Outbound investments into Latin America

Legal system overview

Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay and Venezuela (the Latam Countries), as with all the other Latin American jurisdictions and mainland China, have a continental legal system. Further, if their legal systems are taken at face value, it becomes apparent that laws seem to be virtually copied from one country to another, a feature that seems likely to stem from their common Spanish legal heritage.

Nevertheless, the manner of applying and enforcing these regulations in the different Latam Countries varies greatly. In terms of contract enforcement, for example, there is a dramatic divergence between countries as to the time and money required to recover a contractual claim. An unfortunate common feature that Chinese investors will encounter when enforcing contracts in all of these countries is that it will be more cumbersome than in their own country. We set out below a chart to illustrate this issue.

These findings lead to an immediate conclusion: unless contractual enforcement shortcomings are taken into account when structuring the deal from a legal standpoint, investors will receive dissimilar protection. When dealing with acquisitions, for example, collaterals permitting private enforcement (such as escrow accounts) are far more important in Latin America than in other Western countries. Most importantly, foreign investors should insist on arbitration as an alternative dispute mechanism for their investment contracts. Arbitration is a well-accepted, widespread and sophisticated means of settling investment disputes in the region. Enforcement of arbitral awards is simple and non-controversial, probably due to all the Latam Countries being bound (as is China) by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Foreign Direct Investment regime

Are there any restrictions on foreign investments?

In comparison with other countries, the general FDI regime in Latin America is extremely liberal and welcoming to external capital inflows for productive investments. Equal treatment between foreigners and nationals is the general rule established in both local and foreign investment statutes and, in some cases, the countries’ constitutions.

Unlike countries such as Australia or India, there are no general foreign investment board approval requirements – except in Mexico where, regardless of the sector, foreign investments exceeding 49% of the capital stock of a local company, and with a total value of assets higher than certain monetary thresholds, must be approved by the government. However, as in all countries throughout the world, there are certain specific sectors:

• that are restricted for foreign investors as they affect national security (nuclear power, national defence, real estate close to national borders, etc.) or are particularly sensitive as regards national interests (postal services in Brazil and Mexico; broadcasting services in Uruguay, Chile and Mexico; domestic land transportation in Mexico and Uruguay; retail sale of gasoline and liquefied petroleum gas and oil distribution in Mexico; hazardous waste disposal in Colombia; lotteries and locally printed Spanish-language newspapers and magazines in Venezuela; etc);
• where foreign investors are required to form a joint venture with a local partner (such as, certain media or broadcasting services in Argentina, Brazil, Colombia, Peru or Venezuela; insurance in Mexico; certain air transportation ventures in Mexico, Peru and Chile; or certain oil and gas activities in Venezuela where foreign investors are only allowed to be minority shareholders in a company controlled by the government);
• where foreign investment in certain specific types of entities requires prior approval or ‘habilitation’ by the government (such as investing in a bank in Brazil, where the investment must be approved by a decree).

There are, however, structured solutions that foreign financial investors may use to invest in some of these restricted sectors (for example, in Mexico, by way of ‘neutral investment schemes’ structured through Mexican trusts or entities approved by the Ministry of the Economy).

Are there any exchange controls or restrictive currency regulations?

With few exceptions, Latam Countries do not impose foreign exchange controls or restrictions: foreign exchange is freely convertible, and there are no particular constraints applicable to overseas payment of dividends or to the repatriation of investments.

There are foreign exchange controls in Argentina and Venezuela, although these are quite different in nature. In Argentina, subject to certain requirements, foreign direct investors are allowed to carry out those transactions that are most relevant for them (transfer of dividends, repatriation of investments, imports of equipment, payments of services and financial debt servicing, etc). Venezuela has tighter exchange controls and, recently, alternative means of access to foreign exchange (through swapping government bonds) have been called into question (although the Government attempted to counter the foreign exchange shortage by setting up a bond/trading system run by the Central Bank (SITME)).

