In the current context not only business become global, but families are global as well. This has become more frequent in Latin America. As a result, we find more closely held, family-controlled business, exposed to the need of sophisticated international tax and estate planning. On the other hand, the recent positive economic trend in Latin America has originated the emergence of the multinational Latin American companies (or Multilatinas), which more often than usual in other environments, are closely held rather than publicly traded corporations.

The main issues are not only to achieve tax efficiency for the company, but looking into structures efficient from the shareholders perspective as well; and in doing the same, protect assets from multijurisdictional estate taxation issues, while creating a reliable holding or control structure, which includes, avoiding black listed jurisdictions that normally present not only tax issues but also financial compliance challenges.
Considering this background, there are two important tools or vehicles for planning. The “Fundacion de Interes Privado” or Private Interest Foundation (PIF) in Panama, and the Barbados International Business Holding Company (Barbados IBC or IBC).
The Panama Private Interest Foundation: an alternative the Trust with legal efficiency in both common law and civil law jurisdictions.
The PIF was introduced by Panama Law 25 of 6/12/1995. It works the same as a German or Liechtenstein “Stiftung”, but in the heart of Latin America. With PIF a family can set aside certain business assets or other property at an independent legal structure, with the sole purpose of protecting such assets and establish specific dispositions favoring beneficiaries upon the death of the organizers or any other events. Although the PIF is not a commercial vehicle or holding company, it might be expected to receive dividends or other passive income from its endowment assets. In such event, for non-Panama beneficiaries or for income from sources without Panama, there are fantastic benefits derived from the Panamanian territorial income tax system. In addition, Law 25 specifically overrides inheritance laws of any other country, including those of Panama. The structure could achieve maximum international estate efficiency if the beneficiaries are other entities domiciled in Panama, or in any other jurisdiction without estate taxes as well, or if the assets to be transferred do not have “situs” in a jurisdiction presenting estate taxation issues for non-residents. On the other hand, Panama continues its crusade to be excluded from the OECD blacklist by entering tax treaties with countries, which are member to such organization.
Finally the PIF assets or endowment is not subject to legal actions (i.e. attachments or other measures) from related entities or the organizers, and most importantly, the legal entity is normally characterized both as a “Trust” from the USA tax law perspective; and as an independent and autonomous legal entity, from a non common law jurisdiction perspective. This dual or hybrid characterization resolves the many issues presented by trusts in the Latin American context, where such arrangements are not recognized and pose several questions for a tax perspective, more specifically when assets are held by non-financial institutions or private trustees or not recognized as “Fideicomisos” under local law.
Confidentiality is a relevant feature of the PIF, as panama law permits the organization of the Foundation with a Basic publicly registered deed, deferring relevant provisions to a privately executed deed or “Reglamento”.
Treaty networking with Barbados International Business Companies
The Barbados IBC presents a significant set of advantages.  Barbados is not a blacklisted jurisdiction, although it presents low taxation for the IBC. Barbados has important Tax Treaties network, as shown below. Therefore, the jurisdiction presents an excellent choice for the tax planning of global business ventures or businesses held by global families, as it has every measure necessary to manage the holdings: efficient or low income taxes, no estate tax, and every measure to prevent double taxation with major jurisdictions, including the following tax treaties:
Date of Signature
March 26, 1970
January 22, 1980
December 31, 1984
December 18, 1991
July 14, 2004
June 15, 1989
November 15, 1990
July 01, 1991
Agreement extended to Barbados by virtue of Agreement between Switzerland and the U.K., 1954
July 06, 1994
December 11, 1998
June 17, 1999
May 15, 2000
February 10, 2010
December 5, 2001
September 28, 2004
February 25, 2005
February 27, 2006
November 28, 2006
Republic of Seychelles
October 19, 2007
April 7th, 2008
Republic of Ghana*
April 22, 2008
December 1, 2009
June 21, 2010
In addition, discussions between Barbadian and Japanese officials over the possibility of a tax agreement took place in August 2006. Barbados has also advanced treaty negotiations with Italy, Spain and Vietnam. Discussions are continuing towards finalization of similar conventions with other nations, including Belgium, Brazil, Chile, Czech Republic, Iceland and India.
