Académique Documents
Professionnel Documents
Culture Documents
Speakers Sam Kaywood Patrick Marley Juan Carlos Guerrero Andrea Bazzo
Overview
Elinore J. Richardson
Overview
Growth of US LLCs as US outbound investment vehicles Issues from the perspective of foreign jurisdictions Focus of recent initiatives by foreign jurisdictions both domestically and in treaty negotiations on hybrid entities. Should the US LLC as an outbound investment entity for use by US (or foreign) investors be categorised as an endangered species?
Sam Kaywood
Simple to Form File Certificate of Formation with Delaware Secretary of State Contains basic information (e.g., name of entity, registered address and any other information desired) Certificate of Formation is publicly available No requirement to file governing documents or financial statements
Other types of entities (including a corporation, partnership or trust) may convert into an LLC at any time A Delaware LLC can convert to another type of entity A Delaware LLC may transfer to or continue in a foreign jurisdiction The LLC may elect to keep its existence as an LLC in Delaware A foreign entity may become domesticated as a Delaware LLC All of these can be done by filing relatively simple certificates with the Delaware Secretary of State
An LLC can be managed by its members or by one or more managers Voting rights of members usually covered in Operating Agreement signed by members An LLC can be managed by traditional officers, e.g., President, Treasurer, etc., as set forth in Operating Agreement An LLC can have a Board of Directors, again, as set forth in an Operating Agreement Operating Agreement is not made public
Buy/Sell arrangements, rights of first refusal, etc. Capital contributions and capital accounts Distributions, allocation of income, loss, deduction, etc. Liquidation, termination, etc. Operating Agreements can be short and simple where there is one member, but are more elaborate where there are two or more members
US Tax Issues
Single member LLC disregarded for US tax purposes An LLC with two or more members is treated as a partnership for US tax purposes Flow-through treatment: income, deductions, loss, etc., pass through to the partners An LLC may elect to be treated as a corporation for US tax purposes Can make retroactive election for up to 75 days longer in some cases
LLC
Income, loss, deductions and credits flow-through No tax at LLC level LLC files a Partnership Return (Form 1065) Members increase their tax basis for their share of income and decrease for losses Distributions are not taxable, but reduce basis
LLC Corp
US Corp taxed at Federal rate of 35% (plus state) Subsequent dividends also taxed currently at 15% (likely to increase) Sale of shares taxable at capital gains rates (currently 15%) No basis increase for income of US Corp
US
US Individual
US Corp
US Individual Flow-through of all income, deduction, loss, etc. of foreign business Federal tax of up to 35% Flow-through of foreign tax credits No additional taxes upon distribution from LLC US Corp Same as above except: Shareholders of US Corp are taxed again on dividends and capital gains
US LLC
US Business
US Co
Under the default rules, the foreign LLC is treated as a corporation for US tax purposes Foreign LLC can elect to be treated as a disregarded entity (or a partnership if two or more members) for US tax purposes
Foreign LLC
US
Foreign
US member taxed on its share of income from foreign business Foreign member not taxed in the US on foreign income
US LLC
No US trade or business Distributions are tax-free to US members they have already been taxed
Foreign Business
Foreign
Foreign
Foreign members not taxed in the US on foreign income No US trade or business US LLC still a US partnership and files an information return (Form 1065) Used to avail of favorable Delaware laws, governance, etc without US tax
US LLC
Foreign Business
INTRODUCTION
Brazilian Scenario for Non-Resident Investments Brazil has a specific set of rules for non-resident investments in the country in the Brazilian capital and financial markets as well as private equity and direct investments Foreign exchange mechanisms Regulatory requirements for registration of the investments Tax specific rules Tax Rules As a rule, Brazil imposes taxes on investments made by nonresidents in respect to: (i) income assessed locally and/or paid by Brazilian source and (ii) capital gains assessed on disposal of assets located in Brazil Beneficial tax treatment (exemptions or lower rates) may be granted in some circumstances, which does not apply to investors located in favorable tax jurisdictions (FTJ), but may apply to privileged tax regimes (PTR)
