Startups and new business: tax planning for long-term success

Christina A Hill
Georgetown University Law Center, Washington, DC

Report on a session at the 17th IBA/ABA US and Latin America Tax Practice Trends Conference in Miami

Friday 20 June 2025

Session Co-Chairs
Brian Harvel Alston & Bird, Atlanta
Leandro Passarella Passarella, Buenos Aires

Speakers
Mónica Bolaños Garrigues, Bogotá
Vittoria Di Gioacchino BLP, San José
Isabel Espinoza Fisher y Cía, Santiago
Giorgio Massari KPMG US, Miami
Francisco Palmero Nader, Hayaux & Goebel, Mexico City
Priscila Farisco Viseu, São Paulo

Introduction

A dynamic panel of international tax professionals from across the Americas shared practical, boots-on-the-ground insight into tax planning for startups operating across borders. The discussion centred around six critical themes:

• entity selection;
• structuring capital contributions;
• managing intellectual property;
• navigating operational and compliance hurdles;
• leveraging tax incentives; and
• planning for a partial or full exit from a country.

Whether you are a founder, investor or adviser, understanding how early tax decisions shape long-term growth, financing and exit strategy is not just smart – it is essential to the overall success of the company. The panel offered real-world guidance for anyone looking to launch, grow or exit a startup while navigating the complex tax realities of doing business between the US and Latin America.

Panel discussion

Entity selection: foundations for cross-border growth

The panel began with Leandro Passarella introducing the topic of entity selection, emphasising that, while reference materials included jurisdiction-specific tables, the goal was to engage in a comparative, practice-based discussion among the panellists.

Giorgio Massari opened the dialogue by outlining two primary considerations that foreign investors typically weigh when structuring a business with US operations. The first is whether the entity can elect to be treated as a flow-through (transparent) entity for US tax purposes – an important feature for investors seeking direct access to income, losses and tax attributes. The second is whether the entity falls under the US per se corporation rules, which preclude such an election. He also highlighted commercial considerations, noting that while early-stage founders may start with common shares, subsequent investment rounds often necessitate the issuance of preferred shares with varying rights and preferences, which may influence the legal form selected.

Brian Harvel added that, in his experience advising non-US investors entering the US market, a corporation is almost always the preferred structure. Although limited liability companies (LLCs) are commonly used, he typically advises electing corporate tax treatment for LLCs to avoid imposing US tax filing obligations and identification requirements on foreign owners. Flow-through entities are considered only in limited cases, such as where investors are based in jurisdictions like the United Kingdom or Canada, which do not recognise LLCs as transparent. In those circumstances, a limited partnership or similar structure may be more appropriate.

In Mexico, Francisco Palmero explained that all entities are taxed as corporations, as transparency is not available under local law. Startups typically use sociedades anónima promotora de inversión (SAPIs) due to their flexibility in shareholder rights, including economic participation and share repurchases. Although simplified forms exist, they are rarely used due to operational and income restrictions. Foreign shareholders are permitted, but Palmero cautioned against locating ownership in low-tax jurisdictions due to heightened scrutiny under Mexican tax rules.

Priscila Farisco noted that Brazil similarly lacks transparent entities. Most startups incorporate as sociedades anônimas, which are favoured for their governance structure. While two shareholders are required at formation, this requirement is primarily for registration purposes – commonly, a second shareholder is added to meet this rule and removed the following week. Tax treatment is significantly influenced by the shareholder’s jurisdiction, and certain sectors – such as rural landholding and insurance – face restrictions on foreign ownership.

Panellists from Colombia, Chile, Costa Rica and Argentina (represented by Mónica Bolaños, Isabel Espinoza, Vittoria Di Gioacchino, and Passarella) echoed similar themes: flow-through structures are unavailable, simplified corporations like sociedades por acciones simplificada (SAS) or sociedades por acciones (SpAs) are preferred for their administrative ease, and treaty access remains a key limitation. Di Gioacchino warned that reliance on popular offshore vehicles, such as Cayman structures, can backfire if not aligned with local rules, underscoring the importance of tailored, jurisdiction-specific planning from the outset.

Funding structures: equity, debt and convertible/preferred instruments

The panel explored various methods of capitalising startups. Massari emphasised that investors are increasingly expecting flexibility in funding rounds, often preferring hybrid instruments such as Simple Agreement for Future Equity (SAFEs) or convertible notes. He cautioned that jurisdictions may characterise instruments differently – for instance, what is treated as debt in one country may be considered equity in another.

