by Alberto Pérez Pardo. International Tax Consultant, Menber of AMKAL Team
The legitimate purpose of any entrepreneur or investor is to obtain the highest return on investment. The investment process concludes once the benefits after taxes produced by their investments are obtained.
The repatriation of Earnings should not be understood nor treated as an isolated action of the investor, but rather a link at the end of a long process, starting with the investment Project, the effective realization of the investment, the business development and the achievement of surpluses or profits from operations.
Repatriation of earnings embrace a wide range of financial practices, before Income Tax, designed to allocate funds to its parent company operating in the country of origin.
Such common practices are the payment of royalties, commissions and interest, provide services and the supply of raw materials and equipment. Payments for these concepts are profusely regulated by the tax authorities of countries where the subsidiary or branch of the parent company operates; therefore, there are legal boundaries to prevent the abuse of transfer of funds into the parent company.
Among the most widespread regulations for transactions between parent and subsidiary, the demand for fixing the transfer price and not exceed certain percentages of income, may be considered abusive or not correlated with the activity or size of the subsidiary; in addition, to the taxation supported and the non-deductibility as expenses when computing the Income Tax.
On the basis of the above, the actions to plan by the investor or entrepreneur, must take no connection between the parties involved. In the case of international trade operations, companies can resort to centralizing procurement, distribution and logistics, based in low tax jurisdictions.
The process to obtain a net profit subjected to be repatriated is complex and ends, apparently, with the corresponding tax clearance that determine the % of the benefits that it has to be paid to the government, remaining the net income for the owner of the company. However, foreign-owned companies are subject to an additional tax on those net profits before allowing the earning repatriation.
Therefore, it implies that those benefits are eligible to be taxed again, once they return to the country of origin if a Double Taxation convention among the countries does not apply. Throughout different stages, the benefit decreases as it meets the subsidiary tax authorities’ requirements until it gets to the status of disposable for the investors.
The planning of business and investment activity has to be done very precisely from the beginning. The legal and tax framework of the country of the subsidiary has to be studied so the legislation requirements are rigorously meet.
Furthermore, we look for the corporate structure that offers the best tax treatment for the parent company´s revenues from dividends.
It is also needed, the study of the corresponding INTERNATIONAL DOUBLE TAXATION CONVENTION (TDC) that the host country has subscribed with the country chosen for the establishment of the subsidiary. The TDC is of great significance in order to reduce the tax burden, since it constitutes the Government agreements to avoid pay taxes on income twice in different countries. Choosing the location will take into account all these factors that directly affect business profit, the ultimate objective of all economic activity.
Reinvestment of benefits
Having determined the net benefit available and repatriable, is appropriate to study its use so that the new production cycle of these funds benefit from the planned financial and tax optimization.
In this phase, it will be crucial to design the most appropriate corporate structure (ex. Holding or an investment fund based in a low tax jurisdiction) to channel the flow of capital into the country of origin, in the form of investing or financing, that is as capital or loan, avoiding the payment of dividends when they are heavily taxed in the headquarters of the subsidiary and the parent.
The Planning oriented to financial and tax optimization is a sophisticated set of measures to reduce the tax burden of profits.
Such actions are “tailored”, varying substantially depending on the type of activity (manufacture, import, export, brokerage, provide services, operations in securities markets, etc..) as well as countries of origin and destination of the investment or business activity.
CAPITAL GAINS AND HEREDITARY SUCCESSION
May not be forget when tax optimizing, forecasting the future taxation of capital gains obtained by the transfer of shares in the case of disinvestment. Planning the hereditary succession of the owner of the business, so that gathers the will and produce the lowest tax cost for the heirs.
The most appropriate corporate structure, so that the final transfer of ownership of the company occurs by the simple transmission or endorsement of the holding´s securities, so is implemented in titles that do not have the status of public document, consequently, is not require the intervention of a notary. The most appropriate jurisdiction for this, the Anglo-Saxon Britain and the U.S.
To conclude, the catalog of solutions to apply is wide and requires personalized study by our technicians.