Editorial: How US Cos. Can Reduce Latin American Tax Obligations

by Bilzin Sumberg

This article is reprinted with permission from Law360.

Many South Florida-based companies conduct business operations throughout Latin America. Typically, these operations are conducted through wholly-owned foreign subsidiaries.

With the corporate tax rates in these jurisdictions approaching the highest U.S. federal income tax rates (for example, the corporate income tax rate is 35 percent in Argentina, 34 percent in Brazil and 30 percent in Mexico), many U.S.-based multinationals simply elect to treat their Latin American subsidiaries as “pass-through” entities for U.S. federal income tax purposes.

This can be accomplished by filing a Form 8832 (otherwise known as a “check-the-box” election) with the Internal Revenue Service, so long as the foreign subsidiary is not a “per se” corporation and therefore ineligible to file such an election.

While this structure prevents any foreign-source income earned by these entities from being deferred from U.S. federal income tax, it does allow the U.S. parent to claim a foreign tax credit for the high corporate income taxes incurred in the local jurisdictions.

Deferral Structures

Instead of the U.S. parent treating the Latin American subsidiaries as pass-through entities for U.S. federal income tax purposes, an alternative structure may be to reduce the foreign corporate income taxes paid in these jurisdictions through intercompany lending and licensing arrangements.

Assuming this can be accomplished without triggering high rates of foreign withholding tax, and the interest and royalty payments made from the Latin American subsidiaries can be deferred from U.S. federal income tax (for example, they may be exempt from the U.S.-controlled foreign corporation rules under the Section 954(c)(6) look-through rule), the overall effective income tax rate may be lower when compared to the overall effective income tax rate paid under a pass-through structure.

This is especially true if the profits eventually can be repatriated to the United States at qualified dividend rates (currently 20 percent).

Given that the only income tax treaties concluded by the United States with Latin American jurisdictions are those with Mexico and Venezuela (the proposed treaty with Chile is not expected to be effective any time soon), it usually does not make sense to lend money or license intellectual property to the subsidiaries in Latin America through a U.S. company.

Not only would this likely result in high foreign withholding tax rates (unless the U.S.-Mexico or U.S.-Venezuela treaties were taken advantage of), but the interest and royalty payments would be subject to current U.S. federal income tax.

Benefits of Using Spanish ETVEs

Historically the jurisdiction that is most commonly used as a holding company for Latin American companies has been Spain. The Spanish holding company (otherwise known as an ETVE) exempts from corporate income tax most dividends received from non-tax haven jurisdictions, has no withholding tax on outgoing dividends to non-tax haven jurisdictions, and Spain has more income tax treaties with countries in Latin America than any other jurisdiction in the world.

While Spanish ETVEs are most often used as a holding company, they also can be very tax efficient when used to finance operations in Latin America with debt, as well as license intellectual property to Latin America, through a branch located in a non-tax haven jurisdiction, such as Uruguay, Ireland or Malta. The reason why such a structure would work well is that, even though the loan or license agreement is entered into between the branch and the Latin American subsidiary, the interest and royalty payments made are eligible for the reduced withholding tax rates available under the treaties in effect between Spain and the Latin American jurisdiction.

Branch Exemptions

Furthermore, just like Spanish ETVEs exempt dividends received from subsidiaries located in non-tax haven jurisdictions, they also exempt from corporate income tax active income earned by a branch located in a nonhaven jurisdiction. For this purpose, a branch engaging in intercompany lending and licensing arrangements would be considered to be deriving active income that is eligible for the branch exemption.

Finally, the branch locations mentioned above (Uruguay, Ireland and Malta) may not be considered tax havens for this purpose, even though they may incur little, if any, local income tax on the receipt of the interest or royalty payments (for example, Uruguay has a territorial tax system and therefore exempts from local income tax income derived from sources outside of Uruguay). To Defer or Not to Defer Accordingly, if properly set up, this structure produces a deduction at the high-tax operating company level in Latin America without incurring significant withholding taxes, and results in income that is exempt from corporate income tax in Spain and possibly at the location of the branch. Finally, if the beneficial owners of the Spanish ETVE are U.S. individual taxpayers, profits eventually can be repatriated at qualified dividend rates. Given these results, a South Florida-based company with operations in Latin America should seriously consider whether to defer or not to defer its profits earned in Latin America.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bilzin Sumberg | Attorney Advertising

Written by:

Bilzin Sumberg

Bilzin Sumberg on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.