How To Tax A Holding Company

Transcription

1 Investing in Latin America through Spain: Planning Opportunities 11th Annual Latin American Tax Conference Miami, Florida March 2010 Luis Carbajo, Isabel Otaola, Joaquin Kersman, Clarissa Machado, Miguel Zamora, Jaime Vargas, Luis Jimenez, Ronald Evans

2 Agenda Host Country for Holding Companies Taxation at Source Comparison: Domestic Law and Tax Treaties Spanish holding companies (ETVE) and practical experience. Taxation of holding company shareholders. Special emphasis on ETVEs 2

3 Host Country for Holding Companies 3

4 Holding Companies Requirements Tax Requirements Exemption or reduced tax on the distribution of dividends or sale of shares in the investment country. Exemption or reduced tax on dividends and capital gains in the holding company. Tax Treaties with the target and investment countries investment. Facilitating Authorities providing binding rulings: legal security. Exemption or reduced tax in the holding company country on the distribution of dividends or sale of shares in the holding company by shareholders. 4

5 Holding Companies Requirements Non-tax requirements Communications, accessibility, existence of a network of professional services and possibility to receive services that provide the holding company with financial substance. Good network of Bilateral Investment Protection Treaties (BIPT): Agreements for mutual promotion and protection of investments. Protection against nationalization or expropriation. Guarantees in the event of armed conflict, revolution or similar. Fair treatment vis-à-vis investors from other countries. Free transferability of payments. International Arbitration. 5

6 Why Spain? Wide Treaties Network COUNTRY ARGENTINA BOLIVIA BRAZIL COLOMBIA COSTA RICA CUBA CHILE ECUADOR EL SALVADOR GUATEMALA BIPT NO CDI NEGOC. NO Spain has signed Bilateral Investment Protection Treaties (Acuerdo de Promoción y Protección de Inversiones) with all Latin-American countries except Brazil, Haiti and Paraguay. HAITI HONDURAS MÉXICO NICARAGUA PANAMA PARAGUAY PERU NO NO NO NO NO PF NO NEGOC. Spain has signed Tax Treaties with most of the Latin-American countries. DOMINICAN REP. NO URUGUAY NEGOC. VENEZUELA 6

7 Taxation at Source Comparison: Domestic Law and Tax Treaties 7

8 Argentine Tax treatment WHT on dividends: General treatment: WTH at 35% on the portion exceeding the income obtained by the Argentine Company in the fiscal year. Held by ETVE: maximum of 10% if ETVE holds more than 25% of the shares. Otherwise, 15% WHT on capital gains: General treatment: local taxpayers WHT at 9%/35%. May not apply for individuals. Foreign beneficiaries: exemption on shareholding (corporations) Held by ETVE, maximum of 10% if ETVE holds more than 25% of the shares. Otherwise, 15% 8

9 Argentine Wealth tax: Applicable at 0.5% Held by ETVE, no tax impact on operating subsidiary's equity. Application of DTT. Concerns Utilization of tax credit for any WHT Formal requirements for the DTT to apply 9

10 Brazil Dividends: 0% withholding income tax ( WHT ) regardless of the domicile of the beneficiary Interest on Equity: 15% WHT (or 25% if beneficiary domiciled in low tax jurisdiction). Deductible expense in Brazil. Potential issue: treatment abroad Dividends? Interest? 10

11 Brazil Capital Gain: 15% WHT (or 25% if seller is domiciled in a low tax jurisdiction) Applicable also in case only the asset is located in Brazil (nonresident buyer and non-resident seller) Brazilian attorney-in-fact of buyer is responsible for the payment Tax treaties do not provide lower tax burden (except Japan) 0% WHT may apply in case sale of publicly traded shares in the Brazilian stock exchange (plus other requirements) 0.38% Financial tax (IOF Exchange) upon the remittance of funds abroad. Some exceptions may apply. 11

12 Chile Non-residents in Chile are subject to income taxation in Chile on their Chilean source income. Exception: alien individuals are subject to taxes in Chile exclusively on their Chilean source income during the first 3 years of stay in the country. Income is considered sourced in Chile when the activities are carried on within Chilean territory or when the assets are located in the country. Special rules: Interest accrued of a loan when the debtor is a Chilean resident Shares of a corporation formed in Chile and of interest in LLC/limitada also formed in the country. Capital again arising from the alienation of shares of a foreign company that controls a Chilean Target, provided that the acquiring party is resident in Chile. 12

13 3. Chile (cont.) Dividends taxation: Chile has an imputation system according to which dividends paid to non-residents shareholders are subject to a 35% WHT against which the 17% Corporate Tax paid on the item of income distributed is creditable (total tax burden of 35%). Considering this special feature of the Chilean income taxation, Chile has negotiated in all its tax treaties that the rate reduction of the dividends taxation generally contained in tax treaties is not applicable to Chile while Chile maintains the imputation income tax system explained above. This is the case of all tax treaties currently in force in Chile, including the one with Spain. 13

