17.5
35
0(3)
15.05/35
21/28/31.5
21 / 28
0-25
34 (1)
34 (2)
34
0
0-25
15
15
Chile
19
17
17
17
18
35 / 4
30 / 15
20 / 15
Colombia
16
34
34
34
0(3)
34 / 0
33 / 26.4
10
Ecuador
12
25
0
25
0
0
235
25
Mexico
15
28
25
28
0
25
25
Peru
19
30
5/30
30
4.1
4.9/10/15/
21/28
30 / 4.99 / 1
30
15/30
Venezuel
a
14
34
34
34
0(3)
4.95 / 34
30.6
17 / 10.2
(1)
(2)
(3)
Branch Dividends Interest Royalties Technical
Tax
WT
WT
WT
Assistance
WT
Combined rate (Corporate Income Tax at 25% plus Social Contribution on Net income at 9%)
Rate applicable to Brazilian entities. In case of foreign entities the capital gain tax rate is 15% (or 25% if the seller is domiciled in a low
tax jurisdiction)
Withholding applies on dividends in excess of the distributing company’s previously taxed income - at 35% in Argentina, 34% in
Colombia, and 34, 50 or 60% in Venezuela.
Techniques for Repatriation of Funds from Latin American Operations
120
Comparison – WHT in LA Countries
WHT on
Dividends
WHT on
Interest
WHT on
Royalties
Venezuela
0% generally;
34% WHT on
excess over
pretaxed profits
4.9%Financial
Institution;
otherwise
34% on 95% of
payment
Colombia
0%
34% WHT on
excess over
pretaxed profits
0% Financial
33%
Institution
(CONPES) (Art 25
CTC)
33%
Peru
4.1%
1% foreign credit
lines of Financial
Institutions
4.99% Financial
Institution
30 % General
5% or 30%
Techniques for Repatriation of Funds from Latin American Operations
34% on 90% of
payment
Tax on
Capital Gains
30%
1% if over Stock
Exchange;
Otherwise 34%
121
The End
Techniques for Repatriation of Funds from Latin American Operations
122
Thank you!
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