This article offers guidance for American business owners considering expansion into South America, with expert advice from Corporate, M&A and Tax lawyers from the U.S., Argentina, and Brazil.
Doing Business in Argentina
Argentina is the third largest economy in Latin America, with a wealth of agricultural goods and natural resource exports like oil, gas, and lithium.
Argentina is a constitutional republic with three branches of government, drawing its inspiration from the Federalist papers. The territory is politically divided into 23 provinces and the city of Buenos Aires, which functions as an independent province. Each province has three branches of government, and the majority of funding comes from the federal government.
Argentina´s legal system is based on the Napoleonic code, similar to the civil code system in Continental Europe.
Business Structures
Commercial activities in Argentina can be carried out directly through a local entity or by means of a joint venture with a local partner or distributor. The different types of business structures in Argentina are regulated under the Argentina General Corporate Law[1]. The most commonly used business structures are (i) the Corporation or sociedad anonima[2];(ii) the Limited Liability Company or sociedad de responsabilidad limitada[3];(iii) the branch of a foreign company that can carry out business activities in Argentina, as long as it is duly registered before the Public Registry of Commerce; and (iv) the Simplified Corporation or sociedad anónima simplificada,[4]or SAS,that has the best traits of the corporation and of the limited liability company.
The use of the corporation is generally intended for large business ventures, whereas limited liability companies are used for smaller partnership-type transactions. Ownership of the corporation is recorded in the central registry of ownership[5], and the identity of foreign shareholders and foreign limited liability company owners is registered in the public registry of commerce[6].
When a foreign entity operates through a branch in Argentina, they must be registered with the Public Registry of Commerce and the tax authorities.[7]This allows the foreign entity to operate in a manner similar to an Argentine entity and be deemed a local company for tax purposes.
To accommodate a growing demand for venture capital transactions, Argentina recently introduced the “Simplified Corporation.”[8]As the name suggests, the Simplified Corporation adopts a streamlined incorporation process—it can often be incorporated online within twenty-four hours.
Joint ventures and associations by agreement are generally governed by a specific section of the Civil and Commercial Code (“CCC”)[9]such as (i) agency (section 1479); (ii) distribution (section 1502); (iii) franchising (section 1512); (iv) joint venture (section 1463); (v) leasing (section 1227); (vi) supply (section 1176); and (vi) concession (section 1502). Argentina also supports the notion of freedom of contract, and, with limited exceptions, all private contractual agreements are enforceable even if not specifically covered by a statute.
Argentina allows local businesses to enter into contractual agreements that are governed by non-Argentine law and subject to non-Argentine venue, as long as these agreements do not conflict with public order rules.[10]There are no currency exchange controls or banking limitations for the payments carried out under such agreements.
Doing Business as a Foreigner
Argentina does not in any way restrict foreign investment and does not impose any limitations or special rules on foreign investors. Argentina has also executed Bilateral Investment Treaties with many trade partners, including the U.S., in order to protect foreign investment from seizure or confiscation.
Taxation
Foreign investors in Argentina can expect to pay taxes at federal, provincial and municipal levels.
At the federal level, the most relevant taxes are (i) the income tax, (ii) the value added tax, and (iii) the tax on dividends.
The corporate income tax is 30% and will be reduced to 25% starting on January 1, 2020. For individuals, the rate is 35% (with a rate of 15% applied to capital gains). Value added tax is levied at the general rate of 21%. Tax on dividends, applicable only to corporations, is 7% and will be increased to 13% beginning on January 1, 2020. Provincial taxes generally include a 3% tax on gross income and a stamp tax of 1.5% (generally depending on the relevant province and on the relevant levied instrument).
While Argentina is a party to a number of income tax treaties, there is no income tax treaty with the United States.
Conclusion and Recommended Structures
It is critical to obtain local counsel when doing business in Argentina. Laws and taxation are always changing, as are the optimal structures for various types of deals and investments. We often advise clients to use the simplified corporate business form while using blockchain technology for bookkeeping.
Doing Business in Brazil
The Federative Republic of Brazil is the largest country in South America. It is the world’s fifth largest country, both by land mass and by population. It is the only Portuguese-speaking country in the otherwise Spanish-speaking Americas.
