Achieving Tax Efficiency with cross-border services and royalties in Latin America. By Leopoldo J Martinez*

In the global economy the growth of royalties and services associated to intellectual property and information technology has become critical for international taxation.  On one-side governments of importing countries regularly source payments as territorial, based on the jurisdiction or location of payor. On the other, exporting countries push to resolve the issue through tax treaties. Unfortunately for US companies, one of their natural expansion markets is a “no-tax-treaty battleground”: Latin America (only Mexico and Venezuela have treaties with the US. A treaty with Chile is expected to be ratified by both countries soon).

Achieving Tax Efficiency with cross-border services and royalties in Latin America presents an important tax planning challenge in outbound taxation for US companies; as the corresponding inbound activity in Latin American countries is subject to high rates of income tax withholdings, and eventually, reverse VAT issues. In countries like Brazil, on top the income withholding tax issues, the scenario becomes even more complicated when the CIDE tax becomes applicable. The CIDE tax is a 10% surcharge withheld on certain services or royalties considered to be importation of technology. As such, the CIDE tax will not be creditable against US income taxes under the Internal Revenue Code, as it is not an income tax nor in lieu of income taxes.
The subject has become increasingly important, particularly in absence of tax treaties. In the US, under the Internal Revenue Code, the tax credit system might be insufficient to resolve the issue from a cash flow perspective; and, secondly, it might present some tax optimization issues as well. Thirdly, another problem could arise when the royalty or service activity is parallel to certain support services, programming or commercialization activities in the importing country. Generally the use of independent contractors could be problematic and eventually not escape potential tax liability issues, including those emerging from the notion of “engagement in a local trade or business”, in absence of a protective permanent establishment provision per a tax treaty.
Three options to consider, from a tax planning perspective are:
1.     Playing as a local with a Tax Hybrid. Reducing withholding taxation on the overseas service payments by creating a Sociedad de Responsabilidad Limitada (hereinafter referred as “SRL”), which is the equivalent of an LLC (or other eligible entity under the check-the-box regulations). This option is optimal when treaty networking becomes complex, expensive or unviable, as well when the growth is focused or concentrates in a particular country.
The SRL (or eligible entity) will become a tax hybrid, thus a disregarded entity in the US but a legal independent entity in the Latin American country. Accordingly the entity is a blocker and a conduit at the same time. As such, the parent company is protected from tax exposure or any other liability issues locally (particularly relevant when there is related marketing or support activity in the importing country), but from a tax perspective all taxes paid flow-through as direct tax credits, and all expenses as deductions, including as the latter all indirect taxes paid.
The key in this planning technique is that income tax withholdings on local payments for services or royalties are very low (or none), compared to the high rates applicable to cross border payments for the same. Additionally, the withholding tax is applicable over the gross amount paid, whereas the entity is taxed on a net basis. Most jurisdictions in Latin America do not tax dividends when declared after previously taxed profits or earnings, but this is an important issue to look country by country as a pre-condition, because it is necessary to ensure that surpluses flow back without tax implications. Thus, with proper planning, the efficiency and savings are significant.
In countries like Brazil, where strategizing becomes highly relevant not only from an income tax perspective but from a CIDE tax and indirect taxation perspective as well, there are additional options to bring efficiency. Brazilian tax law allows that any legal entity provided that its income is below the BzR$ 2.4 million threshold, to elect taxation under the simplified “presumed profits method”. One alternative to consider is to create one SRL for each contract or revenue stream from royalties or services, to meet the income threshold necessary to meet the presumed profits method election. Accordingly, in a service scenario, the presumed profits are considered to be 32% of gross revenue. With nominal tax rates in the 35%, the effective rate of taxation upon this election becomes 11,2 (compared to a 25% flat withholding rate applicable, including the 10% CIDE tax, when the payments are made directly to a foreign provider or licensor). Finally, any net profits accumulated at the local entity in Brazil can be repatriated as dividends at 0% income tax withholdings. Another advantage of the presumed profits method is that it will significantly simplify local compliance and reporting packages.
2.     Treaty Networking. Avoiding withholding taxation on Service Payments adopting a Tax Treaty Country. Another approach if significant expansion is expected in several Latin American countries is to create an IP holding incorporated or filed on a jurisdiction with a good tax treaty network.
The critical factor is to overcome the limitation of benefit provisions provided under the treaties, as well as giving substance to the IP toolbox or holding. Jurisdictions of choice for Latin America are Spain and the Netherlands.
3.     Transactional Structuring. Another alternative to avoid withholding taxation on royalties and technical assistance is by creating and selling a legal entity. This approach is relevant in a transactional planning scenario. An entity is formed in an offshore low tax and non-blacklisted jurisdiction (preferably with a tax treaty) and capitalized with a contribution in pre-paid royalties and services. Thereafter, the local client, affiliate or partner purchases the stock in the capitalized offshore entity.
A jurisdiction to consider in this planning technique is Barbados, as it is not blacklisted by the OECD and has tax treaties with a number of countries, including the United States.

