Tax Management International Forum

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1 Tax Management International Forum Comparative Tax Law for the International Practitioner Reproduced with permission from Tax Management International Forum, 38 FORUM 18, 9/1/17. Copyright 姝 2017 by The Bureau of National Affairs, Inc. ( ) SEPTEMBER 2017

2 BRAZIL Henrique de Freitas Munia e Erbolato and Pedro Andrade Costa de Carvalho Tax lawyers, São Paulo I. Introduction One of the most important factors that has to be taken into account in dealing with cross-border M&A transactions is their tax consequences. This is particularly the case where the target company is a Brazilian company Brazil s tax system is highly regulated and complex, so that special attention is required in order to identify opportunities and mitigate potentially adverse consequences when structuring such transactions. By way of an initial remark, it should be noted that stock (shares or quotas) deals in Brazil are more usual than asset deals, whether the Foreign Country buyer (FC buyer) concerned makes a direct investment in a Brazilian target company or uses an investment vehicle to make the investment. An FC buyer will rarely make a direct asset acquisition in Brazil, since an FC buyer that does so will likely face operational problems for a number of reasons, among which the authors would draw particular attention to the fact that such a buyer will not be registered with the Corporate Taxpayers ID (the Cadastro Nacional de Pessoas Jurídicas or CNPJ) as a Brazilian resident and, therefore, its ability to conduct its business in Brazil will be compromised. II. Asset Deal Versus Share Deal One of the first tax-related decisions to be made with respect to a cross-border M&A transaction is whether to buy stock (shares or quotas) or assets of the target company. Depending on the particular transaction, an acquisition of assets may not achieve the expected outcome, as the FC buyer (or locally incorporated company, as the case may be) may become liable for potential past tax contingencies of the seller in accordance with Brazilian law, since the asset deal per se does not isolate the FC buyer from the past liabilities of the company whose assets it acquires. That being said, as noted in I., above, in practical terms, it would be difficult for an FC buyer to conclude an asset deal in Brazil without incorporating a local entity. The Brazilian tax legislation provides that a legal entity that acquires goodwill or a commercial, an industrial or a professional establishment from a third party and continues to operate its core business will be: (1) fully liable, if the seller ceases to carry on the same business; or (2) secondarily liable, if the seller continues to carry on the same business, or constitutes a new company to carry on the same line of business within six months from the conclusion of the acquisition transaction. It is also important to note that some taxes in Brazil are associated with actual assets, such as the tax on real estate (Imposto Predial e Territorial Urbano or IPTU). Where this is the case, potential tax debts associated with an asset will be automatically transferred to the buyer of the asset, even where the conditions referred to in the previous paragraph are fulfilled (i.e., the purchase of real estate from a company will automatically make the buyer liable for IPTU, even where the real estate is purchased as part of the acquisition of a business unit). The capital gain for the seller in the case of an asset deal will correspond to any positive difference between the value of the sale and the respective accounting cost of the assets, and will be subject to a combined rate of 34% (i.e., to corporate income tax or CIT (comprising Imposto de Renda das Pessoas Jurídicas or IRPJ and Contribuição Social sobre o Lucro Líquido or CSLL) if the seller is a legal entity. Except where a fixed asset is being sold, in addition to CIT, the social contributions on revenues (Programa de Integração Social/Contribuição Social sobre o Lucro Líquido or PIS/COFINS) will be levied at a combined rate of 3.65% (under the cumulative regime in which no credits are allowed) or 9.25% (under the non-cumulative regime in which credits are allowed for PIS/COFINS paid on some items of depreciation or amortization, leases, freight, and, most importantly, inputs used in the production and sale of goods and/or services), depending on the method used to calculate the taxpayer s CIT liability. It should be noted that an asset deal may also trigger indirect taxes (Imposto sobre a Circulação de Mercadorias e Serviços or ICMS and/or Imposto sobre Produtos Industrializados or IPI (excise tax)), depending on the nature of the assets sold and the State(s) in which the seller and the buyer are located. If the seller is an individual domiciled in Brazil, the capital gain will be calculated based on the difference between the cost of acquisition of the assets recorded in a special file included in the individual income tax return where all individual taxpayers must list their assets (such as shares, real property, bank accounts, 2 09/17 Copyright 2017 by The Bureau of National Affairs, Inc. TM FORUM ISSN