Similar to Argentina, Brazil has a federal constitution, three branches of government, a federation of states, and a civil law legal system. Business laws are set forth primarily in the Civil Code Introductory Law and the Brazilian Civil Code of 2002. The Brazilian economy is largely dependent on natural resources and manufacturing.
The Brazilian financial and capital markets system is highly regulated by various agencies, including the National Monetary Council and the National Council of Private Insurance. The Central Bank of Brazil and the Brazilian Securities and Exchange Commission supervise, regulate and inspect publicly held corporations, financial institutions and stock exchanges, among other entities.
Business Structures
The two most common types of legal entities used in Brazil are: (i) Limited Liability Company (Sociedade Limitada,“LLC”),[11]which is a more flexible structure with fewer formalities that is often recommended for foreign investors; and (ii) Share Company (S.A. – Sociedade Anônima).[12]
It is important to note that shares represent small pieces of a company. When you buy a share, you are acquiring a portion of the capital stock of a publicly traded company. When you acquire a percentage of an LLC, you also own, which gives you the right to share in business profits, as well as the right to vote on business matters. The most important characteristics of these two companies are:
a) Capital Company: Its main function is to raise capital to fulfill the purpose of the company. There is no need for direct activity of the partner or the shareholder. Therefore, there is no presence of the so-called “intuito personae,” which means thatthere are only obligations between the company and third parties, and never with its shareholders or partners.
b) Capital Division:The capital is divided into equal parts, as a rule, of the same nominal value—shares. However, the participation of each member of the company will vary according to amount of capital he owns.
c) The member of LLCwill only answer to demands limited to the total amount of capital for which he is responsible, even in cases of bankruptcy. In the case of S.A., the shareholders will not answer to any demand; only the company and its board. Importantly, the members of the company, in both cases, will only answer to company´s debts in cases of fraud, activities against law, and against the company’s bylaws.
d) Free trade of shares and membership percentage: The participation in the company, as a rule, can be freely transferred, which generates a constant change in the shareholder structure. However, the Statute may impose restrictions on the assignment (Article 36 of Law 6404/76).
Advantages and disadvantages of each entity type
(i) S.A. – Sociedade Anônima
The Sociedade Anônima(S.A. or corporation) is the oldest structure existing in Brazil and it is governed by Law No. 6,404 of 1976, which regulates companies with public shares to negotiate. It possesses a more complex and costly structure than the LLC, but is an excellent choice for startups wishing to seek investment.
This performance is regulated through bylaws, which have a similar role to the Articles of Association of an LLC. It can be an opened capital company or a closed capital company, depending on the entrepreneur’s interest in negotiating shares of the company on the stock market. Importantly, a public company operating as an S.A. is subject to stringent regulations.
Another disadvantage in relation to an LLC, besides the higher cost of maintenance, is that the Corporation cannot elect the Simples Nacional, which is a simplified taxation system in Brazil.
(ii) Limited Liability Company
One of the most common company models in Brazil is the Limited Liability Company. Its main characteristic is the limited liability of its partners. This means that the shareholder’s commitment is limited to the value of its shares. To form an LLC, it is necessary to prepare and implement its articles of association, which establishes the rights and duties of partners before the company and third parties.
One benefit of an LLC is that it allows the company to use Simples Nacional,which simplifies and reduces taxes.
In addition, an LLC is less burdensome than an S.A., because public disclosure of the companies acts and financial information is not required. It is also a great structure for startups due to the low cost and the simplicity of maintenance.
Despite all of the information herein explaining that using LLC is easier than S.A., there are some points that do not favor this model, especially in cases in which the company intends to obtain investments.
Another disadvantage of an LLC, especially for startups and technology companies, is that the participation of partners in the capital of the company is always proportional to the amount effectively invested by each one.
Both the LLC and the S.A. must be registered before the Board of Trade, Federal Revenue and the local City Hall. Each entity must adopt articles of association (for the LLC) or the bylaws (for the corporation), as well as a shareholders’ agreement.[13]
Doing Business as a Foreigner
Foreign companies doing business in Brazil must have a Brazilian legal representative and a manager.[14]The Corporate Taxpayer Identification Number (CNPJ) is also required for companies formed by foreigner partners that own properties or rights in Brazil. In this sense, the Brazilian Central Bank (BACEN) is in charge of monitoring and regulating foreign exchange transactions.
