Foreign investment in Latin America – opportunities and challenges



Cate Ambrose, president and executive director of the Latin American Private Equity & Venture Capital Association (LAVCA), moderates a discussion on opportunities and challenges for foreign investment in Latin America between Alejandro D. Fiuza, a partner at Brown Rudnick LLP, Jaime Mercado, a partner at Simpson Thacher & Bartlett LLP, and Richard L. Winston, founder of Richard L. Winston P.A.

Ambrose: How would you characterise the economic outlook for Latin America? To what extent do current trends set a favourable platform for foreign investment?

Fiuza: While growth for the remaining of 2014 is expected to be, on average, flat or stable, the outlook for Latin America remains cautiously optimistic for the mid-term and optimistic for the long term. Over the last decade, regional growth has been fuelled by three factors. First, the commodities boom, which generated excess cash arising out of exports and allowed Latin American governments and the private sector to increase consumption and investment. Second, the rise of the middle class in many countries and a growing young population. Finally, a trend of structural reforms in several Latin American countries, along with major infrastructure investments. This growth has not gone unnoticed by foreign investors, particularly private equity and venture capital investors, which have infused the region with substantial amounts of capital. Although commodities prices are not as high as they were in the last decade, the second and third factors mentioned above will continue to be present, subject to the historic volatility in the region. A decline in the demand of some commodities – for example, oil and substitutes – is having an impact on mining and oil production this year. Looking forward to 2015, experts expect that overall growth will look stable in most parts of Latin America with some slowdown in Brazil and Argentina, and less growth in Chile. Countries like Colombia and Peru are expected to continue showing faster growth rates. This expectation continues to attract investors. A study among Latin American private equity and venture capital firms reported by the LAVCA has showed fundraising of $5.5bn and investments of $8.9bn in 2013, and fundraising of $3.5bn and investments for $2.571bn during the first half of 2014.

Mercado: Considering the recent slowdown in the world economy, particularly in Europe and China, coupled with the dependence of many Latin American economies on exports of commodities, the outlook for 2015 is more negative than it has been in recent years. The trends signal smaller gains in GDP growth and more emphasis on internal consumption as a driver of economic growth. For classic private equity investors, these trends could make for attractive asset valuations as owners look for other sources of growth capital and present more balanced valuation multiples. For economies that are investing intelligently in expanding infrastructure, such as Colombia, Mexico and Peru, the appeal of higher yielding instruments for investors should result in greater interest in these investments.

Winston: The economic outlook for most of the Latin American countries remains favourable, but each country presents its own separate opportunities and challenges. Historically, Latin American investment has been disproportionately sensitive to worldwide economic conditions. The opportunity for growth in Latin American continues to outpace those same opportunities found in more mature North American and European markets. Many countries in Latin American have made great advances in monetary controls to prevent hyperinflation from destroying an otherwise favourable investment climate. These same countries continue to enjoy increases in the wealth of their ‘B’ and ‘C’ classes. Unfortunately, the economic conditions in Argentina and Venezuela continue to degrade for investors due to stronger government controls. There is still good money to be earned in these countries in the right industries, but the present levels of instability have created uncertainties for even the most straightforward opportunities.

Ambrose: Could you outline some of the policy initiatives undertaken by governments across Latin America to encourage foreign direct investment (FDI)?

Mercado: Many of the interesting developments in this area involve tax reform and greater recognition that legal reforms are focused on protecting foreign investors. Brazil has historically been at the forefront of developing a tax regime that is geared to attracting FDI, allowing for dividends on invested capital to be paid without tax impact, complemented by a sophisticated legal system of investments through tax-incentivised funds, commonly known as FIPs. In the capital markets, Brazil has made it simpler for foreign investors to open requisite accounts to invest in shares of locally traded companies on the BOVESPA.

Winston: Certain jurisdictions like Peru offer ‘stability agreements’ to investors to guarantee that the government will abide by a specific set of legal rules – for example, stable tax regimes and non-discrimination with respect to local investors – for a fixed period. Other jurisdictions, such as Uruguay, offer tax holidays and tax credits for inbound investors based on the amount of the investment. Various states in the country of Brazil continue to offer tax incentives to stimulate foreign direct investment, such as reduction of State ICMS tax, but the Brazilian Supreme Court is on the verge of declaring most of these state tax incentives unconstitutional – unless the states act on their own to end their infamous ‘war’. Colombia and Costa Rica are well known for favourable ‘call centre’ regimes. Most jurisdictions in Latin America will generally provide a favourable climate and incentives for investments if those investments will generate exports.

