Managing payments from and to Latin America: Reducing your company's tax burden

Transcription

1 Managing payments from and to Latin America: Reducing your company's tax burden Latin America 2010: Proactive Strategies for Doing Business in Today's Changing Landscape Miami, Florida March 17, 2010

2 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 2

3 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 3

4 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 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 4

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 5

6 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 Benefits of losses flowing through hybrid entities that make a U.S. check-the-box election U.S. Foreign Tax Credit Consequences U.S. Dual Consolidated Loss Rules Branch recapture rules- Code Sections 904(f)(3) and 367(a)(3)(C) 6

7 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 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 7

8 Distribution of Earnings from Latin American Subsidiaries 8

9 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% 9

10 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 aftertax profits (FUT) depends on several factors. Double Taxation Treaties Do Not reduce WHT on dividends 10

11 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 Mexico, Venezuela, Argentina take care in timing of distributions In Chile Find an Alternative to Dividends 11

12 Reducing or Avoiding Local Tax on Cash Distributions Consider Making a Capital Reduction Generally tax free locally Treated as a dividend in the United States 12

13 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 13

14 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 14

15 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 15

16 Planning for Other Intercompany Payments from Latin American Affiliates 16

17 Comparison WHT in LA Countries WHT on WHT on WHT on Tax on Dividends Interest Royalties Capital Gains Argentina 0% if pre-tax profits, 35% WHT on excess over pretaxed profits 35% generally; 15.05% Financial Institution; 21% / 28% / 31.5% Exempt for shares. Taxable for quotas sold to an Argentine party. Brazil 0% Generally; 15% Generally; 25% Tax Haven 15% Generally; 25% Tax Haven 15% Generally; 25% Tax Haven Chile 35%: CIT (first level tax of 17%) may be credited 35% generally; 4% Financial Institutions 15% / 30% Exempt / 17% / 35% Mexico 0% WHT; Corp Level Tax on dividends in excess CUFIN (1.3889% x div x 28% CIT rate in 2006) 4.9% FI, 40% tax haven, 10%, 15%, 21%, and 28% 25% Generally; 40% - Tax Haven 25% WHT on Proceeds or 30% of Net gain (Exempt if over Stock Exchange) 17

18 Comparison WHT in LA Countries WHT on WHT on WHT on Tax on Dividends Interest Royalties Capital Gains Venezuela 0% generally; 34% WHT on excess over pretaxed profits 4.9%Financial Institution; otherwise 34% on 95% of payment 34% on 90% of payment 1% if over Stock Exchange; Otherwise 34% Colombia 0% 33% WHT on excess over pretaxed profits 0% Financial Institution (CONPES) (Art 25 CTC) 33% 33% Peru 4.1% 1% foreign credit lines of Financial Institutions 4.99% Financial Institution 30 % General 30% 5% / 30% 18

19 Corporate & Withholding Tax Rates in Latin America Country VAT Corporate IT Capital Gains Branch Tax Dividends WT Interest WT Royalties WT Technical Assistance WT Argentina / (3) 15.05/35 21/28/ / 28 Brazil (1) 34 (2) / / 25 Chile / 4 30 / / 15 Colombia (3) 33 / 0 33/ Ecuador Mexico /10/15/ 21/ Peru / / 4.99 / /30 Venezuela (3) 4.95 / / 10.2 (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. 19

20 Argentina 1. Bolivia 2. Chile 3. Germany 4. Italy 5. France 6. Brazil 7. Spain 8. Canada 9. Finland 10. Sweden 11. Denmark 12. Holland 13. UK 14. Belgium 15. Swiss 16. Norway 17. Russia 18. Australia Brazil 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 Chile 1. Argentina 2. Canada 3. Mexico 4. Brazil 5. Norway 6. S. Korea 7. Ecuador 8. Spain 9. Poland 10. Peru 11. UK 12.Denmark 13. Croatia 14. Sweden 15. New Zealand 16. France 17. Sweden 18. Paraguay 19. Portugal 20. Ireland 21. Malaysia 28. Paraguay (pending Decree) 29. Russia (pending Decree)1 Colombia 1. Spain 1. Argentina 2. Andino 2. Brazil 3. Chile 3. Chile 4. Switzerland* 4. United States 5. Mexico* 5. Mexico 6. Canada* 6. Italy 7. Germany** 7. France 8. Belgium** 8. Switzerland 9. Netherlands** 9. Andino 10. Luxembourg** 11. Korea** 12. U.S.A.** 13. India** 14. Czech Republic** *not yet ratified ** Under negotiation Ecuador México Perú 1. Germany 1. Canada 2. Australia 2. Brazil 3. Argentina 4. Belgium 3. Chile 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 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 20