Brazilian law imposes some restrictions on investments by foreigners, such as investments in activities related to nuclear energy, health services, postal and telegraph services, and the aerospace industry.
There are also restrictions on foreign investment in certain activities, such as participation in financial institutions, mining operations, operation of public services and administration of newspapers and magazines, as well as radio and television.
The Tax System
Taxation in Brazil is primarily regulated by the 1988 Federal Constitution, the National Tax Code of 1966, and the Federal Income Tax Code. Taxes are payable by all private business entities resident in Brazil, including corporations, LLCs, partnerships and sole partnerships, and branches & agencies of corporations with head offices abroad. Taxes are levied by the federal, state and municipal governments.
Brazil has a complex system of corporate taxation in which the federal government levies (i)corporate income tax (IRPJ)—15% of the annual profit of companies; (ii) tax over manufactured goods (IPI), which varies by product and is charged to industries; (iv) financial transactions tax (IOF) varies according to the operation; (v) social security financing tax on revenue (COFINS)—rate from 0.62% to 7.6%[15]of the income; (vii) social integration program tax on revenue (PIS/PASEP) rate from 0.62% to 7.6%[16]of income; (viii) employer social security contributions (INSS), which are a percentage of the salary of each employee charged to the company and also to the employee for health care (varies according to the branch of activity); and (ix) income tax – varies from 7.5% to 27.5%.
It is important to note that Brazil does not have an income tax treaty with the United States.
Tax differentiation
In general, there are three commonly used modes: Simples Nacional (National Simple in free translation), Lucro Presumido (Presumed Profit in free translation), and Lucro Real (Real Profit in free translation). However, there are some restrictions and restricted use for any of these.
Simples Nacional: Only those companies that have an annual income from R$ 3.6 million in 2016 to R$ 4.8 million in 2017 can apply for this model. It was created to benefit mainly small and micro enterprises; all taxes on this legal entity will be paid in a single ticket in a much more simplified way and with lower values.
Presumed profit: As the name says, the profit margin used to calculate taxes is presumed. Thus, for the calculation of IRPJ and CSLL – Social Contribution on Net Income – a pre-defined index will be used for the respective calculations, according to the activity carried out by the company – 1.6% to 32% of revenues, depending on the activity.
Real profit: This model is obligatory to all companies with incomes greater than R$ 48 million per year. Some companies are obliged to adopt this mode—such as companies that conduct investment banking, financing and leasing companies.
Special tax regimes are provided by Brazilian legislation to benefit certain specific economic activity sectors. In most cases, taxpayers must comply with the application requirements due for each special tax regime, as well as other special requirements and obligations that must be considered on individual cases.
In this sense, all companies, including foreign companies or foreign investors will be subject to such taxation in Brazil.
Doing Business in Chile
Chile has the richest economy in South America in terms of GDP per capita and is one of the most prosperous and stable economies of South America. Chile’s largest economic sectors by GDP are mining, business and personal services, wholesale, retail trade, and manufacturing.
Chile is a unitary republic with three branches of government including an executive, legislature with both a senate and chamber of deputies, and an independent judiciary. It is a multi-party republic with a presidential system under the Constitution.
Chile´s legal system is based on the civil law model common in Europe.
Business Structures
Foreign companies may choose from the following organizational structures as a vehicle for foreign investment: Limited Liability Company (Sociedad de Responsabilidad Limitada or “SRL”), Individual Limited Liability Company (Empresa Individual de Responsabilidad Limitada or “EIRL”), Corporation (Sociedad Anonima or “SA”), Simplified Corporation (Sociedad por Acciones or “SpA”), or Branch of a Foreign Legal Entity.
SRL:The SRL is the most commonly used entity in Chile for business activities. It is organized by at least two parties (individuals and/or legal entities) through a duly notarized public deed that sets forth the company name, its purpose, capital contributions, and its deed of incorporation. An abstract of the deed must be published in the Official Gazette and registered with the Registry of Commerce within 60 days from its day of execution. SRL equity interests are not represented by shares or other negotiable instruments and may not have more than 50 partners, whether individuals or legal entities. Each partner’s liability is limited to the amount of his capital contribution or a greater specified amount.
