Investing in the Americas

Fuelled by high digit economic growth over the past few years, a stable political climate and steadily decreasing risk indicators, European investors have set their eyes on the Latin America real estate market.
Within the region Mexico is the front runner with a real estate market that has grown to maturity through US investments. Brasil runs a strong second with significant international interest and high future potential as one of the four so-called BRIC countries.1 Argentina and Chile round out the top echelon. Other Latin American jurisdictions also attract investments but often these are sector-specific; for example, both Costa Rica and the Dominican Republic have been targeted by investors in the leisure industry and have seen some major hotel resort deals as a result.
As with all investments there are some general concepts that apply and that dictate the parameters the investors can play with: how the investors themselves are taxed, regulatory constraints, exchange controls, etc. Our main focus for this article is how to structure the investments in a tax-efficient way. In cross-border situations the impact of international double taxation is mitigated by tax treaties concluded between the relevant jurisdictions. Historically Spain and Portugal have strong ties with the region; hence it is not surprising that Spain has the most extensive treaty network with the Latin American region including the four jurisdictions in our top echelon. Portugal has treaties in place with Mexico and Brasil, has signed a treaty with Chile and is currently negotiating a treaty with Argentina. The Netherlands and Luxembourg, as typical locations for holding companies, also have extensive treaty networks. The Netherlands has tax treaties with Mexico, Brasil and Argentina. Luxembourg has tax treaties with both Mexico and Brasil.

Brasil Based on domestic tax law, Brasil does not levy a withholding tax on dividend distributions. As such, the investor does not require the benefits of a tax treaty to reduce such withholding tax. However, investors into Brasil should be mindful of the Brasilian capital gains taxation that arises upon repatriation of the investment out of Brasil. Unfortunately, none of the tax treaties that Brasil has concluded mitigates such tax, except for the tax treaty with Japan. Considering the Japanese tax system, with corporate income tax rates at 40% and higher, re-routing investments via Japan is unlikely to be a viable option for most European investors. On the other hand, Brasil does offer an attractive tax feature in the form of allowing interest payments on the equity of a Brasilian company to be tax deductible at 34%.3 Such interest payments are subject to a 15% interest withholding tax but are potentially tax exempt at the level of the recipient if such recipient jurisdiction qualifies the income as dividends and it is covered by their participation exemption regime.