21 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 21

22 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 22

23 Argentina Impact of Tax Treaties Tax Treaty WHT on Dividends WHT on Interest WHT on Royalties Tax on Capital Gains With No Tax Treaty (e.g. US, Luxembourg) 0% generally, 35% WHT on excess over pretaxed profits Netherlands Yes limited to 10%, 15% Spain Yes limited to 10%, 15% Switzerland Yes limited to 10%, 15% Canada Yes limited to 10%, 15% 15.05% Financial Institutions; 35% generally o%, 12% 21% / 28% / 31.5% Exempt for shares. Taxable for quotas sold to an Argentine party. 3%, 5%, 10%, 15% 0%, 12.5% 3%, 5%, 10%, 15% Arg. Tax limited to 10% or 15% if not exempt under D Law 0%, 12% 3%, 5%, 10%, 15% Taxing rights Switzerland only 0%, 12.5% 3%, 5%, 10%, 15% D Law Arg. Tax limited to 10% or 15% if not exempt under D Law 23

24 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. 24

25 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 25

26 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 26

27 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 27

28 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. 28

29 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 29

30 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 30

31 Thin Capitalization Rules Introduced by Provisory Measure No. 472, of December 15, 2009 Limitation on the deduction of interest payments to related parties abroad as defined by the transfer pricing legislation Beneficiaries established in regular tax jurisdictions - Debt equity ratio: 2:1 the debt held by each related party should not exceed two times the net equity of the Brazilian company held by such related party, and the total debt held by all related parties should not exceed the total net equity of the Brazilian company held by all related parties 31

32 Thin Capitalization Rules Beneficiaries established in low tax jurisdictions or subject to privileged tax regime (as defined by Articles 24 and 24-A of Law 9,430/96), regardless of any effective equity participation held by the foreign party in the Brazilian entity Debt equity ratio: 0.3:1 the debt held by each party established in low tax jurisdiction or subject to privileged tax regime should not exceed thirty percent of the net equity of the Brazilian company, and the total debt held by all parties established in low tax jurisdiction or subject to privileged tax regime should not exceed thirty percent of the net equity of the Brazilian company The concept of debt in principle includes all types of financing transactions and also transactions with third parties where a related party act as guarantor, attorney in fact or as intervening party 32

33 Thin Capitalization Scenario 1 Parent Assumptions Brazil Co.: Loan with A = 2000 Interest on loan = 200 Net Equity = 800 A Cash $2000 B C Interest Deductible on loan with A: Regular Tax Jurisdiction 60% 40% Total Net Equity = 800 Equity Interest A (60%) = 480 Brazil Debt/ Equity Ratio 2:1 = 960 Loan $2000 Brazil Co. Maximum Interest Deductible = 96 33

34 Thin Capitalization Scenario 2 Parent Assumptions Brazil Co.: Loan with C = 2000 Loan $2000 Interest on loan = 200 Net Equity = 800 Regular Tax Jurisdiction Brazil A Cash $ % B 40% C Interest Deductible on loan with C: Total Net Equity = 800 Equity Interest C = 0 Equity Interest All Related Parties (100%) = 800 Debt/ Equity Ratio 2:1 = Brazil Co. Loan $2000 Maximum Interest Deductible = 160 Potential Controversy: Nothing is deductible because C has no interest in Brazil Co. ( this result is unlikely = too conservative) 34

35 Thin Capitalization Scenario 3 Assumptions Brazil Co.: Parent Loan $1760 Low Tax Jurisdiction Loan $240 Loan with C = 1760 Loan with D = 240 Interest on loans = 200 Net Equity = 800 Interest deductible on loan with C: Regular Tax Jurisdiction Brazil A Cash $ % B 40% C Loan $1760 D Low Tax Total Net Equity = 800 Equity Interest with C = 0 Equity Interest All Related Parties = 800 Debt/Equity Ratio 2:1 = 1600 Maximum Interest Deductible = 160 (1) Interest deductible on loan with D (Low Tax): Brazil Co. Loan $240 Total Net Equity = 800 Debt/Equity Ratio 0,3:1 = 240 Maximum Interest Deductible = 24 (2) Total Deductibility: (1) + (2) =

36 Thin Capitalization Summary Loan with Regular Tax Jurisdiction Loan with Low Tax Jurisdiction (*) Total Total Interest Deduction Scenario 1 $ 2000 N/A $ 2000 $ 96 Scenario 2 $ 2000 N/A $ 2000 $ 160 Scenario 3 $ 1760 $ 240 $ 2000 $ 184 (*) Interest Subject to 25% WHT 36

37 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 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 37

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 38

39 Interest on Equity Opportunity Opportunity: payment of IOE calculated over the net equity of prior years Decisions (Nos /07 and /08 CSN ) from the Administrative Court of Tax Appeals (CARF) recognized the possibility to declare and deduct IOE accumulated with respect to past years. In the same sense, Superior Court of Justice s Decision No (date Feb. 2009) 39