14 Chile Capital Gains Taxation: There is no capital gains tax as such in Chile. Capital gains arising from the alienation of shares of a corporation formed in Chile is either subject to a 17% tax or deemed ordinary income subject in the hands of a non-resident shareholder to a 17% Corporate Tax and to a 35% WHT less the credit for the Corporate Tax paid. The application of the tax depends on the seniority of the holding (1 year or more), if the alienation takes place among related parties or not and if the seller is to be considered a trader or an habitual seller of shares. In exceptional cases the capital gain is exempt from taxation e.g. (i) when held since 1984, (ii) in the case of publicly traded shares with a certain market presence and (iii) in the hands of an institutional investor. The general rule of the tax treaties negotiated by Chile is that Chile retains taxation right on capital gains arising from the alienation of shares of a corporation formed in Chile. Only specific treaties reduces the Chilean taxation and the treaty with Spain is one of them. 14

15 Mexico Capital Gains The transfer of title to shares issued by a Mexican company is subject to Mexican federal income tax, at a rate of 25% on a gross basis, or of 30% on a net basis, as the seller may elect. This second option is only available when the non-resident transferor is not subject to a preferential tax regime (i.e., it is not subject to less than 75% of the income tax payable under Mexican tax law) and the seller designates a legal representative in Mexico (this can be an individual or a corporation, in both cases resident in Mexico for tax purposes). The transferor is also subject to Mexican federal income tax on the sale of shares issued by non-mexican companies when the assets thereof are mainly represented by real estate property located in Mexico. 15

16 Mexico Dividends distributions Dividends distributed by Mexican companies are not subject to income tax withholding. Mexican companies that distribute dividends are subject to income tax if they do not have balance in their Net After Tax Profit Account (CUFIN). 16

17 Venezuela Dividend distributed out of untaxed profits are subject to 34%. In most cases, Corporate Income Tax may not be totally or partially due to inflation adjustments. Capital gains derived from disposal of shares of Venezuelan companies is taxed in Venezuela regardless of the residence of the holder or place of payment. Except in case of a Tax Treaty 17

18 Taxation at Source - comparison table (1) México Venezuela Colombia Domestic legislation Best Tax Treaty Spain The Netherlands Luxembourg Austria Capital Capital Capital Capital Capital Divid. gains Divid. gains Divid. gains Divid. gains Divid. 0% (if CUFIN) 0% (if profits have been taxed in Venezuela) 0% (if profits have been taxed Colombia) 25%(gross)/ 30%(net) Up to 34% 33% Argentina 0%/35% 0%/35% Chile 35% (17% is deductible) 17% Brazil 0% 15% Domestic legislation Domestic legislation Domestic legislation 0%: among others, Italy or Switzerland 5% (=>25%)/15% 0%: among others, Spain, 0% (=> 25%) / Germany, the 10% Netherlands or Switzerland Spain 0% (=> 20%) / 5% 25% (net) if =>25%+12 months). 0% 0% 5% (=>10%)/15% 10% (net) 8% (=>10%)/15% 0% (=> 25%) / 10% 10% 10% 10% 10% 10% (=>25%)/15% N/A (=>25%)/15% (=>25%)/15% (=>25%)/15% (=>25%)/15% 5%, among others, Spain, UK or Sweden Domestic legislation 16%: among others, France, Ireland, Portugal or UK 0% : Japan 5% (=>20%)/10% 10% (=>25%)/ 15% 17% (=>20%+12 months) / 16% N/A 0% 15% 15% 15% N/A gains Divid. Capital gains Divid. Taxable if =>25% or 5% (=>10%) exempted / 10% 20% (net) Non taxable in Lux. 5% (=>15%) / 15% N/A N/A N/A N/A 15% (=>10%) / 25% N/A Up to 34% if participation is equal or higher than 10% of the assets of the transferred company N/A N/A 15% 15% 15% UK 0% (=> 10%)/10 % Capital gains Taxable if =>25%+12 months). Up to 34 % > 50% value = inmovable property 10% 10% (=>25%)/15 (=>25%)/15% 5% (=> 20%)/15 % N/A N/A % 17% (=> i) 20%+12 months or ii) + 50% value = inmovable property) / 16% (1) Does not consider taxation of real estate companies or business reorganisations. 18

19 Comparison Table: Conclusions Spain is a good country for investment in companies resident in Venezuela and Colombia and even Chile (given the existence of Tax Treaty). Argentina: Wealth/Asset Tax is avoided. Mexico: although capital gains from shares are taxed in Mexico pursuant to both domestic law and Tax Treaty, the Tax Treaty contains a deferral clause in the event of business reorganizations. The Netherlands can also be an alternative for Mexico, although there are no Tax Treaties in place with Colombia or Chile. Brazil: There is no substantial difference between investing through Spain or through The Netherlands. 19