Fiuza: Governments play a key active role in FDI in Latin America, and it is crucial for investors to understand that they often wear many hats – as regulators, competitors, creditors, enforcement agencies, and so on. The more strategic the investment is perceived to be by the host State, the greater the influence local governments will have over the success of the investment upon its inception and during its life. Many governments in Latin America have taken specific steps to foster FDI in their respective countries. Most policy initiatives tend to fall into one of four categories. First, customs and tax-related incentives – for example, the recently enacted Uruguay business process outsourcing operations regime, Brazil’s tax amortisation of certain goodwill in the context of acquisitions, or Peru’s or Chile’s stability agreements. Second, governmental credit for export related industries and small and medium size companies. Third, grants for pre-investment assessment and set-up costs and access to government-sponsored research and developments in strategic industries. Finally, local human skills development. Traditionally, governmental initiatives are industry-specific such as IT or technology and strategic industries, development-related such as start-up programs and small and medium-size enterprises, or territorial based comprising regional or local incentives. One of the major challenges for a foreign investor to expand into Latin America is the availability of skilled human resources, but many governments recognise this and are investing heavily to increase and improve the skills base of their population. Governments may provide specific incentives by industry – for instance, technology, manufacturing, oil and mining – or allow the voluntary execution of contracts with the government providing for legal stability and non-discriminatory fiscal conditions, as seen in Chile’s D.L. 600 and Comite de Inversiones Extranjeras (CIE) contract. Needless to say, more significant incentives involve long-term structural reforms. Although generalisations only go so far, with some notable exceptions, these reforms tend to be slower to implement.

The opportunity for growth in Latin American continues to outpace those same opportunities found in more mature North American and European markets.
— Richard L. Winston

Ambrose: What forms of FDI are you seeing in the market? Which types of foreign investors are active, and which sectors are proving popular?

Winston: The sectors of energy and financial services continue to thrive throughout Latin America. As a matter of dollar volume, these sectors dominate and will continue to dominate into the future. We are seeing a much larger growth in renewable energies such as wind power. It is worth taking a moment to discuss the various ways for an investor to enter into a new Latin American jurisdiction. From a distance, an investor can use a local independent contractor or distributor to provide goods and services on behalf of the investor. At the next level, the investor may choose to enter into a joint venture with an experienced local party. Moving further along, the investor may choose to completely acquire a local business to quickly gain market share. At this time, the largest number of deals that we are seeing involve smaller to mid-sized North American or European companies seeking new and underdeveloped markets for their products and services. The lesser experienced companies prefer a ‘joint venture’ model to enter into new markets. This model is often the most difficult to implement and the most difficult to break up in the event of a relationship failure. The more experienced companies choose either a distributor model or a complete entry into a market through an acquisition.

Mercado: Peru and Mexico have adopted highly sophisticated PPP schemes that enable financing of large infrastructure projects that attract significant FDI. In this regard, the Metro de Lima and various gas pipeline projects in both Mexico and Peru have been financed recently by way of securitising future payments due by the government to develop these projects.

Fiuza: We have seen FDI from China, the US and European-based strategic players and from private equity and venture capital funds investing in Latin America. Recent active sectors include agribusiness, telecommunications, biotech, emerging technology, consumer products and energy-related products. Private equity investors continue to be the main sources of FDI in the region, having accounted for almost 40 percent of total FDI in the last two decades per the Economic Commission for Latin America and the Caribbean. Over the same period, the main recipients of FDI in the region continue to be Brazil, Chile, Colombia, Mexico and Argentina. According to the UNCTAD, the primary sector for FDI is services, followed by manufacturing, and then natural resources. More specifically, telecommunications leads in the services sector, and in manufacturing, car parts dominate.

Ambrose: Are you seeing increasing growth in intellectual property and technology concepts in Latin America? What opportunities – and challenges – does this present to foreign investors?

Fiuza: Without a doubt, the concept of intellectual property is gaining traction in Latin America as a region as more and more young entrepreneurs develop technological innovations, and FDI continues to target this sector for investment. Governments have started to understand the strategic value of protecting intellectual property and to consider this in their development agendas. While the territorial enforcement of many intellectual property laws gives rise to many limitations and old cultural and political prejudices are hard to overcome, significant progress has been made. Enforcement of intellectual property rights, while moving in the right direction, is still in the nascent stage in many areas of the region. Piracy and infringement are major concerns, but legislative and executive branch attempts to combat them are slowly and steadily on the rise. Many investors believe that more could be done in terms of education and training in this area. The rise of corporate social responsibility programs in this field reflects this concern. An increasing number of countries from Latin America have joined the Patent Cooperation Treaty – including Brazil, Chile, Colombia, Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama and Peru – and many other countries have enacted domestic legislation in accordance with the General Agreement on Trade in Services (GATS).

