Exiting and moving out: entity shut down – where, when and why?
Mariana Díaz-Moro
Gómez-Acebo & Pombo, Madrid
Report on a panel discussion at the 16th IBA/ABA US and Latin America Tax Practice Trends Conference in Miami
Thursday 13 June 2024
Co-Chairs
Carola Trucco Horwitz Barros & Errázuriz, Santiago
Alex Fischer Fischer & Cia, Santiago
Speakers
Tomás Alonso Zedra, Miami
Fernando Camarena Foley & Lardner Mexico, Mexico City
Leandro M Passarella Passarella, Buenos Aires
Jeffrey L Rubinger Winston & Strawn, Miami
Ramon Tomazela Santos Mariz de Oliveira e Siqueira Campos, São Paulo
Introduction
The panel focused on why multinationals consider migrating and the most common recipient jurisdictions. The panel navigated the country-specific tax and non-tax reasons considered by decision makers when looking at such a migration.
Carola Trucco Horwitz introduced the speakers and stated that they were going to discuss issues related to relocating the headquarters of a company abroad and, in extreme situations, reasons for its winding up. She also added that generally speaking, in the Latin American (LATAM) region, there is a common situation related to a lack of certainty from a legal, political and economic standpoint. In particular, she referred to the Chilean case, but panellists also mentioned these aspects as drivers for relocation and exiting.
Panel discussion
The panel was divided into two parts, the first related to relocations (why and how, tax consequences and risks) and the second related to exit rules and the implications of shutting down entities.
Relocation: why and how
The panel began with a discussion on the overall tax environment for headquarters relocation, initially presented by Tomás Alonso. He stated that there might be legal reasons for moving out, such as patent protection, in addition to tax reasons. In this context, there are legal issues to consider, such as the type of company and the jurisdiction you are moving to. Additionally, many anti-abuse provisions should be taken into consideration, which can have a multilateral (MLI – base erosion profit shifting (BEPS) 15th action), bilateral (limitation on benefits (LOB) and principal purpose test (PPT)), or local tax nature. Among other measures, the MLI/BEPS 15th action allows countries to modify bilateral treaties to prevent abuse through PPT or LOB rules.
Some LATAM countries have enacted generally accepted accounting rules (GAARs) in recent years. Although others have not, their courts and tax authorities rely on ‘substance over form’ principles.
Alonso concluded by stating that the most common recipient jurisdictions are Spain, the United Kingdom, Canada and Luxembourg, and that it is quite common to see Canadian partnerships in combination with Spain, and Spain with ‘multilatinas’.
Alex Fischer asked Alonso how much substance over form is needed. Alonso replied that it depends on the business and jurisdiction but there is a minimum requirement, such as tax resident directors, bank accounts and some material resources.
Jeffrey Rubinger provided the United States perspective on why and how to relocate. He stated that in the past, certain rules related to transferring intangible properties to a foreign corporation could be subject to taxation depending on certain conditions. Now there is an ‘inversion rule’, which is a kind of anti-avoidance rule to prevent relocating. Rubinger stated that reasons for converting are normally to get out of the controlled foreign corporation (CFC) rules, reduce global intangible low-taxed income (GILTI) or enter into licensing agreements to reduce the US tax base, and that these types of transactions are generally taxable.
He explained that there are two typical types of inversions:
- the 80 per cent inversion, meaning that if certain requirements are met, the new non-US incorporated company will be treated as a US corporation; and
- the 60 per cent inversion, where the foreign company is treated as a non-US company but cannot use certain tax attributes for ten years.
He added that when transferring US assets or business to a foreign company with no substance and these inversion rules apply, the result may be treated as if the shares were not transferred.
He concluded by stating that the US is not the best option for locating holding companies with investments in LATAM because of (1) the lack of a treaty network, (2) expansive US rules and (3) foreign tax credit rules being in flux. More likely jurisdictions include countries such as Spain (because of its treaty network). To avoid the inversion rules when moving out of the US, a 50 per cent or less shareholding is required (US shareholders may not be taxed on exchange).
Trucco asked Leandro Passarella about Mercado Libre, a US setup company with a corporate seat in Argentina until December 2020. Passarella stated that the sale of shares of this company might have been subject to taxation in Argentina if its corporate seat was located there, should the Argentine competent corporate authority have argued successfully that such foreign incorporated company fell within Law No 19550, Section 124. Rubinger added that such a sale would also have been subject to US taxation, which seems to be a double tax residence scenario.
From the Mexican perspective, Fernando Camarena explained that companies may move out of Mexico for tax-driven reasons, but there are applicable CFC rules. Currently, Mexico has an active manufacturing programme that provides certain non-tax-driven advantages.
