Repatriation of Profits to Latin America: Who Needs Treaties!

If you’re not a U.S. taxpayer and you don’t do business in the U.S., you’ll only be taxed on certain types of income from the U.S., like dividends. Unless there’s a tax treaty to lower the tax rate, you’ll usually have to pay a 30 percent tax on U.S. dividends. Most Latin American countries don’t have tax treaties with the U.S., so the 30 percent tax usually applies.

But there are ways for U.S. companies to bring profits back to Latin America without paying a lot of tax, even without a tax treaty. In general, non-U.S. taxpayers are only taxed on certain types of income from the U.S., like dividends, and on income from doing business in the U.S. If you’re not a U.S. taxpayer and you want to pay lower taxes on income from the U.S., you need to be a resident of a country that has an income tax treaty with the U.S. You also have to meet certain conditions in the treaty, like the “limitation on benefits” provision. This provision ensures that only residents of the treaty country can get the benefits.

For example, if you’re a company from Mexico, you can avoid paying the full 30% withholding tax on dividends from a U.S. company if you’ve owned at least 80% of the U.S. company for at least 12 months. Otherwise, the tax rate is reduced to 5% or 10%, depending on the type of shareholder and ownership in the U.S. company.

On the other hand, if you’re from Venezuela, the tax rate on U.S. dividends can be reduced to either 5% or 15% under the income tax treaty with the U.S.

There are also ways to lower taxes even if you don’t qualify for treaty benefits. One strategy is to use a tax provision called “boot within gain limitation” to reduce the tax you have to pay. In a corporate reorganization, if a shareholder gets cash or other property (boot), they may have to pay taxes on it. But the amount they have to pay is limited to the amount of profit they made from the exchange. If the exchange looks like a dividend, then part of the profit is treated as a dividend and the rest is treated as a profit from the exchange. This rule applies even if the property received would normally be considered a dividend for tax purposes. This provision allows a Brazilian company to transfer its U.S. subsidiary shares to a Spanish company to avoid paying high U.S. withholding tax on dividends. By making a tax election, the Spanish company can be treated as a partnership for U.S. tax purposes, allowing the U.S. subsidiary shares to be valued at their current market price for tax purposes. In a business deal, a company in Spain gets cash from its U.S. subsidiaries without having to pay a lot of taxes. The U.S. subsidiaries can do this because they recently changed their tax status. This lets them give the cash to the parent company in Brazil without paying a lot of taxes either. This is a good way to move money around without owing a lot in taxes. Some older treaties between the U.S. and other countries also let companies pay less tax when they send money to each other. If a foreign person wants to invest in the U.S. and avoid high taxes on dividends, they can set up a company in a country with a good tax treaty with the U.S. For example, a person from Colombia can invest through a company in Poland, which has a lower tax rate. This means they only have to pay a small amount of tax in the U.S. and can then bring the money back to their home country without paying more tax. Basically, just because a tax treaty doesn’t have certain rules, it doesn’t mean the IRS can’t deny benefits in some cases. They might argue that a foreign company is fake and shouldn’t get treaty benefits because it doesn’t really have a business purpose. But the U.S. Supreme Court says that as long as a company has a real business purpose or does business activities, it can’t be ignored for tax purposes. The IRS has said that a foreign holding company, even if it’s not actively doing business and only owns stock in another company, is still a valid corporation. This means that using a holding company in a country without a tax treaty with the US, like Poland, to bring profits out of the US at a lower tax rate could be okay as long as the company follows all the rules, like holding meetings and keeping separate books. Another way to bring profits out of the US tax-free is to use contingent interest instead of dividends. This can be done under certain rules that allow non-US taxpayers to receive tax-free contingent interest. If a foreign person earns interest on an investment that is based on the performance of certain stocks or an index, they may not have to pay U.S. withholding tax on that interest. A U.S. company did this, and the IRS said it was okay because the stocks were actively traded and their value was available to the public. If a person in Latin America wants to bring money from the U.S. back to their country, they may have to pay a 30% tax. There are some ways to lower this tax, like for people in Mexico and Venezuela. Other countries, like Chile and Trinidad and Tobago, don’t have tax treaties with the U.S. yet. If someone does business in the U.S., like owning property or having investments, they may have to pay taxes too. It’s important to consider these things carefully, and maybe get help from a tax expert. The U.S. has signed a tax treaty with Chile but it has not started yet. Under the treaty, the U.S. withholding tax rate on U.S. dividends will be reduced. The treaty with Mexico also has provisions for reduced withholding tax rates. The treaty with Venezuela also has provisions for reduced withholding tax rates. It’s important to reduce or eliminate U.S. withholding tax for Brazilian-controlled foreign corporations to avoid high taxes in Brazil. The transfer of ownership between the Brazilian company and the Spanish company should not have any taxes for the U.S. government. The Brazilian company should not own more than 80% of the Spanish company to avoid extra taxes. The type of reorganization being used is approved by the IRS and treasury. The dividend paid by the Spanish company to the Brazilian company should not have any taxes in Spain, and according to a treaty, it should not have taxes in Brazil either, although Brazilian authorities may see it differently. The same strategy can be used to send money to Venezuela through a Dutch cooperative, as the treaty also says dividends from a Dutch company should not be taxed in Venezuela. Congress proposed a change to a tax rule, but it didn’t pass. The IRS also made rules to limit this tax provision in certain situations. There are exceptions to U.S. tax on dividends for certain types of companies. A new tax treaty with Hungary has a rule that will affect how taxes are applied. There are also specific rules for interest payments. The mentioned code sections outline rules for withholding taxes on foreign profits. One strategy for bringing profits back to the US involves distributing a note to a parent company in a non-treaty country and then becoming a US corporation. There are also treaties that exempt certain types of interest from US withholding tax. The author of the article is a tax partner at a law firm in Miami. The article is from the Tax Section of The Florida Bar.

Source: https://www.floridabar.org/the-florida-bar-journal/repatriation-of-profits-to-latin-america-who-needs-treaties/