Outbound Planning Into Brazil - U.S. Tax Considerations - Transnational Tax Network November 30, Jeffrey Rubinger Bilzin Sumberg LLP

Transcription

1 Outbound Planning Into Brazil - U.S. Tax Considerations - Transnational Tax Network November 30, 2017 Jeffrey Rubinger Bilzin Sumberg LLP

2 Basic Case - Direct Ownership of High Tax Latam Subsidiaries Parent (US C corp) Sub Brazil Sub Colombia Sub Mexico

3 Tax Consequences of Structure U.S. corporate parent eligible to claim indirect foreign tax credit for corporate level income paid or incurred in foreign jurisdictions. Double tax in the United States (corporate and shareholder level tax). Cannot claim indirect foreign taxes for certain foreign taxes such as Brazilian PIS or COFINS; VAT taxes. Income earned in foreign subsidiaries can be deferred from U.S. tax until repatriated. Losses do not pass through. No treaty based reductions if withholding taxes paid in countries, such as, Brazil on royalties. No ability to defer intergroup payments of interest, dividends, royalties, etc.

4 Flow-Through Tax Treatment of High-Tax Latam Subsidiaries Parent (US C corp) Venezuela (Malta) (Malta) Brazil (Malta) Chile

5 Tax Consequences of Structure No ability to defer income Can claim direct foreign tax credit for eligible foreign income taxes paid Double tax in the United States (corporate level plus shareholder dividend) Losses flow-through But potential loss recapture rules, dual consolidated loss rules, and overall foreign loss rules. No treaty based reductions of withholding for non-treaty subsidiaries. No ability to defer intergroup payments

6 Flow-Through U.S. Parent Parent US (US Parent C corp) LLC Mexico Brazil Chile

7 Tax Consequences of Structure U.S. parent cannot claim foreign tax credit for corporate level income paid or incurred in foreign jurisdictions (can only claim credit for any withholding taxes incurred). But single layer of U.S. income tax. Income earned in foreign subsidiaries can be deferred from U.S. tax until repatriated. Losses do not pass through. No treaty based reductions if withholding taxes paid in countries on dividends. U.S. owners eligible to claim qualified dividend treatment on dividends received from treaty-based subsidiaries, such as Mexico, but not Brazil. No ability to defer intergroup payments of interest, dividends, royalties, etc.

8 Flow-Through U.S. Parent and High-Tax Latam Subsidiaries US Parent LLC (Malta) Chile Mexico (Malta) Opco (Malta) Brazil

9 Tax Consequences of Structure No ability to defer income Can claim direct foreign tax credit for eligible foreign income taxes paid Single layer of U.S. income tax. No ability to treat income as qualified dividend income Losses flow-through But remember potential loss recapture rules, dual consolidated loss rules, and overall foreign loss rules. No treaty based reductions of withholding for non-treaty subsidiaries. No ability to defer intergroup payments

10 Holding Company Structure Parent (US C corp) Holdco Spain Chile Mexico Brazil

11 Tax Consequences of Structure U.S. corporate parent eligible to claim indirect foreign tax credit for corporate level income paid or incurred in foreign jurisdictions. Cannot claim indirect foreign taxes for certain foreign taxes such as Brazilian PIS or COFINS. Double tax at U.S. corporate level Income earned in foreign subsidiaries can be deferred from U.S. tax until repatriated. Losses do not pass through. Can claim treaty based reductions with Spanish holding company if withholding taxes incurred in foreign jurisdictions. No qualified dividends for dividends received from Spanish holding company as C corporations do not qualify for lower rate. Can defer intergroup payments of interest, dividends, royalties, etc, so long as Section 954(c)(6) exists. Benefit from bilateral investment protection treaties with Spain (except Brazil)

12 Holding Company with Flow-Through Subsidiaries Parent (US C corp) Holdco Spain (Malta) Brazil Mexico (Malta) Colombia (Malta)

13 Tax Consequences of Structure U.S. corporate parent eligible to claim indirect foreign tax credit for corporate level income paid or incurred in foreign jurisdictions, even though foreign subsidiaries disregarded because holding company treated as separate corporation. Cannot claim indirect foreign taxes for certain foreign taxes such as Brazilian PIS or COFINS. Double tax at U.S. corporate level Income earned in foreign subsidiaries can be deferred from U.S. tax until repatriated. Losses do not pass through. Can claim treaty based reductions with Spanish holding company if withholding taxes incurred in foreign jurisdictions. No qualified dividends for dividends received from Spanish holding company as C corporations do not qualify for lower rate. Can defer intergroup payments of interest, dividends, royalties, etc, because foreign subsidiaries are disregarded for subpart F income purposes Benefit from bilateral investment protection treaties with Spain (except for Brazil)

14 Flow-Through Holding Company and Subsidiaries Parent (US C corp) Opco Holdco (Malta) Spain (Malta) Chile (Malta) Brazil Opco Venezuela (Malta)