In general terms, he stated that for the transfer of shares of a parent company, there is an indirect rule of capital gains applicable, linked to real estate. Additionally, when changing the residency of a parent company of a group with Mexican subsidiaries, it is very important to review the PPT rule (as provided in the MLI, which had already been mentioned by Alonso). There is also a tendency to locate holding companies outside of Mexico through ‘flip’ transactions to attract investors. For these transactions, the Mexican treasury applies GAARs, CFC rules and taxed capital gains on the transfer of shares.
Fischer commented that tax authorities in Chile are now trying to use GAARs instead of a transfer pricing rule, which is a specific one, and that they try to challenge these transactions in any case. Camarena specified that in Mexico, they could apply both, not only the specific rule but also the GAAR one, and that they are not exclusive as in other jurisdictions where the specific rule should apply over the general one.
Ramon Tomazela Santos highlighted that, in Brazil, companies may decide to move out for various reasons, ranging from economic issues to optimising the tax burden. The common structures for doing this include:
- the sale of assets;
- shutdown/liquidation;
- relocation of functions and operations;
- redomiciliation/international merger; or
- a corporate inversion.
In any case, rules related to capital gains and transfer pricing are applicable, and there are no specific rules related to corporate migration. Additionally, there are no GAARs, but there are judicial doctrines that allow authorities to challenge tax-motivated transactions. Pillar Two implementation is currently uncertain.
Tomazela made special mention of Decision 2402-011061 of 3 February 2023, which is very relevant for capital gain purposes on indirect taxation (ie, Brazilian subsidiaries with non-substance holding companies). He also mentioned that as of 2023, new transfer pricing rules have been introduced, which include a very broad concept of controlled transactions.
Regarding redomiciliation, there is tax neutrality in Brazil as long as the new jurisdiction recognises the legal personality of the redomiciled company. Additionally, international mergers can be carried out at book value (considering that if there are assets in Brazil, they may characterise as a permanent establishment (PEs)). Panellists explained the Mexican, Argentinian, Canadian and Spanish positions in this regard.
Finally, Tomazela explained the interaction between tax neutrality rules and new transfer pricing rules. He described which rule should be considered lex specialism to conclude that transfer pricing rules should prevail and why.
From an Argentinian standpoint, Passarella outlined the reasons for moving out of Argentina for tax and non-tax reasons. He specifically mentioned the cases of Tenaris/Globant, which is in Luxembourg, and Mercado Libre Inc. Additionally, he mentioned three binding rulings (Consulta 17/2010, Consulta 44/2012 and Consulta 15/2015) related to Argentinian companies moving out of the country.
In Consulta 17/2010, Argentinian tax authorities ruled that a split-off where a successor entity was to be domiciled in Spain was not entitled to tax-free treatment.
In Consulta 44/2012, they ruled that a company’s redomiciliation implied the availability of the company’s tax attributes until its deregistration as an Argentine company. After that point, the company becomes a non-resident entity for Argentine tax purposes, unless it remains with activities that reach the PE threshold. It also stated that the deregistration from the Public Registrar implied the cancellation of its taxpayer registration, which may have tax implications.
This aspect was implicitly revisited in Consulta 15/2015, which states that corporate relocation is not a liquidation because the entity still exists. However, the unanswered question is how the redomiciled entity’s tax attributes are rolled over to its new Argentine PE, considering that Argentine income tax law considers them as separate entities. Passarella suggested that a tax-free reorganisation would still need to be implemented.
At the end, the speakers generally discussed how to carry out a redomiciliation through a reorganisation.
Exit rules and entity shutdown implications
Passarella commented on entities shutting down in Argentina, which, in his opinion, is carried out for non-tax reasons. Typically, the forms of exit are liquidation or a sale to a local investor. At the time of liquidation, all taxes are applied, making liquidation a longer and more complicated process. Sale is a possibility, but a 15 per cent capital gains tax applies. The main problem with exiting and shutting down is how to repatriate the money.
Camarena also stated that, in Mexico, entities shutting down or exiting are primarily for business or political reasons, rather than tax reasons. He added that sometimes companies move to other countries to obtain the protection of a foreign government to shelter their assets. However, the issue is how much substance is needed to obtain such governmental protection, which goes beyond taxation. In any case, in Mexico, moving a company abroad is treated as a deemed liquidation, and market value rules apply.
From a US perspective, Rubinger stated that, in the US, relocating a company is also treated as a deemed liquidation and that fair market value rules apply, similar to Mexico and many other jurisdictions.