EIRL:An EIRL can be formed by one individual who is liable up to the amount that she is committed to contribute as capital through a duly notarized deed. An EIRL can undertake any type of civil and commercial activity, except those reserved by law for corporations, and its assets are limited to the amount specified in its deed.
SA:Under Chilean law, corporations may be publicly held or closely held. The stock of publicly held corporations are publicly traded; must have at least 500 shareholders, or at least 10% of the shares shall belong to 100 shareholders; and are subject to supervision of the Superintendency of Securities and Insurance (SVS). Closely held corporations do not fall within the definition of a publicly held corporation and are not subject to the SVS. Both publicly and closely held corporations are incorporated by execution of a public deed by at least two incorporators. An abstract of the public deed must be published in the Official Gazette and registered with the Registry of Commerce within 60 days of the execution date. Shareholders are only liable for the pay-in amount for the subscribed shares.
SpA:The SpA was created to encourage private entrepreneurship and investment in venture capital companies. The SpA is similar to the closely held structure except with less formalities and administrative costs. The SpA may have a single shareholder, which is useful for foreign companies to avoid having to include a nominal shareholder to meet the two- shareholder rule for publicly or closely held SAs. Shareholders are only liable for the pay-in amount for the subscribed shares.
Branch:The foreign company must appoint an agent who sets up the branch in Chile. The agent must provide notarized copies of the foreign company’s articles of incorporation, bylaws, certificate of good standing, and a general power of attorney granted to the agent who will manage the branch. The power of attorney must clearly state that the agent acts in the company’s name with full powers. All documents must be translated to Spanish by the Ministry of Foreign Affairs of Chile.[17]
Doing Business as a Foreigner
Generally, there are no restrictions based on the nationality of owners of Chilean companies.[18]The only restrictions imposed by law apply to highly specified fields of business, such as coastal shipping.[19]
The Foreign Investment Committee registers and controls foreign investment in Chile (i.e., foreign capital, loans and technology). The following foreign investments require prior authorization from the Foreign Investment Committee:
(i) Investments over USD $5 million;
(ii) Investments in sectors or activities normally undertaken by the State and investments made in the public services sector (i.e., transportation and public utilities);
(iii) Investments made in the communications sector; and
(iv) Investments made by a foreign country or by an entity owned by a foreign country.[20]
Income Taxation
The main taxes under Chilean law are income tax, VAT, stamps tax, and real estate tax. Only the income tax will be discussed here. Foreign taxpayers (non-domiciles and non-residents) are subject to income tax only on income from Chilean sources.[21]
First Category Tax:A tax levied on business income that is not subject to the sole second category tax. It is generally levied on an accrual basis and the tax rates are 25% or 27%.[22]
Sole Second Category Tax:A tax levied on salaries, wages, and other remuneration paid for dependent personal services. The tax is generally paid by withholding at progressive rates.
Surtax:A progressive tax assessed on the worldwide income of individuals resident or domiciled in Chile. Professional income is subject to the surtax as a single tax. The highest tax bracket is currently 40%. Generally, the first category tax is creditable against the surtax on amounts distributed or paid that were subject to the first category tax.[23]
Additional Tax:Imposed on Chilean-source income remitted abroad to a nonresident individual or business enterprise, including a legal entity organized abroad that has a PE in Chile in the form of a branch, an office, an agent or a representative. Generally, the first category tax is creditable against the additional tax on amounts distributed or paid that have been subject to the first category tax. The additional tax is paid by withholding at a rate of 35%.[24]Income tax treaties may reduce the withholding rate. There is no treaty between the United States and Chile.
AMERICANS DOING BUSINESS ABROAD
Americans operating businesses or investments abroad are subject to a complex set of U.S. tax rules because U.S. citizens and residents are subject to worldwide taxation. Therefore, the appropriate business structure for business operations or investments abroad is frequently a U.S. tax-driven decision.