20 Spanish holding companies (ETVE) and practical experience. 20

21 Spanish Holding Companies: ETVE Exemption of dividends and capital gains from the transfer of shares in operating companies. Very good Tax Treaty network: Mexico, Brazil, Argentina, Colombia, Chile, Venezuela, Bolivia, Cuba, Ecuador, El Salvador Uruguay and Costa Rica: signed and pending publication. Peru: negotiated. Distribution of dividends by an ETVE to a non-resident shareholder in Spain and capital gains on the sale of ETVE shares not subject to tax. Very good network of BIPT: Argentina, Bolivia, Costa Rica, Cuba, Chile, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panamá, Paraguay, Peru, Dominican Republic, Uruguay and Venezuela. Colombia: signed and pending publication. 21

22 Spanish Holding Companies: ETVEs Possibility of submitting binding rulings to the Tax Authorities. Same language (except for Brazil), very good communication and accessibility. Corporate purpose must include the holding and management of the participation, but needs not be exclusive. 5% direct or indirect participation or 6M (acquisition cost). Minimum holding period of 12 months (before or after). Subsidiary subject to similar Corporate Income Tax (CIT). Performance of business activity abroad by subsidiary: 85% test and no Controlled Foreign Corporation (CFC) rules. 22

23 Practical Experience with ETVEs: critical issues Material and human resources to manage the participation in the subsidiary Lack of well-defined Spanish law. Rulings. Sufficient organizational means to exercise rights and fulfill obligations as a shareholder. At least 1 Member of the Board of Directors (or one employee) responsible for such obligations. Document all communications relating to the exercising of such rights and fulfillment of obligations. 23

24 Practical Experience with ETVEs: critical issues Subject to similar CIT: Fulfilled if the subsidiary is resident in a country with a Tax Treaty containing an information exchange clause. All Tax Treaties signed by Spain. Tax havens excluded. Broad definition of similar CIT: taxing income, revenue or any other earnings indicator. Special consideration for territorial tax regimes (Costa Rica or Uruguay): considered fulfilled only with regard to income subject to tax in such jurisdictions. 24

25 Practical Experience with ETVEs: critical issues 85% of income from business activity abroad: Non-applicable to CFC income. Safe harbour: 15% of income may proceed from companies located in tax havens or that do not fulfil requirements. Admissibility of intermediary holding companies between the ETVE and the operating subsidiary. Individual calculation of test on direct subsidiary. 25

26 Practical Experience with ETVEs: Conclusions Good practical experience, despite complexity of test on 85% of business activity abroad. Important to review fulfillment of requirements before the end of each year. For dividends, only the year in which income is earned is taken into account. For capital gains, requirements must be fulfilled in all years during which the participation is held. 26

27 Holding Company Comparison Table: Spain, Austria, Luxembourg and The Netherlands. Dividends Spain Austria Luxembourg The Netherlands -Exemption regime -Minimum participation - Time requirement - Subsidiary taxation requirement Capital gains 100% 5% or 6M 1 year No if Tax Treaty exists 100% 10% 1 year No 100% 10% or 1.2M 1 year Yes outside EU (11%) 100% 5% No No (except passive assets) -Exemption regime 100% 100% 100% 100% -Minimum participation - Time requirement - Subsidiary taxation requirement CFC 5% or 6M 1 year No if tax Treaty exists Yes 10% 1 year No No 10% or 6M 1 year Yes outside EU (11%) No 5% No No (except passive assets) No Capital Duty 1%, except for business re-structuring 1%, except business re-structuring No No Holding tradition Medium / High Medium High High 27

28 Taxation of holding company shareholders. Special emphasis on ETVEs 28

29 Taxation of ETVE Shareholders in Spain Non-resident shareholders, either individuals or companies, are not subject to taxation in Spain: On dividends distributed by ETVEs arising from tax-exempt income. If not arising from tax-exempt income, applicable tax rate of 19% except for EU (if the requirements set forth in the Parent- Subsidiary Directive are fulfilled) or Tax Treaty. On capital gains from the sale of the ETVE participation corresponding to reserves derived from tax-exempt income and on the goodwill attributable to subsidiaries qualifying for application of the CIT exemption. If not arising from tax-exempt income or the subsidiary does not qualify, the applicable tax rate will be 19%, except for Tax Treaty or EU (in certain cases). 29

30 Taxation of ETVE Shareholders in Spain Subject to tax (at a rate of 19%) if the non-resident shareholder is resident in a country classified as a tax haven: The Dutch Antilles and Aruba are no longer considered as tax havens as a result of the signing of an information exchange agreement. Andorra has already signed such agreement, which nevertheless is yet to be published. 30