Although there are no proper foreign exchange restrictions, it should be noted that in certain countries (most notably, Brazil) the Government taxes specific foreign exchange transactions to curb speculative inflows and portfolio investments (in Brazil the inflow of funds in listed fixed income securities are levied at a rate ranging from 4% to 6%).

Needless to say, there are reporting obligations related to foreign exchange transactions in virtually all Latam Countries (Peru is a notable exception). Any failure to comply with such requirements generally results in fines and, in some cases, the forfeiture of benefits or the inability to exercise certain rights to which foreign direct investors are entitled.

Are there any special benefits or protection granted to foreign investors?

Public aid, subsides, tax breaks and refunds are available in certain Latam Countries and for certain sectors. Many take the form of a reduction in customs duties or taxes on imports of capital goods to be used in establishing a new foreign direct investment, such as the ‘maquila’ programmes set up in Mexico for the manufacture of goods for export at a later date.

In some of these countries (such as Colombia, Peru or Chile) foreign investors may enter into investment agreements with the Government and be granted certain specific rights and benefits (in Peru, maintaining certain investors’ legal rights and the income tax remaining unchanged; in Chile, access to foreign exchange to repatriate capital and profits, more favourable tax treatment for certain investments above US$50 million, etc). Moreover, Chinese investors are generally granted enhanced protection under a number of Bilateral Investment Treaties (BITs) that China has entered with all the Latam Countries (except for Brazil and Venezuela), as well as by the Free Trade Agreement (FTA) recently entered into between China and Peru (there is an FTA in place between Chile and China, but it does not contain substantive investment protection rules).

Both the FTA and the BITs provide protection against unfair treatment, expropriation and inconvertibility, among other relevant areas for foreign direct investors. It should be noted, however, that most of these BITs belong to the ‘first generation’ of Chinese BITs (negotiated when China was predominantly a destination for inbound investment) and characterised by limited fair treatment rights and restricted investment dispute resolution mechanisms (generally limited to disputes arising from compensation due to expropriation). This shortcoming may be bypassed by channelling the investment in Latin America through companies incorporated and domiciled (or with a corporate seat) in other countries – such as Spain that have the broadest and most substantial network of BITs with Latin America.

Structuring the deal

How are acquisitions structured from a corporate perspective?

Acquisition deals in Latin America may be structured as asset deals or share deals, as in other countries around the world.

In an asset deal, the purchaser acquires individual assets and liabilities from the target company. This will generally require third party consents if agreements or licences are assigned (as opposed to some European countries where third party contractors, such as lessors or insurance providers, are not generally required to accept the subrogation of the acquirer of an ongoing concern). Furthermore, from a mechanical stand point, asset deals will involve an individual assignment or transfer of each asset, agreement or liability (which means an additional level of complexity and greater transactional costs).

This drawback is mitigated to a certain extent, as most Latin American jurisdictions (including Argentina, Brazil, Colombia, Mexico, Peru and Uruguay) offer legal mechanisms to transfer assets and liabilities constituting an ongoing concern in a single, relatively simple transaction. It should be noted that in all these countries, the non-fulfilment of the relevant legal requirements to transfer an ‘ongoing concern’ has certain adverse effects on the parties, including, in some cases, the joint and several liability of the seller and purchaser for certain debts. It is also worth pointing out that purchasers of assets and liabilities constituting an ongoing concern in the Latam Countries will normally be liable for certain pre-acquisition tax and labour liabilities associated with the ongoing concern.

Moreover, in some jurisdictions, the acquirer of a single real estate asset will be liable for associated real estate taxes (in Mexico, for example) or environmental liabilities (in Argentina, for example). Purchasers are often able to assess these tax liabilities by requesting tax clearance certificates before the closing date (and adjust the price accordingly). Meanwhile, in some countries (such as Argentina or Brazil), they can avoid inheriting tax liabilities by notifying the tax authorities of the transaction and prompting a response which, if unanswered within a certain period of time, will exonerate the purchaser from any tax liability in connection with the assets or business acquired.