* Leopoldo J Martinez is the Principal of LMN Consulting LLC. A consulting firm specialized in tax, regulatory and compliance in Latin America, with operations in Washington DC, Dallas, Miami, Caracas, Mexico and Panama.


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.


Panama is rapidly changing its tax policies without loosing its attractiveness.
For several years Panamá has been characterized as a “tax heaven”, thus, blacklisted by many jurisdictions for tax purposes, including the OECD countries. Being a blacklisted jurisdiction pays a price that sometimes out weights the benefits provided by low or none income taxes in such jurisdiction. Many Latin American countries increase income tax withholding rates on payments to blacklisted jurisdictions and impose stringent reporting requirements that include treatment of the entity as a local taxpayer. Outbound tax regulations in the US and other OECD countries do have some negative implications for “blacklisted jurisdictions” in different ways. Finally; the OECD list is used as a reference for many other compliance matters in the financial regulations terrain; and as such, an obstacle to long lasting development policies fostering foreign investment and free trade. In fact, interesting opportunities with the European Union, Chile and the United States have pushed Panama to move out of the “darkness” of being listed as a “tax haven” to enter into free trade and investments agreements. Panamá, a country with a growing population and economic potential, has the ambition of embracing international transparency, promoting policies that will make economic growth sustainable and diverse, yet not giving up its attractiveness for foreign investors, both in the real economy or the financial sector. Consequently, Panama’s new policy has moved to negotiate and execute international tax treaties, while preserving a tax system that raises domestic revenue without loosing international competitiveness, therefore, offering incentives to new projects attracted by its strategic geographical location to serve as a platform to reach into the emerging developing Latin America economy, without becoming a typical “tax haven”.
The government of Panama has introduced a number of changes in tax policy and legislation. One very important development relates to the signing of Tax Treaties with OECD countries. Tax Treaties to prevent double taxation also bring transparency to the table as tax information, transfer pricing requirements come together with measures to relief international taxpayers from the tax implications of doing cross-border business or engaging in international, multijurisdictional operations or investments. In the intergovernmental relation, tax treaties offer enhanced exchange of information to fight against tax evasion, as well as rules to resolve sourcing of income or transfer pricing issues through competent authority procedures if necessary. Treaties have been signed by Panama with Mexico and Spain; concluded negotiations with Barbados, Italy, France, Belgium, The Netherlands, and advancing negotiations with Luxembourg, Singapore, Ireland, Check Republic and Korea. The government expects to have 12 treaties in force by September and October this year. With such target, Panamá could be removed from the OECD low tax jurisdictions list, gaining status and recognition for international transparency and commitment to prevent tax evasion, but at the same time, granting investors and businesses relief from double taxation. The model OECD treaty has been the central piece or point of departure for all negotiations.
However, Panama domestic income tax system remains highly competitive and offers interesting incentives. The maximum nominal income tax rate applicable is 30%. However, capital gains are taxed at lower flat rates of 10 % for real property and 5% for personal property and securities.[1] Distributions made by the SA and SRL to its shareholders are also taxable. A 10% withholding tax would be imposed upon the distribution of dividends by the SRL to the stockholders.[2] Under Panamá Law dividends must be paid out of earnings and profits received and liquidated. Return capital and other non-divided distributions could result from redemptions and liquidation. However, all distributions will be subject to the 10% withholding tax. Retained earning will be subject to a “retained earnings tax” or minimum dividend tax of 10% of 40% of the after tax income. There is an Alternative Minimum Tax of 1.401% of the gross taxable income creditable towards income taxes (thus, the company pays the higher of 30% of net income or 1.4% of gross). Nonetheless, the Panamá income tax system only taxes territorial income, therefore, all income not sourced to Panama under the sourcing rules will escape taxation in Panamá.  Re-invoicing is considered non-territorial income, which includes sales done from Panama of goods that did not enter Panama territory. Accordingly, outbound or extraterritorial income could pass-through a panama entity without major implications in Panama, including for dividend distributions.
On the other hand, Panamá had introduced the “Colon Free Trade Zone” and “Export Processing Zones”, among other tax incentives to trade and investment.. Tax laws provide under this two regimes a set of incentives to export and re-export operations under the Colon Free Trade Zone and the Special Regime applicable to Export Processing Zones.
Located near the northern entrance of the Panama Canal, the Colon Free Zone (CFZ) offers free movement of goods and full exemption from taxation on imports and exports. The CFZ is a major factor in facilitating the supply of goods from large industrialized countries to the consumer markets in Latin America. Firms located in the CFZ are exempt from import duties as well as from guarantees, licensing and other requirements and limitations on imports. There are no taxes on the export of capital or the payment of dividends. Companies operating in the Free Zone must separate their accounting systems for their external operations from their internal operations. External operations are defined as the re-export of merchandise from CFZ warehouses and are exempt from income tax. Internal operations are those in which sales are made from CFZ warehouses to customers located within the customs territory of Panama, including those made to ships and airplanes using canal facilities, and to passengers in transit. Profits arising from internal operations are not subject to any special treatment. In general, commercial or industrial enterprises are required to obtain a license to carry on their activities in Panamá. An annual business and industrial license tax is levied at the rate of 1% on the net worth of the company concerned, which is increased by amounts owed to any parent company or head office located abroad. This license tax may not exceed US$20,000. Companies engaged exclusively in off shore or CFZ are not required to have a license. Companies established in the Colon Free Trade Zone are exempt from the obligation of filing any type of tax return for income derived from “external operations”, which is the re-export of merchandise from Colon Free Trade Zone warehouses.
The Special Incentives for Export Processing Zones (EPZ) are provided pursuant to Law Nº25 of 1992, these are basically private free zones, that allow for import and re-export operations with total exemption from duties. Among the Enterprises that can participate in the EPZ are manufacturing enterprises; assembly enterprises (“maquilas”); finished or semi-elaborated products processing enterprises; services export enterprises; general services enterprises. The main tax incentives for an EPZ are:
• The enterprises, as well as its activities, are exempt from all local direct or indirect taxes, contributions, assessments, rights, and charges. Nevertheless, there is some discussion on whether income tax exemption will be granted to those foreign enterprises whose countries permit the deduction or crediting of taxes paid in Panamá.
• Duty free importation of machinery, equipment, raw materials, tools, accessories, lubricants, and all goods and services required for operation.
• Exemption from license tax.
Recently, the Panamanian government introduced some changes applicable to the Colon Free Trade Zone. Accordingly, a 5% withholding tax applies to dividends paid by enterprises in the Colon free trade Zone, but the companies continue to be free of taxation from extraterritorial operations (i.e. re-exportation operations), export or other categories of exempted income.
One interesting issue emerging from Panama’s crusade to become a treaty partner to OECD countries will be transfer pricing. Panama income tax law has no transfer pricing requirements or regulations. However, most of the model treaties upon which negotiations are based do require in their Article 9 that “Associated Enterprises” do comply with transfer pricing.
Finally, some of the Panama withholding taxes imposed on remittances, services or dividends could be reduced or eliminated by the tax treaties signed, particularly when there is no Permanent Establishment in Panama (i.e. Business, profits, Royalties) or dividends are paid to a fully owned subsidiary or one where the parent company controls more than 75% or 80%.