Business Structures
Americans operating businesses abroad may do so as a (i) sole proprietor (i.e., in his or her name directly or through an entity disregarded for income tax purposes), (ii) partnership, (iii) corporation or (iv) trust.
Sole Proprietor: An American who operates abroad as a sole proprietor will be taxed in the United States on whatever income is generated abroad. From a theoretical viewpoint, there is no room for abuse because all income earned (net of deductions) is taxed currently at a maximum 37% tax rate for individuals.
Flow–Through Taxation – U.S. Partners of Foreign Partnerships:Partnerships pass income through to its U.S. partners on a current basis. Similar to sole proprietorships, there is no opportunity for tax deferral. A U.S. resident or citizen investing in a foreign partnership will be taxed currently on his or her share of income earned by the partnership, even if no distribution is received. The same tax rates that apply to sole proprietors likewise apply to partners.
Conversely, tax deferral may be possible when a foreign business is conducted through a foreign corporation or owned through a foreign trust.
Foreign Corporation: Generally, foreign corporations are not subject to U.S. tax unless they earn U.S. source income or conduct a U.S. trade or business. Consequently, the U.S. can tax only the shareholders of foreign corporations that are residents or citizens of the United States. However, not every U.S. shareholder of a foreign corporation will be currently taxable on the income of the corporation.
U.S. Income Tax Treaties
Bilateral U.S. income tax treaties can reduce the effect of double taxation for residents of the treaty countries. Unfortunately, there is no U.S. income treaty with Argentina, Brazil, or Chile.
The Tax System for Corporations
The United States lacks jurisdiction to tax a foreign corporation that does not engage in a U.S. trade or business and does not earn U.S.-source income. Theoretically, this allows for U.S. tax deferral of foreign income earned by a foreign corporation, even when the corporation is owned by an American shareholder. To prevent tax abuse, U.S. shareholders are required to include the undistributed income of a controlled foreign corporation (“CFC”) under two separate and independent income inclusion systems, (i) Subpart F inclusions and (ii) Global Intangible Low-Taxed Income (GILTI) inclusions.[25]Generally, Subpart F inclusions apply to a CFC’s passive income and GILTI inclusions apply to a CFC’s operating income.
Definitions – CFCs and U.S. Shareholders:A CFC is a foreign corporation more than50% (by vote or value) owned by “U.S. shareholders” on any day during the taxable year of the foreign corporation.[26]To determine CFC status, a “U.S. shareholder” is a U.S. person that owns 10% or more of the voting stock or the value of the stock of a foreign corporation.[27]Shareholders owning less than 10% are ignored for CFC purposes. A U.S. person is a U.S. citizen or resident, a U.S. partnership or corporation, and estates and trusts other than foreign estates or trusts.[28]Direct, indirect, and constructive ownership of stock determines ownership for both the shareholder and CFC tests. However, only direct and indirect ownership are used to determine the percentage of stock owned by a U.S. Shareholder for Subpart F and GILTI inclusions.[29]
Subpart F Inclusions– Passive Income: U.S. shareholders of CFCs must include in gross income certain kinds of passive income earned by the CFC, whether or not they receive a distribution. Passive income includes dividends, interest, rents, royalties, annuities,[30]insurance company income,[31]certain services[32]and sales income.[33]
GILTI– Operating Income: Generally, GILTI requires U.S.shareholders of CFCs to include their pro rata share of certain operating income in their gross income for each taxable year.[34]The calculations for determining GILTI are performed at the U.S. shareholder level.
Corporate U.S. shareholders are allowed to deduct their GILTI by 50% and are subject to a corporate tax rate of only 21%.[35]Thus, corporate U.S. shareholders pay a minimum tax of 10.5% (50% x 21%) on GILTI. After December 31, 2025, the deduction will be reduced from 50% to 37.5%.[36]Additionally, foreign tax credits are available to reduce the corporate tax, which may result in no income tax being due.[37]However, carry forward of GILTI foreign tax credits are not allowed.[38]
Conversely, individuals who are U.S. shareholders are not permitted to deduct 50% of their GILTI, and generally cannot claim a credit for the foreign taxes paid or accrued by the CFC on GILTI. Therefore, individual U.S. shareholders will generally be subject to U.S. tax on GILTI at a rate of up to 37%. Fortunately, proposed regulations released in March 2019 provide an annual election for U.S. shareholders who are individuals (including trusts or estates) to elect to be taxed as a U.S. corporation on Subpart F income and GILTI.[39]The election permits individuals to deduct 50% of GILTI. Significantly, individuals who are U.S. shareholders of foreign corporations owned through a U.S. partnership or S corporation are also eligible for the election.[40]A spreadsheet analysis is recommended to determine whether the election will ultimately reduce an individual’s U.S. income tax liability.
Passive Foreign Investment Companies(“PFICs”):A PFICis any foreign corporation thatmeets either of two tests: (1) 75%or more of the corporation’s gross income for the taxable year is passive; or (2) 50%or more of the corporation’s assets are passive assets – that is, assets which do not produce business income.[41]If a foreign corporation is both a PFIC and a CFC, then as to the U.S. shareholders (the 10% or greater shareholders), the foreign corporation is a CFC and not a PFIC. PFIC classification generally applies to foreign corporations that are mutual funds, investment funds, hedge funds,or private equity funds.
Note that the PFIC classification applies to all shareholders, not just the 10% or greater shareholders. Similar to foreign corporations classified as CFCs, it is not the corporation itself that is taxed by the United States, but only those shareholders that the United States has jurisdiction to tax.
The Foreign Tax Credit:U.S. taxpayers who pay foreign income or excess profits taxes to a foreign country can elect a direct credit or a deduction for foreign taxes paid.[42]The decision as to whether to credit or deduct foreign income taxes is to be made each year. In addition to the election, acash basis taxpayer can elect to treat foreign taxes as if the taxpayer were utilizing the accrual method of accounting. Theelection is necessary to allow the credit to have significance to cash basis taxpayers who have uneven years of income and foreign taxes, and who might otherwise lose the foreign tax credit. Unlike the election to credit rather than deduct, the election to accrue, once made, is binding for subsequent years.
There are strict limitations on the amount of credit allowed. Within those limitations, taxpayers can reduce their federal income tax, dollar for dollar. To be creditable against federal income taxes, the levy – that is, the foreign payment must be income, war profits, or excess profits taxes paid or accrued to any foreign country or possession of the United States.[43]A payment in exchange for a specific economic benefit is not a tax, nor is a subsidy a tax.
Taxation of Foreign Trusts:For U.S. income tax purposes,a trust may either be a grantor trust [44]or a non-grantor trust. Further, the assets of the trust may be included in the settlor’s or beneficiary’s U.S. estate or excluded from the estate.[45] The U.S. source income earned by a grantor trust flows through to the grantor/settlor and is taxed at regular tax ratesthat apply to individuals. Individual tax rates also apply to non-grantor trusts; however, the tax brackets are more compressed. This means that the highest tax rate of 37% is reached at a much lower income level for non-grantor trusts.
A foreign trust settled by a U.S. person will always be a grantor trust if there is a U.S. beneficiary.[46]A foreign trust settled within five years prior to immigration to the United States will likewise be treated as a grantor trust.[47]
Code Section 7701(a)(30)(E) provides that the term “United States person” means any trust if (a) a court within the U.S. is able to exercise primary supervision of the administration of the trust (the “Court Test”), and (b) one or more U.S. persons have the authority to control all substantial decisions of the trust (the “Control Test”). A trust will be treated as a U.S. person on any day that the trust meets both the Court Test and the Control Test. A foreign trust is any trust other than one described in Code Section 7701(a)(30)(E).
If a trust is deemed to be a foreign trust for U.S. tax purposes, any transfer of appreciated property to the trust will be treated as a sale to the trust, and the trust will be subject to substantial reporting requirements.[48]If a foreign trust is classified as a grantor trust, then there is no tax on the transfer because the grantor is deemed to sell assets to herself; but the reporting requirements still apply.
Under Internal Revenue Service Notice 97-34, a transfer of assets to a foreign trust must be reported on Form 3520, and the trust must annually file Form 3520-A. A beneficiary who receives a distribution from a foreign trust must likewise report the distribution on Form 3520.