The other common way of structuring an acquisition is a share deal, where the purchaser acquires the shares of the target company. Other than that required in accordance with prudent supervision in some regulated areas (credit entities, for example) third parties have no say in a change of control situation and, in particular, senior officers have no statutory rights in the event of a change of control, as would be customary in other jurisdictions (i.e. termination, additional compensation, etc). Buyers of concessionaires should be aware, however, that while the consent of the contracting authority is not required as a matter of law to proceed with a change of control (except for Brazil), the bidding terms of many Latam Countries would contain this type of restriction (this is the case, for example, in Colombia, Mexico and Peru).

Frequently, a structural disadvantage of share deals is that the acquirer is required to deal with minority shareholders. However, in many of the Latam Countries, ‘squeeze out’ procedures are in place, which allow the purchaser of a majority stake in a company to force the minority shareholders to sell their holdings (subject to certain requirements and limitations, this is the case in Argentina, Brazil, Chile and Peru as regards listed companies, and in Venezuela and Colombia for simplified stock corporations).

Within a global context, another issue arising in share deals is the inability to leverage the acquisition financing on the assets of the target company due to corporate restrictions dealing with ’financial assistance’ (that is, the prohibition of a target company to provide credit facilities of any kind to finance the acquisition of its own shares or any kind of collateral for such purpose). In this respect, the Latam Countries offer a competitive regulatory advantage for acquirers as they do not normally prohibit or restrict these leveraged acquisitions (except for Peru, where ‘financial assistance’ is prohibited, or in Venezuela, where it may be deemed contrary to the regulation restricting companies from acquiring their own shares in certain circumstances).

How are Chinese acquisitions structured from a tax perspective?

Traditionally, domestic tax laws in capital-importing countries (developing nations) establish high withholding tax rates on cross-border payments to foreign taxpayers. This enables these countries to increase their tax revenues. In general, this holds true in Latin America, where most countries apply high withholding tax rates on the repatriation of source income to foreign investors. For this reason, Chinese investors in the region should work on setting-up an efficient tax structure from the outset that allows for the repatriation of income (in the form of dividends, interests, royalties or gains). This would reduce or eliminate, where possible, the tax leakage in the source country and hence increase the after-tax return on investments.

In this regard, the tax efficiency of the repatriation of income may be enhanced by legitimately using an intermediate holding company to hold the Latin American subsidiaries. The ideal holding entity will be resident for tax purposes in:

• a country boasting a large and favourable tax treaty network with Latin American countries;
• an attractive holding regime under which dividends and capital gains deriving from foreign subsidiaries are exempt under the participation exemption regime, and may be subsequently distributed to foreign shareholders of the holding entity without tax leakage; and
• an extensive BITs network with Latin American countries providing protection against unfair treatment for foreign investments.

Taking into consideration that China a) has a reduced tax treaty network with Latin American countries, b) lacks an attractive tax regime for holding entities, and c) has signed only a few BITs in the region, Chinese investors may set up their holding entities abroad and, more specifically, in European jurisdictions that are better suited for these purposes (Spain, the Netherlands and Luxembourg are probably the most common routes to directly invest in Latin American countries). In this way, Chinese investors can significantly reduce withholding taxes on dividends, interest, royalties and gains deriving from their Latin American subsidiaries, and thus increase the net yield of their investments. It goes without saying that, when choosing the optimal holding jurisdiction, Chinese investors will have to consider general anti-avoidance rules (GAAR) that may be used by the local or foreign tax authorities to challenge the use of conduit companies on ‘treaty shopping’ grounds, or on the lack of a valid business purpose for structuring the investment through a third country.

Besides reducing withholding tax rates in the source country, channelling the investment through an appropriate holding entity may enable the depreciation of financial goodwill or avoid the application of other taxes. For instance, a Chinese investor directly holding an Argentinean subsidiary will annually be subject to personal assets tax at 0.5% on the net-worth value of its interest, whereas if the interest is held through a Spanish holding entity, the tax will not be levied by virtue of an exemption under the Argentina-Spain Tax Treaty. Tax planning of the financing of the investment and the use of intangibles can also be instrumental in reducing the overall taxation of the investment structure.