3 etc.) and the sale price. Progressive rates ranging from 15% to 22.5% will apply, depending on the amount of the capital gain. It is important to mention that in the event of subsequent sales of the same share or quotas (same asset or right), if the following transactions occur until the end of the calendar year following that of the first transaction, the capital gain accrued must be added to the capital gain of the first sale in order to determine the applicable rate, but the amount previously paid can be offset. Usually, ICMS is not levied in the case of sale of an asset by an individual, unless the individual is regarded as a taxpayer who frequently carries out commercial transactions or transactions the volume of which indicates a commercial intention. Share deals, however, are more common in Brazil, since they do not trigger value-added tax (VAT) and they are also easier to implement. In addition, the past tax liabilities of the seller are fully transferred to the buyer. Where the target company is a subsidiary or controlled company of the seller resident in Brazil, the Brazilian tax legislation provides that a share deal will give rise to a taxable capital gain, calculated as the difference between the price paid for the shares and their book value. It should be noted that Brazil uses the equity pick-up method to measure investments in subsidiaries, affiliates and jointly-controlled subsidiaries, so the value of the shares at the time of sale will be the original cost of the investment adjusted accordingly (gain or loss). It is important to note that the amount resulting from the use of the equity pick-up method will not be included in the CIT calculation. As in the case of an asset sale, if the seller is an individual resident in Brazil, the capital gain will be calculated based on the difference between the cost of acquisition of the shares recorded in a special file included in the individual income tax return where all individual taxpayers must list their assets (such as shares, real property, bank accounts, etc.) and the cost of acquisition. As previously noted, the applicable tax rate will depend on the amount of the capital gain. On the other hand, if the seller is a nonresident, Normative Instruction 1,662/2016 provides that, for purposes of calculating the capital gain on a sale of shares, it is no longer acceptable to prove the acquisition cost of the shares based on the capital registered in the Central Bank of Brazil linked to the purchased shares. The seller must instead prove the cost of acquisition based on documentation such as contracts, bank vouchers, terms of discharge, receipts, foreign exchange contracts and other documents that have evidentiary status under civil law. Finally, Normative Instruction no ( IN/1732 ) has been published on August 29, 2017, changing and equating the applicable rates for capital gain in the case where the seller is a legal entity domiciled abroad (non-resident). Now, instead of applying a flat 15% rate, progressive rates ranging from 15% to 22.5% will also be applicable, depending on the amount of the capital gain accrued. Specific tax treaty provisions must be observed depending on the country where the legal entity is located. According to IN1732, progressive rates apply as of January 1, Controversies arise in relation to the application of the new rates as from January, and reinforces other one in relation to the fact that progressive rates must apply to capital gains earned by non-residents, regardless of whether they are individuals or legal entities as from the enactment of Law no /16 that introduced the progressive rates, since in view of Article 18 of Law 9249/ 95, capital gain rules for resident individuals in Brazil should be the ones applicable for non-residents as well. There are exceptions for sellers resident in lowtax jurisdictions, to which a 25% rate applies, or in Japan, to which a reduced rate of 12.5% applies under the Brazil-Japan tax treaty III. Acquisition Price: Possible Alternatives There is another aspect that needs to be considered when the target is a corporation (this is not applicable to limited partnerships, notwithstanding a 2014 decision of the Federal Administrative Tax Court) located in Brazil and, instead of the buyer acquiring existing shares in the target, new shares are issued at a premium and the buyer acquires those new shares. In these circumstances, no taxable capital gain is triggered and the taxation of the goodwill is deferred until such time as the new shares are effectively sold. The side effect of this alternative is that the seller remains an equity holder, albeit its holding is diluted. It should be noted that the Federal Tax Administrative Court does not permit this alternative if the transaction has no economic purpose, especially when it is followed by a capital reduction, with the former shareholder taking the goodwill in cash. Another alternative that may be considered, depending on the intended result of the transaction, is an exchange of shares instead of a cash payment. Care must, however, be exercised in implementing this alternative, since the Federal Administrative Tax Court has ruled against taxpayers in cases where shares of one entity were exchanged for shares of another entity and there was a difference between the values of the two sets of shares. Taxpayers have argued that no effective capital gain arises from such a transaction, since the shareholder does not liquidate its investment, but merely exchanges shares. This argument appears to be more persuasive when the owner of the shares is an individual, since the tax legislation makes it clear that a capital gain only arises to an individual when there is a sale, so that a simple exchange does not constitute a taxable event. Neither the Federal Tax Administrative Court nor the Federal Tax Judicial Court has yet resolved this controversy. It should be noted that, where either of the above alternatives is used, the tax authorities may deem the transaction to be invalid if it lacks a reasonable economic purpose (such as is likely to be the case when the seller leaves the company shortly after the transaction, or when the traded company is merely a cash vessel and not an operating entity). In such circumstances, the transaction could be considered a sham, the seller could be assessed accordingly and, instead of the regular fine of 75% of the tax due being imposed, a fine of 150% may be imposed. 09/17 Tax Management International Forum Bloomberg BNA ISSN

