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

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Page 1: Private Equity Investments in Brazil KPMG’s Private Equity practice Brazil March 2011

Private Equity Investments in Brazil

KPMG’s Private Equity practice Brazil

March 2011

Page 2: 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

[email protected]

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.

Page 3: Private Equity Investments in Brazil KPMG’s Private Equity practice Brazil March 2011

Country overview

Page 4: 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.

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

Page 5: 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.

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%

Page 6: 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.

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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Page 7: Private Equity Investments in Brazil KPMG’s Private Equity practice Brazil March 2011

How to structure your investment in Brazil?

Page 8: 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.

8

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

Page 9: 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.

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

Page 10: 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.

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

Page 11: 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.

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

Page 12: 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.

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

Page 13: 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.

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)

?

?

?

Page 14: 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.

14

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

Page 15: 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.

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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

Page 16: Private Equity Investments in Brazil KPMG’s Private Equity practice Brazil March 2011

Additional Comments

Page 17: 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.

•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

Page 18: 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.

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.

Page 19: 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.

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.