Mercado: KKR made its first investment in Latin America into ACECO TI, which closed earlier this year, and Silver Lake made its first ever Latin American investment into Locaweb, a web design and development company. The opportunities for sophisticated investors are meaningful. IP and technology growth is expected to be a major area of development for Latin America and should present interesting investment opportunities. The challenges principally relate to a rather primitive system for the protection of intellectual property rights that is made more complicated by a lack of enforcement mechanisms such as specialised courts and tribunals, which make it difficult to protect an investment. On the technology end, the lack of latest generation IT infrastructure and of highly qualified technicians, including engineers, presents challenges for certain investors who may be seeking opportunities in IT development.

Winston: The proliferation of the internet has accelerated the development of new technologies in Latin America. The advancement of new ‘B2C’ technologies has provided much greater efficiencies in the speed and quality of services rendered both inside a Latin American country, and from abroad into a Latin American country. The main problem is that the rules and laws in most Latin American countries are not set up to handle the internet delivery of goods and services. For example, the rules in Brazil that govern the importation of new technologies were created in the late 1960s, and there have been few fundamental changes to these rules since this time. A foreign investor that tries to import new technologies into Brazil will quickly learn that a Brazilian subsidiary is not allowed to pay royalties for technology in excess of 1-5 percent of the Brazilian earnings from that technology. Most high technology businesses operate on margins that exceed 15-30 percent. The delivery of internet services is also highly difficult to regulate because those services are generally rendered through an electronic beam from thousands of miles away. Only recently has it been possible for student in a Latin American country to obtain specialised training solely through an internet classroom taking place on another continent. Certain Latin American countries are taking drastic measures to completely shut down or block certain internet segments that do not comply with local policies and moral values. Other countries are just starting to discover new ways to tax transactions that are conducted solely over the internet and paid for with an international credit card.

Ambrose: What legal and political conditions do investors prefer when making investments in Latin America?

Mercado: The legal framework is simple to analyse: investors are looking for meaningful returns on their investments in an environment where the legal norms are predictable, the resolution of any dispute is reasonably streamlined, and the return on and of capital is not subject to the vagaries of changing political fortunes. On the political end, the analysis is, of late, a bit more complicated. The perception of certain economies turning too far in one direction or the other will complicate an investor’s perception of the investment. Investors are generally less concerned about making outsized returns than they are about having certainty at the moment they make their investment that the return will not be adversely affected by a political turn. In recent years, the perception regarding several Latin American economies is that they have turned away from a market friendly view.

Winston: Investors generally seek to invest in jurisdictions where they can properly identify and mitigate risk to an acceptable and quantifiable level. The largest mistake that an investor into Latin America can make is to assume that the fundamental rules of business engagement are similar to their own home-country rules. For example, when the typical American investor experiences obstacles when dealing with a local American government administrator, the investor will demand relief by attempting to appeal to a higher power. In most Latin American countries, such an appeal will tend to offend the local officials, and the investor will learn the ‘hard way’ how much power the local official can actually wield to interrupt the investor’s future goals. Risk mitigation starts with the confirmation that the local jurisdiction follows general ‘rule of law’ principles. An ‘investment’ is not safe if a jurisdiction can change the ‘rules of the game’ on a daily basis with no regard for the safety and certainty of the local investment. Corporate investors will always prefer local policies that guarantee stability and security rather than protectionism and territorialism. The American saying that ‘all politics is local’ equally applies in Latin America. Local officials are always looking to take credit for new investments, and their ability to stay in political office often depends on their track record in stimulating FDI. One should take note that a $50m investment in a Latin American country means many times more to a local government official than it would mean to the average North American or European government official.