Palmero warned that in Mexico, contributions for future capital increases must follow strict accounting protocols or risk being reclassified as debt, which would trigger income recognition and inflationary adjustments.

Harvel made a quick point that in the US, related-party debt can often avoid transfer pricing complications by applying the safe harbour applicable federal rate (AFR), which is generally accepted as arm’s length – an approach that many counterparties and foreign authorities are willing to accept.

Similarly, Di Gioacchino and Espinoza highlighted the importance of proper documentation to avoid unfavourable recharacterisations and tax penalties.

Farisco explained that, although dividends are tax-exempt in Brazil, 92 per cent of foreign startup investments are made via convertible debt, primarily due to liability and labour law concerns. Investors prefer not to appear as shareholders to avoid exposure to lawsuits or labour claims.

Capitalisation of debt was a widely debated issue. Several panellists, including Di Gioacchino and Bolaños, noted that tax authorities in Costa Rica and Colombia have aggressively challenged conversions of debt into equity, especially when significant foreign exchange losses are involved.

Intellectual property: strategic placement and tax implications

As startups grow, IP becomes a central asset. Massari stressed the importance of identifying where IP is created and ensuring it is appropriately owned and valued. Many startups overlook this until investors demand clarity.

In Colombia, Bolaños pointed out that royalties paid to a related party for IP developed locally are non-deductible under recent reforms. Similarly, in Mexico, Palmero explained that tax authorities may disallow royalty deductions and related advertising expenses if IP was transferred abroad without proper valuation and tax compliance. A past wave of IP migrations in Mexico led to intensified scrutiny by the tax authority.

Harvel explained that changes to US law now require IP development costs to be amortised over time, prompting some startups to consider relocating R&D functions offshore. Brazil imposes high taxes (15 per cent withholding tax plus 10 per cent local levy) on royalty payments and often disregards treaty protections. These issues have led to pending constitutional court challenges.

Most Latin American jurisdictions lack tax amortisation for self-generated IP. Panellists from Chile, Costa Rica and Argentina confirmed that while R&D costs may be deductible as expenses, acquiring IP from third parties provides little or no amortisation benefit.

Local compliance and non-tax considerations

The panel also touched on practical non-tax hurdles. In Colombia, Bolaños described foreign exchange reporting requirements and restrictions on offsetting payables and receivables. Palmero warned that in Mexico, tax compliance – especially with electronic invoicing – can be stringent. Failing to match tax returns with e-invoices may result in suspension of operations or blacklisting.

Di Gioacchino (Costa Rica) noted that while there are no foreign exchange controls, the strengthening of the Costa Rican colón has made it more expensive for US investors to enter the market. In Brazil, Farisco described how strict banking regulations and a tax on cross-border money flows complicate inbound and outbound transactions.

Exit strategies and indirect capital gains tax

As startups mature, exit planning becomes critical. The panel discussed indirect capital gains taxes, which apply when foreign investors sell shares of a foreign entity that indirectly owns local assets.

In Chile, Espinoza explained that a 35 per cent withholding tax may apply on such sales unless the seller qualifies under a treaty and meets specific ownership thresholds. Colombia applies a similar rule if the local asset comprises 20 per cent or more of the foreign company’s value. In Mexico, indirect capital gains tax applies only if the underlying asset is real estate.

Massari and Harvel clarified that, under US tax law, crediting these foreign taxes is complex and often limited by entity structure and sourcing rules. If capital gains are recharacterised as dividends, foreign tax credits may not be available at all.

Final remarks

The panel closed with a reminder that tax planning for startups is not one-size-fits-all. Coordination between legal, accounting and tax professionals is essential from the outset. As Farisco and Palmero emphasised, choosing the right entity, funding method and IP location early can reduce long-term tax burdens and avoid legal complications. Startups, especially those with cross-border ambitions, should engage with local advisers before taking any definitive steps.

Passarella echoed this point, emphasising that strategic decisions made at formation can significantly impact investor outcomes and future exits. Additionally, he highlighted that while Argentina aligns with the region in taxing all entities as corporations, it imposes additional scrutiny on contributions from shareholders located in non-cooperating or low-tax jurisdictions. In such cases, the Argentine tax authority may presume those contributions to be undeclared income unless properly documented, adding a layer of compliance risk that startups must plan for early.