4 IV. Financing the Transaction With Debt A. General Rules Assuming the FC buyer is acquiring assets or shares through a Brazilian subsidiary, the following rules will apply if the transaction if financed with debt. Under Brazilian tax law, for a particular item of expenditure to be deductible, the item must comply with the general rules on deductibility. Under these rules, for an expense to be deductible, it must be usual, operational and necessary. Expenses are usual, operational and necessary if they: (1) are effective (i.e., there is an actual reason for incurring them); (2) are required, reasonable, and appropriate for the performance of the taxpayer s business activities or the maintenance of its assets; and (3) benefit the taxpayer and not another party. Usually, financing expenses are considered operational unless they relate to resources obtained for purposes other than those of the business regular activities. In summary, if an expense, including an interest expense, meets all of the above requirements, it will, in principle, be deductible (subject, in the case of interest, to the additional rules described below). B. Limits on Deductibility Under Thin Capitalization Rules Article 24 of Law 12,249/10 provides that interest paid or credited by a Brazilian company to a related individual or legal entity 1 resident or domiciled abroad (although Article 24 does not apply to interest paid or credited to a recipient resident in a low-tax jurisdiction 2 or subject to a privileged tax regime 3 ) will only be deductible from the Brazilian company s CIT base if: (1) the interest payments are necessary for the company s business activities; and (2) the amount of the company s debt owed to the related party, on the date of recognition of the interest expense, is not higher than twice the value of the equity investment that the related party holds in the Brazilian company measured by reference to the company s net worth. In addition, the value of all the Brazilian company s debt owed to foreign related parties, on the date of recognition of the interest expense, cannot be higher than twice the value of all the equity investments that all such related parties hold in the Brazilian company measured by reference to the company s net worth. Cases in which payments of interest are made by a Brazilian company to an individual or a legal entity that is resident or domiciled in a low-tax jurisdiction or that is subject to a privileged tax regime are governed by the provisions of Article 25 of Law 12,249/10. Under Article 25, such interest payments will only be deductible from the Brazilian company s CIT base if: (1) the payments are necessary for the company s business activities; and (2) the amount of all debts owed to all individuals and entities located in low-tax jurisdictions or subject to privileged tax regimes does not exceed 30% of the Brazilian company s net worth. Under both Article 24 and Article 25, all forms of financing, whatever their terms, must be taken into account for purposes of calculating the indebtedness level of the Brazilian company, regardless of whether the relevant contract is registered with the Brazilian Central Bank. Furthermore, the provisions of Articles 24 and 25 apply to all debt transactions of a Brazilian entity in which a guarantor, an agent or an intermediary is, respectively, a related party, or a party located in a low-tax jurisdiction or subject to a privileged tax regime. Where a Brazilian company s debt exceeds the limits set forth in Articles 24 and 25, the amount of the interest related to the excess will be considered unnecessary and, therefore, will not be deductible for purposes of calculating the company s taxable base for CIT purposes. It is important to note that the fact that the excess interest amount is not deductible does not prevent withholding income tax from being imposed when the relevant interest payments are made to the nonresident recipient and also will not lead to the amount being reclassified as a dividend. B. Transfer Pricing Transactions entered into by a Brazilian legal entity with a nonresident that is resident in a low-tax jurisdiction or subject to a privileged tax regime or with a nonresident that is a related party (wherever resident) are within the scope of the Brazilian transfer pricing rules. In relation to the deduction of interest, Law 12,766/ 2012 provides that interest on related-party loans is only deductible up to specified maximum rates as follows: s Fixed-interest-rate U.S. dollar loans: the maximum deductible rate is the market rate on sovereign bonds issued by the Brazilian government on the external market, indexed in U.S. dollars; s