Fiuza: Recently, a long-time investor in Latin America noted that the single most important decision that a board needs to make, beyond the analysis of the opportunity itself, is whether to do business in any specific geography. This is true for anywhere in the world, including in Latin America. As with any emerging market, investors prefer stability first and foremost in the economy, the political situation, the institutional structures and the application of the rule of law. Country stability provides a higher degree of predictability in cash flows, which is key in any investor valuation decision. Of course, there will always be investors who are willing to take on additional risk by entering into markets where these characteristics are less stable in exchange for high yields. Many of these investors are opportunistic, and some need to be. While there are many motivations for making an investment, if the only scenario in which an investor can make a return on the investment involves a short-term exit, the only investors a country will attract are those who can bear the higher risk and likelihood of failure. These investors usually expect higher compensation and shorter holding periods. Unsurprisingly, governments do not favour this type of speculative investment, and they tend to heavily regulate them. However, many economists argue that if governments are indeed interested in long-term FDI, they should consider making structural changes to render long-term investment conditions attractive enough for such investors to invest and remain. In legalese, this is translated, at the very least, as predictability and legal certainty, and in public policy terms, as stable State policies.

Investors are generally less concerned about making outsized returns than they are about having certainty at the moment they make their investment that the return will not be adversely affected by a political turn.
— Jaime Mercado

Ambrose: What impact can financial services regulation, such as rules covering payments and currency, have on businesses operating in Latin America?

Winston: I typically divide Latin American countries into three groupings on currency issues. In the first grouping, I include countries like Mexico and Uruguay, where there are few currency regulations, and investors enjoy fluid movements of currency. Most investors into these countries worry mainly about unexpected fluctuations in currency values and normal exchange gains and losses. The second grouping of countries includes Brazil and Colombia. These countries regulate the movements of currency through either central bank controls or exchange markets. For example, Brazil imposes a currency exchange tax on inbound and outbound flows of funds – a so-called ‘IOF tax’. At certain times in recent years, this IOF tax has been material with respect to certain kinds of investments. Brazil often uses its currency exchange policy to regulate both inflationary pressure and export/import balances. Brazil’s currency rules also serve an important purpose of guarding against tax avoidance as funds enter and leave the country. Investors into Brazil or Colombia always need to watch out for new currency rules that could affect their investments, but currency regulations will rarely create an insurmountable obstacle for an investment. The final grouping of countries, which includes Venezuela and Argentina, present large currency risks for investors who are not deeply familiar with local techniques for repatriating capital. Several large companies have ceased doing business in both countries based solely on their inability to convert local currencies into US dollars without the need for sophisticated and risky instruments. Until more recently, it was a crime in Venezuela to trade currency through the parallel currency markets. Even with the promised establishment in Venezuela of more fluid currency exchange vehicles, most investors are quite sceptical that they will ever be able to properly repatriate the excessive amounts of local currency that they maintain on their Venezuelan books. Currency devaluations are also the expected norm in Venezuela rather than the exception. Over the last year, Argentina has adopted new currency regulations that more closely resemble the rules found in Venezuela.

Fiuza: In short, the impact can be quite significant, particularly if regulations are not stable, clear or the controls are not based upon the rule of law. Financial services regulation has a significant impact over businesses operating in Latin America. While business and consumers tend to rely less on credit than in the US and Europe, stable government financial controls are critical for maintaining the predictability of cash flows. Controls over so-called speculative flows range from registration and approval requirements, higher taxation, maintenance periods and to mandatory uncompensated reserves for certain flows. Regulations may require the conversion of foreign payments into local currency for current account purposes or provide for multiple exchange rates – legally or de facto – giving rise to arbitrage opportunities. Currency controls have been historically imposed for balance of payment or current account purposes by Central Banks in many Latin American countries, yet many strategic investors have been doing business in these markets for decades. While these types of controls tend to increase FDI entry transactional costs, sudden regulatory changes become even more costly by adversely affecting budget, P&L planning cycles and ultimately capital expenditures and investment cycles. Indirectly, currency controls might even affect valuations as they may seriously limit investors’ expectation to receive returns on their investments. Paradoxically, sudden changes also create opportunities for speculative investors. Some newer controls, such as those based on anti-money laundering and anti-terrorism policies are certainly welcome by the investment community, if not enforced asymmetrically. Examples of payment and currency controls are found in Argentina and Venezuela. Most countries, including Argentina, Brazil and Colombia, require registration of FDI flows with the Central Bank or with a special Commission, as in Mexico for the businesses that remain within the scope of the Ley de Inversiones Extranjeras after the amendment dated 11 August 2014.

Mercado: Financial services regulation has a very meaningful impact. Jurisdictions such as Argentina and Venezuela – and, to a much lesser extent, Brazil – have such complex and unpredictable regulatory environment that investments are all but unviable. In Brazil, the regulatory environment has the effect – usually intended – of suppressing FDI.