40 Interest on Equity Opportunity Years Interest on Equity Net Equity Accounts Capital 100,00 100,00 100,00 100,00 Retained Earnings -20,00-30,00-35,00 415,00 Reserve Fair Value 0,00 0,00 0,00 0,00 Current Earnings -10,00-5,00 450,00 60,00 Interest Rate (TJLP) 6,3750% 6,2496% 6,1248% 6,0000% Basis for TJLP 80,00 70,00 65,00 515,00 TJLP over Net Equity 5,10 4,37 3,98 30,90 IOE Deductible each Year 0,00 0,00 3,98 30,90 IOE Deductible in 2010 Sum IOE Deductible in ,10 4,37 3,98 30,90 related to Prior Years 44,36 Profits Limitation 50% Current Earnings -5,00-2,50 225,00 30,00 50% Retained Earnings -10,00-15,00-17,50 207,50 Controversial Aspects: - Reserve: need to calculate the net equity of a given year reducing the IOE payable in one year from the net equity of the company in the following year - Accrual regime: losses in the year vs. mere postponement 40

41 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 41

42 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 % 42

43 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 43

44 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%) 44

45 Brazil - Importation of Services Import of Services Net price of services 100,00 Grossed up amount 125,00 WTH 15% (18,75) ISS 5% (6,25) Amount net of taxes 100,00 CIDE 10% 12,50 Tax basis PIS/COFINS 137,74 PIS/COFINS 9,25% 12,74 IOF 0,38% 0,57 Total Cost to Brazil Co. 150,81 With PIS/COFINS credits Tax Cost to Brazil Co. Cost of services 150,81 PIS/COFINS credit (12,74) Deductibility CIT 34% (46,94) Total Cost of Services (after tax recov) 91,13 Summary Net amount payable abroad 100,00 Disbursement by Brazil Co. 150,81 Total Taxes 50,81 Recoverable Taxes (59,69) Total Cost (8,87) 45

46 Brazil - Importation of Services Import of Services Net price of services 100,00 Grossed up amount 125,00 WTH 15% (18,75) ISS 5% (6,25) Amount net of taxes 100,00 CIDE 10% 12,50 Tax basis PIS/COFINS 137,74 PIS/COFINS 9,25% 12,74 IOF 0,38% 0,57 Total Cost to Brazil Co. 150,81 Without PIS/COFINS credits Tax Cost to Brazil Co. Cost of services 150,81 PIS/COFINS credit 0,00 Deductibility CIT 34% (51,28) Total Cost of Services (after tax recov) 99,54 Summary Net amount payable abroad 100,00 Disbursement by Brazil Co. 150,81 Total Taxes 50,81 Recoverable Taxes (51,28) Total Cost (0,46) 46

47 Brazil Impact of Tax Treaties Tax Treaty WHT on Dividends WHT on Interest WHT on Royalties Tax on Capital Gains With No Tax Treaty (e.g., Switzerland) 0% 15% Generally; 25% Tax Haven 15% Generally; 25% Tax Haven 15% Generally; 25% Tax Haven Netherlands Yes 0% 10% / 15% 15% / 25% 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 47

48 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 48

49 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 49

50 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 50

51 Venezuela Impact of Tax Treaties Tax Treaty WHT on Dividends WHT on Interest WHT on Royalties Tax on Capital Gains With No Tax Treaty (e.g. Luxembourg) 0% Generally; 34% on excess over pre-taxed profits 4.95% F Institution 34% on 95% of payment 34% on 90% of payment U.S. Yes 0% Generally; 10% excess of pre-taxed profits Netherlands Yes 0% Generally; 10% excess of pre-taxed profits 5% 5%, 7%, 10% Taxing rights NL only 5% 5%, 7%, 10% Taxing rights NL only Yes 0% Generally; 10% Spain excess of pre-taxed profits 4.95% / 10% 5% Taxing rights Spain only 51

52 Venezuela Impact of Tax Treaties Tax Treaty WHT on Dividends WHT on Interest WHT on Royalties Tax on Capital Gains Yes 0% Generally; 10% 0% / 5% 5% Taxing rights Swiss Switzerland excess of pre-taxed profits only Canada Yes 0% Generally; 34% excess of pre-taxed profits 4.95% FI 34% on 95% of payment 34% on 90% of payment Domestic Law 52

53 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) 53

54 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 Registrations with Siex Limits on deductability 54

55 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 55

56 Why a Holding Company? 56

57 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 57

58 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 58

59 Dueling Loan Strategy 1B 1A USCO USCO 2B 2A CFC OPCO 1 CFC OPCO 1 (Low-Tax) (Low-Tax) 12/31 Year end 11/30 Year end CFC OPCO 2 CFC OPCO 2 (Low-Tax) (Low-Tax) 59

60 The End 60