Fixed-interest-rate Brazilian real loans: the maximum deductible rate is the market rate on sovereign bonds issued by the Brazilian government on the external market, indexed in Brazilian real; and s All other loans: the maximum rate is the six-month LIBOR for the appropriate currency. A spread margin of 3.5% (the margin percentage is set by the Treasury Minister) is added to the above rates in the case of inbound loans. C. Tax on Exchange Transactions If the FC buyer finances the acquisition of assets or shares through a Brazilian finance institution, the loan will be subject to the tax on exchange transactions (IOF), specifically: s IOF-Credit at a % daily rate, limited to 1.5%, plus an additional rate of 0.38% of the amount lent; and s IOF- Exchange levied on foreign currency exchange transactions entered into to enable the outflow and inflow of funds, at the rate of 0.38% (outflow and inflow). It should be noted that, since IOF-Exchange is only levied on effective exchange transactions, it may be possible to argue that IOF-Exchange should not levied on the kind of transaction contemplated here if the amount used to pay for the assets or shares is remitted directly to a seller resident in Brazil. On the other hand, if a Brazilian entity (such as a subsidiary of the FC buyer) enters into a loan agree- 4 09/17 Copyright 2017 by The Bureau of National Affairs, Inc. TM FORUM ISSN

5 ment, IOF-Credit is not levied, but IOF-Exchange is levied at an increased rate of 6% where the loan has a term of 180 days or less, as demonstrated by loan registration information recorded with the Brazilian Central Bank. The 6% IOF is levied on the amount of the loan. Loans with a term of more than 180 days are not subject to IOF-Exchange. V. Amortization of Goodwill Another matter that needs to be addressed when structuring a cross-border M&A involving a Brazilian target company is the legal provision that allows the amortization of goodwill acquired on the acquisition of the equity of a Brazilian entity by another Brazilian entity. Before the new Brazilian accounting standards came into effect, acquired goodwill could be amortized for tax purposes, provided there was documentation and evidence to show that the acquired goodwill arose from the future profitability of the invested company. In addition, the target company had to merge with the buyer that acquired the goodwill. The new accounting standards changed the procedure for allocating the value of an equity investment to acquired goodwill, but not the tax benefit itself. Accordingly, as from the entry into effect of Law / 2014, the value of an equity investment is to be allocated among the accounting entries in the following order (the Purchase Price Allocation or PPA): (1) net equity; (2) asset value surplus or decreased value (i.e., the difference between the fair value of the net assets acquired and the net equity of the company invested in); and (3) future profitability goodwill, which corresponds to the residual value that cannot be included in items (1) or (2) (i.e., after the proper allocation of the total equity value into net equity and asset value surplus/decrease). The goodwill so determined may then be amortized at a maximum rate of 1/60 per month. These entries must be recorded in separate sub-accounts, and the surplus of assets must be based on a report prepared by an independent expert to be filed and recorded with the proper authorities. Furthermore, it should be noticed that the ability to amortize goodwill for CIT purposes requires that the transaction giving rise to the goodwill is entered into between unrelated parties. Thus, goodwill recorded with respect to transactions between related parties is not allowed to be amortized for CIT purposes. VI. Use of Acquisition Vehicle There are other, non-tax aspects that need to be considered when deciding to invest in Brazil through a subsidiary (an investment vehicle ). For tax purposes, one of the most important reasons for using such a vehicle is that it affords the possibility of amortizing the goodwill acquired on the acquisition of shares. As noted in item V., above, it is only possible to amortize goodwill for tax purposes when there is a merger or spin-off of the investing company into the invested company. In these circumstances, only a Brazilian entity acquiring the goodwill will trigger the amortization for CIT purposes. Nonetheless, there must be relevant economic grounds reasons for structuring a transaction through an investment vehicle beyond its tax benefits (such as the ability to amortize goodwill), since the tax authorities may challenge the transaction if there is no evidence to justify using an investment vehicle to acquire a Brazilian company (for example, a regulatory requirement) or the vehicle lacks substance. In practice, the substance-over-form concept is applied with respect to all transactions, and there is no statutory or case law that is conclusive in relation to the minimum standards that must be met for the tax authorities to accept a transaction. VII. Carryfoward of Net Operating Losses An entity may carry forward indefinitely tax losses incurred in previous fiscal years, but such carried forward losses may be set off only to the extent of 30% of the taxable income of any given year. Net operating losses (NOLs) may only be set-off against operational taxable income and the 30% limitation applies in this context as well. Usually, a gain or loss from the sale of inventory