Ambrose: What are some of the key risks that foreign investors need to consider when deploying capital in Latin America? What practical issues exist? In your experience, what steps can they take to mitigate these risks?

Fiuza: Foreign investors who invest in Latin America, as in any emerging market, face many cultural and business challenges. They need to quickly come to grips with the reality of different risks and rewards. Not all investors are in a position – or frankly, have the willingness and time – to deal with these challenges. From a purely legal perspective, investors need to navigate waters regarding complex tax and foreign investment laws, active governments and bureaucracies, political and economic volatility or instability, currency risks, changes of laws and their enforcement, the potential of unlevelled playing fields, employee retention, different labour and employment standards and practices, lack of transparent, compliant and good quality information, compliance risks, and, in many instances, the challenge of ‘Babushka dolls’ of asymmetrical information games played during the negotiation. The seasoned investor in Latin America is patient and fully understands that these risks do not work in the same manner in all jurisdictions and at times, not even in the same manner at all times in any given country. This investor also understands that relationships help to more effectively deal with many of these challenges. However, these risks are not uncompensated risks. The good news is that most of these risks, if properly identified and assessed, may be mitigated through due diligence and adequate structuring. There are several legal tools and structures to mitigate risks. However, the bottom line still is that investors need to conduct extensive due diligence and fully understand what they are investing in.

Winston: First, local corruption presents one of the largest risks for any foreign investor deploying capital into Latin America. While the US Foreign Corrupt Practices Act and the UK Anti-Bribery Act have brought great attention to the problem, most Latin American countries are still many years away from eliminating it. From an internal corporate perspective, corruption can be addressed only through a deep personal understanding of the critical revenue generating aspects of the business. Corruption will always follow the money. The Brazilians have a well-known expression, ‘para ingles ver’ which means ‘for the English to see’. While an investor may believe that established and detailed anti-corruption policies will take care of the problem, such written policies may serve only to further conceal an actual problem. I regularly hear American and British companies questioning how they can run a competitive business when their competition from other countries is able to regularly engage in corrupt practices to outmatch them. The answer is not to engage in a ‘race to the bottom’. Second, every investor in Latin America must understand that the rules in most countries change quickly. A single political election, for example, can divert the focus of a country from pro-investment to pro-protectionism. Moreover, Latin American countries continue to struggle to collect revenues, and the most compliant – and vulnerable – taxpayers are usually the foreigners. Practically speaking, the best advice for a new investor is to move slowly and test the waters before making a material investment. Many large multinational investors have learned a difficult and costly lesson by making large investments without truly understanding the risks. It is quite common to see in-house legal counsel devoting more than 25-35 percent of the legal resources of a company to Latin American investment issues worth less than 10 percent of the company’s investment portfolio. For most countries in Latin America, we recommend that clients consider using corporate structures that incorporate Bilateral Investment Treaties (BITs) to protect against expropriation or unfair treatment vis-à-vis local investors. BITs generally provide investors with the rights to litigate claims through arbitration in world tribunals, such as ICSID, in the event that a local jurisdiction violates the terms of the BIT. Many countries, such as Venezuela and Bolivia, have denounced existing BITs. Other countries, such as Brazil, have never established a strong BIT network with North American or European countries. Finally, all investors need to consider local ‘labour’ issues. In most jurisdictions, firing an employee ‘without cause’ generally means paying the employee a severance package worth two times the employee’s annual compensation.

Mercado: The principal risk is capital preservation. A poorly designed investment that does not take full account of multijurisdictional tax implications can present rather meaningful obstacles to any investment. In this regard, tax treaties among jurisdictions should be fully vetted by local counsel through tax analysis. On recent transactions, we have seen how tax effects can impact investors, including thin capitalisation rules that have required the modification of financing structures to mitigate or eliminate the impact of these rules on deductibility of interest payments on incurred debt for tax purposes.

Ambrose: What general advice can you offer to foreign investors on sourcing, structuring, negotiating and financing Latin American deals in the current market?

Mercado: When sourcing, focus on the traditional players who are plugged into the transactional environment in each jurisdiction: financial advisers, investment banks with local presence or expertise, and, more frequently in recent years, legal advisers who have longstanding relationships with owners. These are always the best sources of information for deals. On structuring and financing transactions, the best advice is to coordinate with local advisers on corporate and tax matters in particular and to address with the financing sources in advance the myriad issues that arise during cross-border transactions, especially in complicated collateralised and future flows transactions.