One relevant consideration for this article relates to the fact of the Treaty with Panama, which places the use of a Barbados IBC, controlled by a PIF in optimal tax efficiency. Also, when looking downstream in the potential holdings of the IBC, treaty networking could be achieved with most relevant European jurisdictions, as well as the United States or Mexico, nations where most Latin American global families or global business, including “Multilatinas”, have significant operations or exposure. The list also includes countries where asset protection strategies are critical, such as Venezuela, with whom the Government of Barbados has a Treaty for the Reciprocal Protection of Investments as well. The prospects of treaties with Brazil and Chile are promising for organizing regional business operations, and in the case of Brazil, it offers an efficient option that escapes the negative implications of domicile at blacklisted jurisdictions according to Brazilian income tax laws and transfer pricing regulations. Finally as a member for the CARICOM (the Caribbean free trade initiative), the Barbados IBC might offer an excellent platform for tax and trade treaty networking in the Caribbean.
Under Barbados law an IBC is a company that carries on the business of international manufacturing or international trade and commerce from within Barbados. International manufacturing is the business of making, processing, preparing or packaging within Barbados, any product that is exclusively for export. International trade and commerce includes any of the following activities, that is to say:
a. The business of being a broker, agent, dealer, seller, buyer or factor within Barbados of goods existing outside Barbados or of goods to be trans-shipped through or from Barbados.
b.             The business of the selling of services which, if originating in Barbados, are to or for, or on account of, persons resident outside Barbados.
A company will be granted an IBC License if:
a. It is resident in Barbados; and
b. It satisfies the Minister of International Business (by furnishing the requisite information) that it is financially capable of carrying on the business of international manufacturing or international trade and commerce.
Tax Regime of the Barbados IBC
IBC’s are subject to tax on all profits and gains based on the following scale:
2.5% on the first US$5,000,000.00;
2% on the next US$5,000,000.00;
1.5% on the next US$5,000,000.00; and
1% on the excess above US$15,000,000.00
No income tax is payable on dividends, royalties, interest, fees or management fees paid or deemed to be paid by an IBC to a company carrying on an international business or to a person resident outside Barbados.
An IBC is not obliged to withhold any portion of the dividends, royalties, interest, fees or management fees or other income paid or deemed to be paid by to a company carrying on an international business or to a person resident outside Barbados.
No tax, duty or other impost is leviable on an IBC, its shareholders or transferees in respect of any transfer of any securities or assets, other than a transfer of taxable assets, to another IBC or to a person resident outside Barbados.
Taxable assets are real estate situated in Barbados and held by or on the behalf of an IBC; as well as office equipment, supplies, furnishings and fixtures, machinery, vehicles and equipment used in Barbados in carrying on the business and affairs of the IBC.
An IBC may import free of customs duty, consumption tax, ad valorem stamp duty and other like duties, taxes and imposts, such plant, machinery, equipment, fixtures, appliances, apparatus, tools and spare parts, and such raw materials, goods, components and articles, as is necessary for the company to carry on its international business.
Where an IBC requires the services of specially qualified individuals in order to carry out its business effectively from within Barbados and
(a)           it is unable to acquire those services from within the CARICOM Region; and
(b)           it is unable to retain those services from outside Barbados without special tax concessions;
The Minister of Finance may authorise that a prescribed percentage of the salary of the specially qualified person (who is not a resident of a CARICOM country):
(a)           be exempt from income or other tax in Barbados,
(b)           be paid in a foreign currency in a trust account without being liable to income tax in Barbados as to the amount paid or any interest earned thereon, or
(c)            be paid in some other prescribed manner in another currency or otherwise without being liable to income tax in Barbados.
No person shall disclose any information relating to any application of a prospective IBC or to the affairs of an IBC, other than so far as such information forms part of the public record kept by the Registrar of Corporate Affairs, except when authorised by the prospective IBC or the IBC to do so, or when lawfully required to do so by order of a court of competent jurisdiction.  There are no currency exchange control restrictions in respect of the international business carried on by an IBC. An IBC must file annual audited financial statements with the Minister of Finance, and the annual renewal of the IBC Licence is contingent upon the said filing. You will therefore need to appoint local auditors for this purpose.
Global Latin American closely held businesses, Multilatinas’ shareholders or Global Latin American Families can benefit from efficient income and estate tax planning strategies by structuring a holding IBC in Barbados, controlled by a PIF in Panama.