is considered to be a gain or loss from an operational activity, while a gain or loss from the sale of assets (equipment, buildings, land, etc.) is considered to be a gain or loss from a non-operational activity. Where there is a change in the ownership of a company as a result of an M&A transaction, existing NOLs may only be used if the core business of the target entity remains the same between the tax period in which the losses were incurred and the tax period in which they are used. Thus, if there is a change in the control of the target and a modification of its core business, previously accumulated NOLs will be lost and consequently will not be available for set off. VIII. BEPS and Brexit Although Brazil has recently filed a formal request to become an OECD member, it is difficult to anticipate any impact related to that action (which would include the BEPS project). The fact is that, in practice, Brazil adopts a neutral position in relation to OECD initiatives since it wishes to maintain its independence regarding tax policy and the adoption of international tax standards. As a consequence, in practice, Brazil has adopted only a few BEPS-inspired measures, such as the Voluntary Disclosure Program and the exchange of information based on bilateral and multilateral agreements. Therefore, neither the BEPS initiative nor the United Kingdom s exit from the European Union, should have any impact on the transactions analysed here from a tax perspective. IX. Non-Tax Factors The structures of M&A transactions involving FC buyers and Brazilian sellers, as well as the terms of the respective transaction documents, are similar to those used in other jurisdictions. Typically FC buyers and home country (here Brazilian) sellers will complete non-disclosure agreements, letters of intent, share or asset sale and purchase agreements, and other commonly used transaction documents. The typical M&A agreement will provide for tax representations, warranties and indemnities. These are 09/17 Tax Management International Forum Bloomberg BNA ISSN

6 particularly important because numerous (and, not uncommonly, overlapping) taxes may be imposed and often extremely complex Brazilian municipal, state and federal tax laws and regulations will apply. As a result, virtually every Brazilian company is a party to judicial and administrative proceedings initiated by or against the Brazilian tax authorities. The general statute of limitations for indemnification claims resulting from a breach of contract (including losses arising out of incorrect or misleading representations and warranties) is three years from the date the respective loss was incurred or the FC buyer acquired knowledge of the breach. Brazilian laws, however, allow the parties to agree contractually to a different statute of limitations, which they will very often do. Other non-tax factors that FC buyers should take into account when acquiring Brazilian shares or assets include: s Restrictions on foreign ownership: an FC buyer may be prevented from acquiring more than a specified percentage ownership interest in certain regulated Brazilian businesses. Controlled sectors and assets include: (1) the financial sector; (2) mining and exploration for mineral and energy resources; (c) farmland; and (d) the broadcasting and news media sector; s Registration with the Central Bank of Brazil: investments made by FC buyers in shares of Brazilian companies must be properly registered with the Central Bank of Brazil. Failure to so register may prevent an FC buyer from remitting abroad dividends and other distributions from the acquired company, as well as giving rise to other problems; s Non-compete conditions: a non-compete provision needs to be carefully crafted with respect to, at least, its scope, its territorial coverage and the period covered in order to avoid its being struck down by the courts on constitutional and labor grounds; it is not uncommon for the parties to agree to separate, reasonable non-compete compensation; s Non-compete conditions: a non-compete provision needs to be carefully crafted with respect to, at least, its scope, its territorial coverage and the period covered in order to avoid its being struck down by the courts on constitutional and labor grounds; it is not uncommon for the parties to agree to separate, reasonable non-compete compensation; s Antitrust notification and approval: transactions that meet certain criteria must be cleared with the Brazilian Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica or CADE) prior to closing. In assessing a transaction, the CADE will analyze whether: (1) the transaction has actual or potential effects in Brazil; (2) the parties to the transaction meet certain revenue thresholds in Brazil; and (3) the transaction may result in the forming of a concentration, as defined in Brazil s Competition Laws. If a share purchase agreement provides for arbitration, it is generally understood that the parties may choose between Brazilian law and some other law (typically, the law of the state of New York) as the governing law of the agreement. Otherwise, Brazilian law will typically govern the agreement. Shareholders agreements must always be governed by Brazilian law. NOTES 1 Related party the following persons are related to a Brazilian entity: (1) the entity s foreign headquarters; (2) the entity s foreign branches; (3) the entity s controlling partners or shareholders (whether individuals or legal