Winston: I would advise foreign investors to establish as much ‘local’ intelligence as possible before engaging in a new transaction. In most Latin American countries, much is done by practice and knowledge rather than by a strong understanding of the law. That said, I would also advise new investors not to follow the masses in all cases. We often find clients thinking that they are using safer business practices because their lead competitors use the same practices. Common sense should prevail, and when a particular business practice is presented that does not make sense, it is important to question the practice. Investors should realise that many local Latin American companies are often very quick to promise knowledge and experience that they do not really have. Many operate by ‘trial and error’. Unfortunately, North American and European businesses do not always have the tolerance or luxury to get caught up in the ‘error’ side. Most structuring decisions should be made before new capital is invested. In practice, however, structuring decisions are too often put off until the last minute. It is generally very easy to deploy capital into a country, but the ability to efficiently remove the capital under changing economic conditions is often dependent on good initial structuring choices. Tax considerations often dominate the discussions for structuring, as ‘taxation’ usually represents more than one-third of the costs of doing business. European holding companies and Delaware limited liability companies are commonly used as the most efficient platforms for a new Latin American investment. Once the vehicle for investment is selected, the next most important decision is usually whether the investment will be made with debt or equity, or a balanced combination. In more recent years, many of the Latin American countries have placed restrictions on the amount of tax deductible debt that may be inserted into a local subsidiary – for example, a 2:1 debt equity ratio.

Fiuza: Deals may be sourced from investment banks, M&A firms and gatekeepers. Local chambers of commerce may be, to a lesser extent, good sources of information. As anywhere else, the key in any acquisition or investment is the ability to distinguish an opportunity from a lemon. Once a potential foreign investor finds the right opportunity, the first step to take is to find a good team of lawyers, tax and labour specialists and auditors – and be prepared to leave no stone unturned. Unlike in the US or Europe, where market information is more readily available and the reliance on public sources is taken for granted, the risk of not knowing all of the facts is much higher, particularly where the target is a private company. While not all foreign investors have the same risk aversion, targets are not of the same size, and not all local sellers and managers share the same business values, an issue that surfaces more often than not is that foreign investors expect to pay a price calculated on the basis of revenues that can be demonstrated. While this sounds simple enough, it is not in practice – for instance, if different accounting principles apply. Practitioners have developed many alternatives, including price formulas, and proper funding structures to solve this challenge. Again, more internationally-minded sophisticated sellers and companies understand this and make adequate changes well in advance of receiving any foreign investment, but this does not mean that a careful review of those changes is not needed. The next step is structuring and the advice here is to fully understand the tax implications of the contemplated transaction – not only of the transaction itself but also the impact that the investors’ own policies will have on the future day-to-day operations of the business. Some tax laws in Latin America make the US Internal Revenue Code look simple. In most Latin American countries, a single tax misstep can trigger significant liability and the ability to settle tax litigation claims is limited. Because of this complexity, tax claims are not unusual and some local firms see taxation as another finance opportunity. This is a risk that many FDI investors are not willing to take and, in turn, this impacts their decisions relating to future working capital of the business.

In most Latin American countries, a single tax misstep can trigger significant liability and the ability to settle tax litigation claims is limited.
— Alejandro D. Fiuza

Ambrose: In what ways might tax treaty provisions impact the way a foreign investor approaches a potential investment?

Winston: Tax treaties are intended, in theory, to mitigate the possibility of double taxation when an investor makes a particular investment in a treaty country. In practice, however, tax treaties are often used by investors to reduce worldwide tax rates below the level of single taxation. For example, an American company – or a ‘tax haven’ company – investing in Argentina may insert an intermediary Dutch holding company into the investment structure to qualify for Dutch tax treaty benefits that may not otherwise be available to the American investor. The American company would then capitalise the Dutch company so the Dutch company could make an interest-bearing loan to the Argentine corporation. When the Argentine corporation pays interest on the loan to the Dutch company, the interest payment should be deductible against the normal 35 percent Argentine corporate income tax. At the same time, the normal 35 percent Argentine interest withholding tax rate would be reduced to 12 percent. The interest payment can also be structured to pass through the Netherlands, to the American company, with minimal Dutch taxation. The net effect of the structure is that the American investor creates a 35 percent in Argentina tax deduction in exchange for only a 12 percent tax inclusion – a very good deal. Latin American countries are now starting to aggressively question the use of intermediary holding companies that lack substance. It is often possible to combine ‘tax treaty’ planning with ‘bilateral investment treaty’ planning to create highly efficient inbound structures.