[1] There is a 5% withholding tax on the gross income of the transaction, which is a final tax unless the gain tax results in a lower tax liability, recoverable through a credit or a refund process in the yearly tax filings of the entity.
[2] This withholding tax will increase to 20% if stock is issued to bearer.

[i] 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 Dallas, Miami, Mexico, Panama and Caracas.

New Foreign Exchange Regulations enacted by the Central Bank of Venezuela

The Central Bank and Minister of Finance of Venezuela enacted the Exchange Agreement #18, giving authority to the Central Bank to issue Resolution #100601. 

The new foreign exchange regulations reestablished, after more than 2 weeks of suspension of the once known as “USD permuta market”, an alternative for foreign exchange transactions outside of the tightly controlled CADIVI system. The new parallel fluctuating USD market (SITME) replaced the once known as “permuta market”, and essentially re-opened the alternative of purchasing and selling USD denominated securities but now only through the banks. Pricing of the bonds should fluctuate within a band or range established by the Central Bank, according to international debt prices. The Central Bank will actively and closely intervene in the market and there is an e-platform for the transactions, giving the Central Bank sufficient indication of supply and demand, as well as the parties participating in each transaction. In practice, the exchange control has moved from a dual to a multiple exchange system, with two controlled pegged rates applicable to certain imports and transactions authorized by CADIVI at 2,60 or 4,40 Bs.F per 1 USD, and a fluctuating rate system administered by the Central Bank through the banks, based on this E-bond” platform using international bond prices as a reference within a band for fluctuation fixed by the BCV. The Central Bank has issued regulations regarding the access to this market. Corporate acquisitions are limited to US$ 50,000 per day per company, and there is a US$ 300,000 per month per company or corporation. Individuals are subject to specific restrictions.

Foreign Exchange companies legally authorized will operate in the market solely for certain foreign currency exchange services such as travelers checks, small remittances, and other individual needs pursuant to the terms of the regulations.

The SITME system is managing total volumes ranging from US$ 30 million per day, with peaks in the range of US$ 50 million. The implicit exchange rate is averaging Bs.F 5,3 per USD and the band for prices of the USD denominated securities traded through SITME are published daily by the Central Bank at: