private equity investments in brazil kpmg’s private equity practice brazil march 2011
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Private Equity Investments in Brazil
KPMG’s Private Equity practice Brazil
March 2011
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
With you today
Contact details:
T: +55 21 3515 9469
Roberto HaddadTax Partner at KPMG
Rio de Janeiro
Roberto is the lead international and M&A tax partner in the Rio de Janeiro office and the National tax lead partner for the Private Equity/ Energy and Oil & Gas areas.
Country overview
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Country overviewThe facts you should know
The seventh largest economy in the world Currency fluctuations and inflation have been under control for more than 10
years Strong financial and capital market systems Brazil became investment grade by Standard & Poor’s, Fitch Ratings and
Moody’s Highly developed Industrial Park A stronger middle class is rapidly forming in Brazil avid to consume Brazil’s economy is riding the worldwide boom in raw material/commodities Significant new offshore oil discoveries (including deep water drilling - pre-
salt) Local alternative energy technology (ethanol-based and others) Brazil will host the FIFA World Cup in 2014 and the Olympic Games in 2016
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Country overviewMain taxes in Brazil
Income Tax 25% Import Tax Variable
Social Contribution9% or
15% WHT15% or
25%
PIS and COFINS9.25% or
3.65% CIDE 10%
IPI (Federal VAT) Variable IOF taxVariable (0.38%, 2%-6%)
ICMS (State VAT) Variable ISS (Municipal tax) 2 to 5%
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Country overviewThe facts you should know
Brazil is not an OECD-member
Brazil has an extensive treaty network but no treaty with the UK, US,
Germany and Switzerland
Brazilian TP rules are not OECD-based
Brazil has recently introduced thin-cap rules
All reporting and invoices moving to electronic/online (SPED, e-invoice)
No tax consolidation available
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How to structure your investment in Brazil?
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Investor
Premium
Downstream merger
Holding B
Holding C
Opco
Offshore sale
Premium opportunity when including a vehicle owned by the non resident investor to acquire target (genuine business purpose)
Investment route through Law 4,131
IOF tax (0.38%)
Tax treaties
Tax havens
Dividends
Interest on net equity
Capital gains
Main drivers
Abroad
Brazil
How to structure your investment in Brazil?Holding structure
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
How to structure your investment in Brazil?FIP structure
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No taxation at fund level (flow-through entity)
Income and capital gains received by the FIP are usually not subject to WHT in Brazil
No WHT on disposal or amortization of FIP quotas for non-residents that hold up to 40% of interest and that are not located in a low tax jurisdiction
Premium opportunity when including a vehicle owned by the FIP to acquire Target
Investment route through Resolution 2,689
IOF tax (2% on the inflow of funds and 0% on capital repatriation)
Tax efficient vehicle
A B C
FIP
Target Co.
Just corporations (S/A)
Abroad
BrazilShares and
dividends must not exceed 40%
limit
Investors InvestorsInvestors
Holding
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Main Drivers
How to structure your investment in Brazil?Target – what to acquire?
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Avoid indirect taxes
Tax and labor responsibility on past contingencies
Possibility to utilize NOLs
Model usually suggested by sellers
Possibility to utilize tax-deductible amortization of Premium (PPA necessary)
Indirect taxes
Inherited liabilities may result, if assets purchased be defined as commercial, industrial or professional establishment
Main tax attributes not transferred to buyer
Depreciation of acquired assets
More complex from commercial, regulatory and legal standpoint
Assets Shares
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
How to structure your investment in Brazil?Capital repatriation
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Dividends Interest on loan
Interest on net equity
Interest deduction for Corporate Income Tax in Brazil (subject to thin cap rules)
WHT of 15% on interest (25% to tax haven)
No WHT on dividends IOF zero-rated No tax deduction in Brazil Trapped cash – no repatriation until
sufficient earnings to pay dividends
Interest deduction for Corporate Income Tax in Brazil
IOF zero-rated WHT of 15% on interest (25% to tax
haven) Trapped cash / Limitation: 50% of
current profits/ Profits reserve
± Treatment on beneficiary country
Brazilian Fund (“FIP”) Disposal of Brazilian company: No WHT Disposal of FIP: No WHT (40% of minimum shares/
dividends)
Non resident Investor Disposal of a Brazilian company: 15% of WHT (25%
when paid to tax haven)
Brazilian Holding Disposal of Brazilian company: 34% of CIT