Mercado: Tax treaty provisions can have a meaningful impact on investments. For private equity, the tax impact of an investment is critical to a determination of whether an investment is viable. Tax treaties allow, in certain circumstances, for a netting of tax effects on investments that make an opportunity more or less attractive. With Mexico, for instance, a tax treaty with the US allows for offsetting taxes paid in one jurisdiction against taxes due in the other. This has a positive impact on the viability of an investment.

Fiuza: Generally speaking, tax treaty provisions, if available during the structuring stage, may help provide tax efficiencies to an operation by capping the withholding tax rates applicable to income or some flows of capital, such as services, interest and royalties. The availability of these provisions is subject to limitations arising from anti-avoidance and other rules aimed at reducing the perceived abuse of bilateral tax treaties arising from ‘tax arbitrage’ practices. This is not surprising in an environment where governments are striving to improve fiscal revenues. Because of the foregoing, in the last decade, countries like Argentina decided to terminate and renegotiate tax treaties with Spain, Switzerland and Chile. Other countries followed the path of enacting special interpretative statues or regulations. This trend is not limited to Latin American governments, but to other countries such as the United States with the recent enactment of the anti-inversion rules or the European Commission’s push regarding Ireland and other countries. Nevertheless, double taxation treaties with the home jurisdiction of the foreign investor remain an important consideration for structuring transactions.

Ambrose: Could you outline the rules and regulations that surround the repatriation of proceeds arising from investments in Latin America?

Fiuza: This is one of the most complex areas of FDI regulation both internationally and domestically. In some Latin American countries, violation of these FDI-related laws could give rise to criminal liability for the investor and its directors. These controls are usually imposed by Central Banks because of balance of payment or current account concerns, or more recently, to pursue protectionist policies. In general, country policies regarding the repatriation of proceeds may be grouped as follows: The first group of countries provides for some form of capital and dividend repatriation requirements. For example, such countries may require registration or approval of the FDI, contain some of form of capital permanency to avoid speculative flows of capital, or conditions the repatriation of capital proceeds to proper registration, or taxes the earlier exit. Some restrictions are sometimes set forth by statue, rules or regulations, or in some cases are set by oral or written orders. In countries like Argentina, Central Bank repatriation rules should be analysed in conjunction with other balance of payment restrictions, such as the effective ability to access the market to purchase foreign currency and the operation and approval process of the so-called DJAIs and DJAS – sworn statements for imports and services, respectively. The second group has no rules regarding repatriation beyond anti-money laundering controls and antiterrorism. The Central Bank of Argentina recently released a regulation concerning the repatriation of any FDI dated 28 October 2011 or later. To repatriate such FDI, there must be evidence that it was made through the Official Foreign Exchange Currency Market, that it remained in the country for at least 365 days, and that the beneficiary resides or is incorporated in a jurisdiction that is considered by Argentina as cooperating for tax transparency purposes – cooperadores a los fines de la transparencia fiscal – among other requirements.

Mercado: Other than with respect to Venezuela and Argentina, repatriation of investment proceeds is generally permitted throughout Latin American jurisdictions, usually subject only – in certain jurisdictions – to payment of taxes on dividends. There are many different procedures in place from one jurisdiction to the next.

Winston: The rules that govern the repatriation of investment proceeds differ from country to country. Historically, Venezuela has presented the greatest challenges, as the government has limited the government conversion of Venezuelan Bolivars to US dollars to certain ‘high priority’ businesses, such as essential foods and medicines. We have seen several major airlines – once considered a high priority business – recently suspend their service to Venezuela with the realisation that they will never be able to convert or repatriate their local currency – except on very unfavourable terms. Within the last couple of years, both Argentina and Mexico have implemented a new 10 percent withholding tax on outbound dividends paid from local companies. Brazil maintains a highly regulated but flexible system for the repatriation of investment proceeds. The regulation of currency conversion by the Brazilian Central Bank provides the government with a reasonable opportunity to ensure that source of the funds to be repatriated is legitimate and that all taxes have been properly collected.

Ambrose: Finally, what are your thoughts on the growth of Latin American companies pursuing outbound investment into other countries, and the regulations governing these strategies?