DELAWARE LLC
Delaware LLC as Vehicle of Investment Historically, Delaware LLC is commonly used as the vehicle for investments in Brazil, specially for investments in the Brazilian financial and capital markets (which includes transactions in stock, future and commodities exchanges, over-the-counter, investments funds, public bonds, derivatives, among others) As a rule, Delaware LLC is well accepted and known type of vehicle
DELAWARE LLC
General Rules in Brazil for Delaware LLC Brazil does not provide specific rules dealing with entities located abroad and their corporate status There is no rule expressly treating differently a vehicle because of its type, corporate status or legal nature or imposing a transparent regime or a disregarded status for foreign entities
DELAWARE LLC
General Rules in Brazil for Delaware LLC However, it is common sense and preferential to use vehicles for investments in Brazil that have legal personality and are treated as corporations/companies instead of vehicles incorporated only based on contractual arrangements. The fact that such vehicles have a transparency regime for tax purposes should not impact or change the view of having an investment made by a foreign company This approach minimizes questionings by authorities tax and regulatory potential
Delaware LLC fits this approach as it is treated in the U.S. as a separate entity with legal personality, despite of the tax regime it adopts in the U.S.
DELAWARE LLC
Tax Rules in Brazil for Delaware LLC Brazil has not signed a tax treaty with the U.S. As a consequence, there is no specific rule or agreement between the countries in respect to LLC Tax authorities have not listed Delaware LLC as FTJ Tax authorities have listed Delaware LLC as PTR Corporate entities incorporated as a State LLC held by nonresidents and not subject to federal income tax in the United States of America
DELAWARE LLC
Tax Rules in Brazil for Delaware LLC Legal concept of FTJ: countries or dependencies which do not tax or imposes income tax at a maximum rate lower than 20% Delaware LLC is incorporated in a country highly taxed Specific tax regimes are special rules for the tax imposed in the country Legal concept of PTR: (i) no income tax income or income tax at a maximum rate lower than 20%; (ii) tax benefits to non-resident: a) without substantial economic activity carried out locally; b) contingent upon no substantial economic activity being carried out locally; (iii) no income tax or income tax at a maximum rate lower than 20% for income assessed outside its territory; (iv) not providing access to information related to shareholding composition, ownership of goods or rights or the economic transactions carried out In fact, there might have some discussions on some characteristics of PTR in respect to Delaware LLC
DELAWARE LLC
What Are the Problems to be PTR? As a rule, there is no major tax impact for the most investments carried out in Brazil by a Delaware LLC Delaware LLC as a PTR have the disadvantaged tax rules in respect to: Transfer pricing Thin capitalization Restricted rules for deduction of payments made abroad down side of certain
DELAWARE LLC
Example of Tax Benefit in Use of Delaware LLC Exemption of income tax on capital gains on disposal of shares in the stock exchange, provided that the acquisition of the shares were made as a portfolio investment (Resolution No. 2,689) Delaware LLC FTJ Investor Dividends: no income tax Capital gain on sale on exchange: 15% Capital gain on sale as private sale or IPO: 25%
Delaware LLC
Dividends: no income tax Capital gain on sale on exchange: 0% Capital gain on sale as private sale or IPO: 15%
DELAWARE LLC
Example of Tax Benefit in Use of Delaware LLC Exemption of income tax for investments in private equity funds (FIP), provided that the investor does not hold more that 40% of the FIP or receives more than 40% of the income from the FIP Delaware LLC (<40%)
Delaware Delaware Delaware LLC 1 LLC 2 LLC 3
FTJ Investor Distribution form the FIP: 15% Capital gain on sale of FIP on exchange: 15% Capital gain on sale of FIP on private sale or liquidation: 15%
FIP
DELAWARE LLC
Conclusions Currently, Delaware LLC is still an attractive tax alternative vehicle for investments in the Brazilian capital and financial markets as well as private equity and direct investments The main current tax benefits applicable to investments held in Brazil are still valid for an investor through Delaware LLC Although listed as PTR, the use of Delaware LLC for investment purposes does not generate major tax disadvantages Legislation may change to limit the application of certain beneficial tax rules Brazil and U.S. Tax Treaty under discussion may have specific considerations for LLC Potential future discussions on substance over form on use of LLC Some investors are considering the use or using other jurisdictions as alternatives: Luxembourg, Netherlands, UK
Patrick Marley
Treatment of LLCs in Canada Common Uses for LLCs in Canada Access to tax treaties Comparisons to other entities
Canada Revenue Agency generally treats US LLCs as corporations for Canadian tax purposes. Limited case law Legal test is to characterize LLC based on a preponderance of its characteristics is it more like a Canadian corporation or partnership? See UK Swift case
TD Securities (USA)
Branch Profits Tax Rate 5% or 25%
Canada
United States
TD Securities
Interpreted Canada-US treaty (prior to Article IV(6)) Held liable to tax based in part on OECD Commentary, 1999 OECD Partnership Report, having regard to text, context and purpose of treaty provisions. Court sought consistency with treatment of other entities (such as partnerships, S-corps)
LLC
Distributi on
100 %
US Canada
ULC
Sonia Velasco
Characterization of U.S. LLCs by Spain Competent Authority Mutual Agreement - SpainU.S. Treaty
The Competent Authority Mutual Agreement entered into force January 1st, 1998 but signed in 2006 Clarifies treatment of LLCs, S corps, and other entities, organized within or without the US, treated as partnerships or disregarded entities for U.S. tax purposes Income will be treated as derived by a resident of the US to the extent that income received by the LLC or other entity is subject to U.S. tax as the income of a U.S. resident
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Characterization of U.S. LLCs by Germany Federal Finance Ministry Circular Issued March 19, 2004
Affirmed by German Supreme Tax Court, decision dated August 20, 2008 docket # I R 34/08) Criteria that qualify an LLC as a corporation
Centralised management (as opposed to management and representation by partners) Limitation of liability Transfer of LLC interest without consent requirements Profit distribution requires a resolution before owners have a claim Contribution of capital required Unlimited lifetime of the company (irrespective of whether a partner dies/retires) Profit distribution is proportional to the nominal share capital Registration of LLC as a formal requirement for formation
There is no beat all criterion (all facts and circumstances have to be considered) An LLC is deemed to be a corporation if a majority of the first five criteria are met
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Use of an Intermediary Jurisdiction between the US LLC and the Jurisdiction of Investment- Equity
Foreign investor
DIVIDEND
US investor
DELAWARE LLC
DIVIDEND
LUX LLC
DIVIDEND
SPAIN
BRAZIL
CANADA
MEXICO
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Use of an Intermediary Jurisdiction between the US LLC and the Jurisdiction of Investment- Debt Financing
LOAN
US CO.
US LLC
LOAN
FOREIGN ENTITY
LOAN
FOREIGN OP CO
Thank You!
Elinore J. Richardson Sonia Velasco Menal Juan Carlos Guerrero Patrick Marley Andrea Bazzo Toronto, Ontario, Canada +1 416 859 8631 erichardson@int-tax.org Cuatrecasas, Goncalves Pereira Spain +34 93 2905590 sonia.velasco@cuatrecasas.com Chavez, Ruiz, Zamarripa Mexico +1 212. 223. 4434 juancg@chevez.com Osler Canada +1 416.862.6580 pmarley@osler.com Mattos Filho Veiga Filho Marrey Jr. e Quiroga Advogados Brazil +55 (11) 3147 7600 / 7799 abazzo@mattosfilho.com.br Alston & Bird LLP US +1 404 881 7000 skaywood@alston.com
Sam Kaywood
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