entities), foreign affiliates and foreign controlled legal entities; (4) any foreign legal entity, if that legal entity and the Brazilian legal entity are under common corporate control or common management, or when at least 10% of the capital of both entities is held by the same individual or legal entity; (5) any individual or legal entity domiciled abroad that, together with the Brazilian legal entity, holds an equity stake in the capital of a third legal entity, if the total investment qualifies the first two parties as controlling shareholders or affiliates of the third legal entity; (6) any individual or legal entity domiciled abroad that participates with the Brazilian entity in any enterprise under a consortium or condominium arrangement, as defined by the Brazilian legislation; (7) any individual domiciled abroad who is related by blood or marriage, up to the third degree, to, or any spouse or significant other of, a manager, controlling partner or controlling shareholder of the Brazilian legal entity, taking into account direct and indirect investments; (8) any individual or legal entity domiciled abroad that has exclusive rights as an agent, a distributor or a dealer of the Brazilian legal entity, to purchase goods, services or rights; and (9) an individual or legal entity domiciled abroad in relation to whom/which the Brazilian legal entity has exclusive rights, as an agent, a distributor or a dealer, to purchase and sell goods, services or rights. 2 Low-tax jurisdiction low tax jurisdiction is a jurisdiction whose legislation does not allow access to information about the shareholding structure of legal entities or their ownership, or the identity of the beneficial owners of income earned by nonresidents, and/or a jurisdiction that does not tax income or taxes income at maximum rates that are lower than 20%, taking into account: (1) the tax legislation applicable to individuals or legal entities, depending on the nature of the person with whom/ which the relevant transaction is performed; and (2) separately, the taxation of labor and capital (literal translation of the law). Listed low-tax jurisdictions are: Andorra; Anguilla; Antigua and Barbuda; Aruba; Ascension Island; the Bahamas; Bahrain; Barbados; Belize; Bermuda; Brunei; Campione D Italia; the Channel Islands (Alderney, Guernsey, Jersey and Sark); the Cayman Islands; Cyprus; Singapore; the Cook Islands, Costa Rica; Curaçao, Djibouti; Dominica; the United Arab Emirates; Gibraltar; Granada; Hong Kong; Ireland, Kiribati; Labuan; Lebanon; Liberia; Liechtenstein; Macao; Madeira; the Maldives; the Isle of Man; the Marshall Islands; Mauritius; Monaco; Montserrat; Nauru; the Netherlands Antilles; Niue; Norfolk Island; Panama; the Pitcairn Islands; French Polynesia; Qeshm; American Samoa; Western Samoa; San Marino; Saint Helena; Saint Lucia; Saint Martin; Saint Kitts and Nevis; Saint Peter and Saint Miguel Islands; Saint Vincent and the Grenadines; the Seychelles; the Solomon Islands; Swaziland; Oman; Tonga; Tristan da Cunha; Turks and Caicos; Vanuatu; the British Virgin Islands; and the U.S. Virgin Islands 3 Definition of a privileged tax regime A privileged tax regime is a regime that satisfies one or more of the follow- 6 09/17 Copyright 2017 by The Bureau of National Affairs, Inc. 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7 ing criteria: (1) it does not tax income, or taxes income at maximum rates that are lower than 20%; (2) it provides tax advantages to nonresidents (whether individuals or legal entities) conditioned on the non-performance of substantial economic activities in the relevant jurisdiction, or without requiring the performance of substantial economic activities in the relevant jurisdiction; (3) it does not tax income earned outside the relevant jurisdiction, or taxes such income at maximum rates that are lower than 20%; and/or (4) it does not allow access to information about the shareholding structure of legal entities, the ownership of assets and rights or economic transactions performed. The listed privileged tax regimes are the regimes applicable to: (1) a Sociedad Anonima Financiera de Inversion (SAFI) under the legislation of Uruguay until December 31, 2010; (2) a holding company under the legislation of Austria, Denmark or the Netherlands, if such company does not carry on significant economic activities (defined in sum as the adequate operational capacity to perform its activities, evidenced, among other factors, by the existence of sufficient qualified employees and sufficient physical facilities for the exercise of management and effective decision-making); (3) an International Trading Company (ITC) under the legislation of Iceland; (4) limited liability companies (LLC) in a U.S. State that is formed by nonresidents and is not subject to federal income tax, under the legislation of the United States; (5) an Entidad de Tenencia de Valores Extranjeros (ETVE) under the legislation of Spain; (6) an International Trading Company (ITC) and an International Holding Company (IHC) under the legislation of Malta; and (7) any type of entity established in Switzerland whose income is taxed at a rate lower than 20%. The inclusion of the regime applicable to ETVEs was challenged by the Spanish government and this regime has been temporarily excluded from the list by Declaratory Executive Act (ADEs) 22/10 until a final decision is handed down on the matter. 09/17 Tax Management International Forum Bloomberg BNA ISSN