Winston: Traditionally, outbound investment from Latin America was reserved to only the largest companies, usually those in the energy and natural resources areas. With the growth of new technologies, we are seeing a much greater level of outbound investment than ever before. Latin American countries have been slow to establish comprehensive regulatory schemes for outbound investment. Several countries in Latin America have taken a distinct interest in trying to tax the offshore earnings of their home country investors. These offshore investors have complained that the taxation of their offshore earnings place them at a competitive disadvantage to their peers from other jurisdictions that do not have such policies. The various countries within Latin America have an extensive network of trade agreements through ALADI and Mercosur. These treaties offer the reduction or elimination of tariffs on cross-border trade. It is no longer unusual to see an investor make a large-scale investment in one Latin American country primarily to access customers in other Latin American countries.

Mercado: Over the past decade or longer, there have been many Latin American-based companies that have pursued investments into other jurisdictions. Notable among these are recent investments by Colombian companies into Central American and Caribbean companies – principally financial services and mining – and the historical investments by Brazilian construction, mining and financial services companies throughout the region. Companies such as Brazilian steel manufacturer Gerdau, Peruvian mining company Hochschild Mining, and Chilean financial services conglomerate CorpBanca have been active on both the sale and purchase side. Investments by these institutions outside of their home jurisdictions typically are not subject to any particular regulation, other than the usual antitrust filings and approvals.

Fiuza: Investments by ‘multi-Latinas’ in other Latin American economies is increasing in importance and visibility, as is the role played by Latin American investors, whether families or companies, who are investing outside of the region. This latter development started many years ago – for example, in the energy sector, YPF investments in the US and PDVSA investment in CITGO. However, it has accelerated over the years as a result of several high profile deals, such as the acquisition of consumer products firms including Heinz and Burger King by 3G Capital, telecommunications and banking investments. According to the Office of the United States Trade Representative, Mexican FDI in the United States was $14.9bn in 2012, up 14 percent from 2011. Mexican direct investment in the US was led by the manufacturing, banking and wholesale trade sectors. We expect this phenomenon to continue as Latin American firms continue to grow with the increasing globalisation.


Cate Ambrose is president and executive director of the Latin American Private Equity & Venture Capital Association (LAVCA). She speaks and writes regularly on a range of topics related to public policy and private investment in Latin America, and is a regular commentator on CNN En Español and a guest lecturer at The Wharton School. Cate is also a member of the Bretton Woods Committee, a nonpartisan network of prominent global citizens, which works to demonstrate the value of international economic cooperation, and a special advisor to the board of AMEXCAP, the Mexican Private Equity and Venture Capital Association. She can be contacted by email:

Jaime Mercado is a partner in Simpson Thacher & Bartlett LLP’s Corporate Department who focuses on cross-border corporate finance and business transactions for both the public and private sectors in Latin America. Mr Mercado represents public and private entities, and financial institutions on debt and equity, project finance, mergers and acquisitions, private equity investment and related transactions throughout the Americas. He also advises Latin American sovereign and quasi-sovereign entities on a variety of assignments, including capital raising and liability management transactions. He is a co-chair of the firm’s Diversity Committee. He can be contacted on +1 (212) 455 3066 or by email:

Richard Winston structures and analyses complex cross-border transactions that involve Latin America and Europe. He focuses primarily on international tax planning while also considering a wide range of corporate and customs/trade issues. Mr Winston represents both US and non-US multinational corporations. His clients include Global 500 companies, large corporations, investment funds, venture capital companies and government agencies. He favours the implementation of tax efficient structures that allow his clients lawfully direct their cash flows to tax-favoured jurisdictions, often with the assistance of worldwide tax treaty networks. He can be contacted on +1 (305) 668 5395 or by email:

Alejandro D. Fiuza is a partner at Brown Rudnick LLP’s Boston and New York offices. He has over 24 years of experience in assisting clients in cross-border transactional work, with a special emphasis in Latin America. His practice involves corporate, M&A, private equity and venture capital transactions, corporate restructurings, cross-border bankruptcy and insolvency, corporate finance, antitrust and international trade. He represents multinationals, funds, investors and global entrepreneurs, in an array of transactions and matters. Mr Fiuza has written articles on his areas of practice and regularly gives presentations. He can be contacted on +1 (617) 856 8393 or by email:

© Financier Worldwide



Cate Ambrose

Latin American Private Equity & Venture Capital Association (LAVCA)




Alejandro D. Fiuza

Brown Rudnick LLP


Jaime Mercado

Simpson Thacher & Bartlett LLP


Richard L. Winston

Richard L. Winston P.A.

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