Doing business abroad, in any country, poses unique issues and challenges. Nevertheless, there are common issues inherent in each deal and each location. In an offshore transaction, it is essential to evaluate and minimize business risk, understand applicable law, determine the necessary types and level of due diligence and observe local customs and practices. Although such issues arise with respect to all offshore deals, for illustrative purposes, this article focuses on doing business in Brazil.
At the outset of an offshore transaction, a U.S. investor in a foreign country needs to obtain reliable and accurate information on valuation of the target asset and costs arising from the acquisition. In many countries, including Brazil, valuation of real property is often not as precise as valuation in the United States. Therefore, it is important for an investor to gather and evaluate accurate financial information to perform an independent valuation analysis. In doing so, the investor will often require the assistance of local consultants; these consultants should be selected with great care. In addition, an investor needs to understand applicable currency exchange restrictions and costs that may prove to be risky or expensive for the client. For example, the payment of dividends back to the United States may be subject to tax.
Influences on Transaction Structure
There are many particular issues to be considered in structuring a transaction involving U.S. investment in a foreign country. For example, the choice of investment entities should be carefully evaluated as different entity structures may have different legal and tax consequences. On the taxation front, the client needs to evaluate and understand how to achieve pass-through status for U.S. tax purposes, local tax issues (such as “social” taxes which fund programs for the poor), cross border taxation and tax consequences of currency conversion and repatriation. Some countries impose various local ownership and management requirements on local entities, such as the requirement that one or more local shareholders or managers must have an interest in the entity. Law firms often provide such services although they may require a broad power of attorney to do so. Finally, many countries have enacted restrictions on foreign ownership of and investment in property that mandate extensive and costly application and approval processes. Such requirements must be taken into account at the outset of the deal structuring phase.
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