* Leopoldo J Martinez is the Managing Partner of LMN CONSULTING LLC, an international strategic and tax planning specializing in the Latin American market place, with affiliates in Washington DC, Dallas, Miami, Mexico, Panama and Caracas.

LatAm Consulting Update: Venezuela’s New Foreign Exchange Law includes “Bond Swaps” as controlled transactions

The National Assembly approved the reform to the Foreign Exchange Control Laws today (5/13/2010).

As indicated in our previous alert, the “bond swap market” (also known as “US$ Permuta Market”) has been defined as a “foreign exchange transaction”. By placing the “US$ Permuta Market” under the Scope of the Law, it will be illegal to trade in securities denominated in US$ outside of the institutional trade to be organized, regulated and intervened by the Ministry of Finance and the Central Bank of Venezuela. It is expected that a “regulatory framework” for the trade with securities denominated in USD will be issued shortly by the Central Bank.

In a press conference yesterday (5/18/2010), the head of the Central Bank and the Minister of Economic Planing addressed the nation indicating that the implementing regulations will be issued within the next week, indicating that there will be a parallel market or a market with USD denominated securities organized by the Central Bank, under a platform that will guarantee no speculative pricing and under the intervention and control of the authorities, permitting the value of the securities, and thus, the rate of exchange of the USD to fluctuate within a band or range. They further announced that “Stock Brokerage  Companies” (Casas de Bolsa y Sociedades de Corretaje) will be banned from participating in this market, indicating that investigations will follow to determine their potential responsibility for illegal speculation at the now banned “Permuta Market”.

We will issue updates when the authorities and the Central Bank take the expected regulatory measures.

LatAm Consulting Alert: Venezuela introduces Dual Foreign Exchange Control System with a significant devaluation

New foreign exchange regulation.
The Government of Venezuela has enacted the “Exchange Agreement No.14 between the Central Bank and the Ministry of Finance” published by Official Gazette 374.064 on 1/8/2010 (hereinafter “the new forex regulation”).
The new forex regulation creates a dual exchange system by introducing two official pegged controlled exchange rates: (i) 2.60 Bs.F per USD (applicable to what is herein defined as sector A); and (ii) 4,30 Bs.F per USD (applicable to what is herein defined as Sector B). Consequently, the devaluation of the official pegged control market rates is 20% and 100% for each sector respectively.
Sector A will only include the following essential industries, imports and transactions:
1. Food and health industries.
2. Heavy equipment imports
3. Public Sector transactions.
4. Remittances for dependents and students overseas.
Sector B includes all other listed remittances and non-essential imports authorized by CADIVI (the currency exchange board) at 4,30 Bs.F per USD. Payments of foreign debt, royalties and profit remittances (dividends) should be classified under Sector B. However, under article 7 of the new forex regulation it was not expressly defined which exchange rate will apply to foreign debt service. It is expected that royalties and dividends would be eligible tom the Bs.F. 4,30 per USD rate if CADIVI approves the remittances on a case-by-case basis; nonetheless, the authorities have not been very responsive to petitions for dividends and royalties lately.
Exporters will be allowed to retain up to 30% of their export proceeds.
The “Bond Swap” parallel market remains legal as an alternative, but the government has announced closer intervention. Towards that end, it is expected that the National Assembly will soon pass a reform to the exchange control law.
Finally, USD 7 billions will be transferred from the Central Bank international reserve to the FONDEM (Government Development Fund) to finance projects during 2010.


The Implications.


The government intends to loosen-up its CADIVI approvals to several imports and remittances at the new Sector B 4,30 per USD rates, but giving priority to Sector A. However, the Ministry of Light Industry and Trade (MILCO) have subjected non-essential imports to their prior approval. Unless and until the new implementing regulations become more flexible in regards to the MILCO approval requirement, the whole process should be problematic, thus, creating several distortions and further demand in the parallel “bond swap market”.
CADIVI currently supplies 60% of the foreign exchange market, and the government is planning to increase such allocations to 75% under new regulations. Uncertainty and increased demand in the parallel “bond swap market” will remain until the new forex regulations are fully implemented, and the tools of intervention by the authorities in the “bond swap market” are defined. Significant activity in the “bond swap market” has resulted in the last few days, with an implicit rate of exchange of approximately Bs.F 6.50 per USD, therefore, a 8% devaluation in the parallel market in a couple of days.
As a result of the new regulations, the resulting official average pondered pegged controlled rate could be estimated at 3,85 Bs.F per USD based on data indicating that sector A represented 26.5 %, and Sector B represented 73.5 % of CADIVI approvals during the last quarter of 2009. The bond swap market should continue to be the source for at least 25% of the foreign exchange transactions in Venezuela.
Inflation should have a significant increase in 2010 due to monetary expansion through government expenditures upon the devaluation and the transfer of 7 billions of international reserves to FONDEM by the Central Bank. Tension with the private sector pursuant to price controls and other intervention measures by the government is likely. The government has already intervened more than 70 businesses in the commercial sector for revising their prices after the devaluation.


Recommended actions.
1) Review cash repatriation strategies to determine if any remittances could be covered under sector B pursuant to the new regulations; or else determine whether to implement a repatriation strategy by means of the “bond swap market” monitoring the best rates that might be available in the following months.
2) Define an adequate financial strategy in this new context.
3) Review the availability and impact of larger domestic NOLs due to devaluation, as well as the inflationary adjustments impact of these measures, for tax purposes, in order to ensure proper planning.
4) Review the impact of the new regulations on pricing policies under tight consumer regulations and price controls.
5) Implement asset protection strategies to minimize the adverse impact of government intervention and eventual expropriation measures, which could be extended to commercial sectors and basic industries of the economy.