31 Taxation of ETVE Shareholders ETVE dividends and capital gains: Spanish Non-resident Income Tax = 0% Non-resident shareholder (ind. or company) Not in a tax haven Subsidiary dividends and capital gains: CIT = 0% Non-exclusive corporate purpose ETVE Material or human resources At least 5% participation and 12 month holding period Dividends and capital gains on the sale of shares in the operating company: Tax Treaty or according to domestic law Profits on activity according to jurisdiction CIT Non-resident operating company Tax Treaty or similar CIT Business activity abroad Not in a tax haven (up to 15% income) 31

32 Comparison of tax rates applicable to holding company shareholders according to domestic law Spain Austria Luxembourg The Netherlands (ETVE) Dividends 0% 25% 15% 15% Capital gains 0% Individual shareholder: 25% 0% (generally) 0% (generally) Company shareholder: 0% 32

33 Taxation of ETVE Argentine Shareholders No CFC Rules applicable / Deferral Obtainable Income Tax Dividends: 35% - Only applicable upon distribution Capital gains: 9% - 35%. May not apply for individuals Double taxation avoidance: tax credit Argentine Wealth Taxes: Individuals may be subject to Personal Assets tax at a progressive rate ranging from 0.50% to 1.25% to the extent that the value of their assets exceeds AR$ 305,000 Legal entities may be subject to a 1% MPIT creditable/offsetable against IT Other jurisdictions: Dividends Germany: tax credit UK: tax credit 33

34 Taxation of ETVE Brazilian Shareholders Income / Dividends General Rule: taxation of foreign subsidiary profits by year-end, based on Brazilian CFC Rules; Arguments to support the deferral or non-taxation, based on Article 7 (Business Profit) and/or Article 23, 4 of the Brazil-Spain Treaty; A Brazil ETVE B C Article 23, 4: Where a resident of Brazil derives dividends which, in accordance with the provisions of this Convention may be taxed in Spain, Brazil shall exempt such dividends from tax. 34

35 Taxation of ETVE Brazilian Shareholders Income / Dividends (cont.) Existing tax assessments on this matter; Article 23, 4 does not apply in case of ETVE; Best alternative from a Brazilian standpoint: non-etve company. Capital Gain Sale of ETVE (or other non-resident entity) by a Brazilian entity: 34% corporate income tax on the gain. ADI SRF nº 6/2002: Are submitted to the incidence of taxes on income the profit and dividends received by residents or parties that are domiciled in Brazil, deriving from the participation in Entidad de Tenencia de Valores Extranjeros /ETVE, regulated by the Spanish Law of the Societies Tax, not applying to the arranged in 4 of Article 23 of the Brazil-Spain Treaty. 35

36 Taxation of ETVE Chilean Shareholders Assuming that the ETVE distributes a dividend to a shareholder resident of Chile, such dividend will be taxable in Chile. According to the tax treaty between Chile and Spain Chile must grant a credit on taxes paid in Spain according to the credit rules existing in Chile. According to foreign tax credit rules existing in Chile a credit for taxes paid abroad is recognized only with regards to the specific country from the relevant item of income is received. Therefore, the Chilean shareholder of the ETVE may not use as a credit against Chilean taxes, the Corporate Tax and/or WHT paid on the source jurisdiction from where the 36

37 Taxation of ETVE Chilean Shareholders Assuming that a Chilean resident shareholder of an ETVE alienates its shares, the capital gain is taxable according to the tax treaty between Chile and Spain (Chile is the residency country) and further because in Chile local residents are subject to taxation on their items of income regardless of its source. Considering that no taxes would be paid in Spain on the capital gain derived, no credit would be available in Chile. 37

38 Taxation of ETVE Mexican Shareholders Income Tax: Dividends received from non-mexican companies are taxable as any other revenue (30% on the annual taxable income), but it is possible to claim foreign tax credit if the Mexican company owns at least 10% of the equity for the prior 6 months to the date of the dividend distribution. Capital gains are taxable as any other revenue (30% on the annual taxable income). Carryforward losses can be used against dividends or capital gains. Business flat rate tax: Neither dividends nor capital gains are subject to this tax 38

39 Taxation of ETVE Venezuelan Shareholders Distribution of dividends by ETVE to a Venezuelan shareholder will be taxed at 34% in Venezuela. Deferral may be obtained by using an NV in Curacao owned by a NZ trust. CFC rules would not apply. Income would only be taxed if actually distributed to Venezuelan resident. 39

40 Alternatives ETVE Structure Direct Investor Trust Direct Investor Direct Investor Blocker (N. Antilles UE) Trustee ETVE LATAM 40

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