15 Tax Consequences of Structure No ability to defer income Can claim direct foreign tax credit for eligible foreign income taxes paid Double tax at U.S. corporate level Losses flow-through But remember potential loss recapture rules, dual consolidated loss rules, and overall foreign loss rules. Can claim treaty based reductions of withholding taxes incurred in foreign jurisdictions under treaty with Spain. No ability to defer intergroup payments Benefit from bilateral investment protection treaties with Spain (except Brazil)

16 Flow-Through U.S. Parent with Holding Company Parent US (US Parent C corp) LLC Holdco Spain Chile Brazil Mexico

17 Tax Consequences of Structure U.S. parent cannot claim foreign tax credit for corporate level income paid or incurred (as well as foreign withholding taxes paid) in foreign jurisdictions But single layer of U.S. income tax. Income earned in foreign subsidiaries can be deferred from U.S. tax until repatriated. Losses do not pass through. Can claim treaty based reductions if withholding taxes paid incurred in foreign jurisdictions under treaty with Spain. U.S. owners eligible to claim qualified dividend treatment on dividends received from Spanish holding company. Can defer intergroup payments of interest, dividends, royalties, etc, so long as Section 954(c)(6) extended. Benefit from bilateral investment protection treaties with Spain (except Brazil)

18 Flow-Through U.S. Parent and Subsidiaries with Holding Company Parent US (US Parent C corp) LLC Holdco Spain (Malta) Chile Mexico (Malta) (Malta) Brazil

19 Tax Consequences of Structure U.S. parent cannot claim foreign tax credit for corporate level income paid or incurred (as well as foreign withholding taxes paid) in foreign jurisdictions But single layer of U.S. income tax. Income earned in foreign subsidiaries can be deferred from U.S. tax until repatriated. Losses do not pass through. Can claim treaty based reductions with Spanish holding company if withholding taxes incurred in foreign jurisdictions. U.S. owners eligible to claim qualified dividend treatment on dividends received from Spanish holding company. Can defer intergroup payments of interest, dividends, royalties, etc, because foreign subsidiaries are disregarded for subpart F income purposes Benefit from bilateral investment protection treaties with Spain (except for Brazil)

20 Complete Flow-Through Holding Company Structure Parent US (US Parent C corp) LLC Opco Holdco (Malta) Spain (Malta) Chile (Malta) Brazil Mexico (Malta)

21 Tax Consequences of Structure No ability to defer income Can claim direct foreign tax credit for eligible foreign income taxes paid (including withholding taxes) Single layer of U.S. income tax. No ability to treat income as qualified dividend income Losses flow-through But remember potential loss recapture rules, dual consolidated loss rules, and overall foreign loss rules. Can claim treaty based reductions with Spanish holding company if withholding taxes incurred in foreign jurisdictions No ability to defer intergroup payments Benefit from bilateral investment protection treaties with Spain (except Brazil)

22 Flow-Through U.S. Parent and Holding Company Parent US (US Parent C corp) LLC Holdco (Malta) Spain Chile Mexico Brazil

23 Tax Consequences of Structure U.S. parent cannot claim foreign tax credit for corporate level income paid or incurred in foreign jurisdictions (can only claim credit for any withholding taxes incurred). But single layer of U.S. income tax. Income earned in foreign subsidiaries can be deferred from U.S. tax until repatriated. Losses do not pass through. Can claim treaty based reductions with Spanish holding company if withholding taxes incurred in foreign jurisdictions No ability to defer intergroup payments U.S. owners eligible to claim qualified dividend treatment on dividends paid from treaty-based subsidiaries, such as Mexico, but not Brazil. No ability to defer intergroup payments of interest, dividends, royalties, etc. Potentially can convert subpart F income into qualified dividend income with check-the-box planning Benefit from bilateral investment protection treaties with Spain (except for Brazil)

24 Use of Holding Company with Branch Exemption Parent US (US Parent C corp) LLC Holdco (Spanish ETVE) Branch (e.g., US LLC/Uruguay/ Irish) Colombia (Malta) (Malta) Brazil Argentina (Malta) Loans/Licenses/ Services to Subs Interest/royalties/ service payments deductible; eligible for reduced withholding tax rates under treaty with Spain; and exempt from Tax in Spain under branch exemption

25 Tax Consequences of Structure U.S. parent cannot claim foreign tax credit for corporate level income paid or incurred (as well as foreign withholding taxes paid) in foreign jurisdictions But single layer of U.S. income tax. Income earned in foreign subsidiaries can be deferred from U.S. tax until repatriated. Losses do not pass through. Can claim treaty based reductions with Spanish holding company if withholding taxes incurred in foreign jurisdictions, even though payments made to low-tax branch of Spanish holding company. May not work with Brazil according to Brazil-Spain income tax treaty. Can claim deductions for intergroup payments incurred at foreign subsidiary level, even though receipt of payments will be exempt (or subject to low taxes) at branch level and Spanish holding company level under branch exemption. U.S. owners eligible to claim qualified dividend treatment on dividends received from Spanish holding company. Can defer intergroup payments of interest, dividends, royalties, etc, because foreign subsidiaries are disregarded for subpart F income purposes Benefit from bilateral investment protection treaties with Spain (except for Brazil).