Exit
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
How to structure your investment in Brazil? Low-tax jurisdictions & Privileged tax regimes
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Low-tax jurisdictions
Andorra United Arab Emirates Panama
Anguilla French Polynesia Pitcairn Island
Ascension Island Gibraltar American Samoa
Antigua and Barbuda Granada Samoa
Netherlands Antilles Hong Kong San Marino
Aruba Kiribati Islands of St. Helen
Bahamas Labuan St. Kitts and Nevis
Bahrain Lebanon St. Lucia Island
Barbados Liberia St. Pierre and Miquelon Island
Belize Liechtenstein St. Vincent and the Grenadines
Bermuda Macau Seychelles
Brunei Madeira Solomon Islands
Campione d’Italia The Maldives Swaziland
Channel Islands Isle of Man Oman
Cayman Islands Marshall Islands Queshm Island
Cyprus Mauritius Tonga
Singapure Monaco Turks and Caicos Islands
Cook Islands Montserrat Vanuatu
Costa Rica Nauru American Virgin Islands
Djibouti Niue Island British Virgin Islands
Dominica Norfalk Island
Privileged tax regimes
Holding companies in Luxembourg and Denmark
“Sociedad Anonima Financiera de Inversion (Safis)” in Uruguai
International Trading Companies (ICTs) in Iceland
Offshore KFTs in Hungary
State Limited Liability Companies (LLCs) in the US
“Entidad de Tenencia de Valores Extranjeros” (ETVEs) in Spain*
International Holding Company (IHC) in Malta
Holding companies in The Netherlands*
* Effects suspended
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
How to structure your investment in Brazil? Low-tax jurisdictions & Privileged tax regimes
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Higher WHT rate / Stronger rules
Type of transaction Low-tax jurisdiction Privileged tax regime
• Capital gain on disposal of investments (Route 4,131)• Royalties• Interest• Interest on equity
• Transfer pricing• Thin capitalization
• FIP
• Capital gain on investment on Brazilian Financial and Stock markets (Res. 2,689)
?
?
?
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Premium
DebtDownstream
Merger
Holding A
Holding B
Opco
Interest
INE
Thin Capitalization rules: debt/ equity ratio of 2:1, or reduced to only 30% if the lender is located in a tax haven or under a privileged tax regime
Foreign exchange gains or losses impact
Interests payments are subject to withholding income tax (WHT) at the rate of 15% (25% in case of tax havens)
Interest deductible for Corporate taxes (if related to company’s activities)
Guarantee of foreign currency parameter
IOF of 0% on inflow of loan (5.38% if less than 90 days)
Debt pushdown: inherent risk
Debt + Premium structure = Negative Net equity / NOLs?
Debt
Abroad
Brazil
How to structure your investment in Brazil? Funding through debt
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Premium
Downstream
Merger
Holding A
Holding B
Opco
INE
DividendsAbroad
Brazil
No impact from exchange variations / no foreign currency parameter
Increases capability to pay Interest on net equity
Presents a more wealthy financial situation
Capital reduction – more complex (only if there is capital in excess or to absorb retained losses; and need of 60 to 90 days to be implemented)
IOF of 0.38% on inflow of capital
Equity
How to structure your investment in Brazil? Funding through equity
Additional Comments
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
•Debate on anti-avoidance regulations
•Substance over form precedents
•Business reason requirement
•5-6 years statute of limitations
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Additional commentsTax planning
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Additional commentsSpecial tax incentives
Some tax incentives available:
For specific geographical locations – in the north and northeast of Brazil, a reduction of 75 per cent in corporate income tax may be allowed
For strategic industrial sectors - ethanol, semiconductor devices, oil & gas, etc
Local R&D investments
Investments in infrastructure projects (Provisional Measure 517/2010)In general lines, income paid by special purpose entities (incorporated to implement infrastructure projects), arising from debentures previously issued, is exempt from withholding income tax when paid to Brazilian individuals. When the income is paid to Brazilian entities, the tax is reduced to 15 percent.
Non-residents may benefit from a zero-rated withholding income tax on income received from investment funds, which have at least 85 per cent of their equity invested in debentures issued by entities involved in infrastructure projects (not applicable for investors located in low tax jurisdictions)
REIDICreated to stimulate investment in infrastructure. REIDI grants a suspension of the PIS and Cofins (social contributions) for entities involved in infrastructure projects in the following sectors: transportation, ports, energy, sanitation, irrigation and for construction of ducts.
© 2011 KPMG Assessores Tributários, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The disclosure of this document to third parties is forbidden.