Investing in private companies

Are minority shareholders of private companies entitled to certain rights?

Corporate law in the Latam Countries grants a number of rights to minority shareholders (information, director’s liability, pre-emption rights, cumulative voting, nullification of corporate decisions, etc) and other corporate rights enhanced when the holding exceeds a minimum threshold (generally from 5-10%). Even in countries like Venezuela, where this protection is not set out in such a specific manner, Supreme Court decisions have reinforced those rights (for example, in terms of the shareholders’ rights to participate in corporate meetings or the duties of the company management to report irregularities).

Once again, although investor protection throughout Latam Countries is fairly homogeneous, in the face of the law the perception of the effectiveness of these rights varies from country to country. This is despite the fact that it exceeds, on the whole, the protection afforded to minority investors in China. A chart summarising the level of investment protection in each country is set out below. It indicates the intensity of additional measures which, from a legal standpoint, would be advisable to adopt in each country to ensure adequate protection of Chinese minority investments in the region:

Are there any requirements concerning the nationality or residence of directors?

In virtually all Latam Countries, board members may be foreigners or reside abroad (except in very limited cases such as Argentina, where the majority of the board members must reside in the country, or Venezuela, where commercial registries request that foreign directors have a business or resident visa). Board members of companies doing business in certain sectors, however, should be resident in the country (for example, in Colombia, in the sector of public utilities and certain companies engaged in national security; in Uruguay, in the sector of passenger road transportation companies; or in Venezuela and Mexico (for senior officers), in certain financial institutions). Furthermore, in Brazil, the statutory executive officers (diretores) are required to reside in the country.

Investing in listed companies

What triggers public disclosure when dealing in listed securities?

In all Latam Countries, it is mandatory to disclose the acquisition or sale of a stake in a listed company when it exceeds certain thresholds. The relevant stakes are defined differently in each of the Latam Countries but generally vary from 5% to 10%:

Additional public disclosure obligations arise upon subsequent acquisitions or disposals. It should also be pointed out that, as opposed to Europe, given that most Latam Countries have not enacted clear rules applicable to the disclosure of synthetic acquisitions (through equity swaps, options, forwards or other derivatives) there might be significant leeway to develop a stake-building strategy using financial instruments.

What triggers a compulsory bid?

Generally, when an investor acquires a controlling stake in a listed company, the investor would be required to launch a tender offer (the tender offer, depending on each country and the circumstances of the acquisition, may or may not be for 100% of the shares of the company). It should be borne in mind that the price of this mandatory tender offer is generally affected by the pre-tender offer acquisitions (except in Mexico, for example, where pre-tender offer acquisitions have no bearing on the tender offer price). Thus, caution is necessary in the stake-building undertaken prior to reaching the tender offer threshold. ‘Controlling stake’ is defined differently in each Latam Country, but generally the acquisition of a stake ranging from 25% to 52% of the voting rights will be considered the acquisition of control.

As an exception, in certain countries (such as Uruguay), tender offers have not yet been regulated, and in other countries (for instance Argentina), mandatory tender offer rules may be opted out of by the issuer.

Rules of conduct in the context of a tender offer are generally laxer than in Europe. For example, they would not generally impose any express restriction on bidders that have carried out a due diligence of the target company, passivity rules for the target company’s directors, etc.

Competition

Which transactions and thresholds are subject to clearance by the competition authorities?

Antitrust clearance proceedings are the norm in Latam Countries (except for instance in Peru, where they only exist in the electricity sector, and in Chile or Venezuela, where as a general rule the competitive effects of the transaction are only subject to judicial or administrative review if the transaction is challenged, though voluntary consultation procedures are also available). The thresholds triggering the review vary from country to country, although if compared to other Western countries these are relatively low.

While in some Latam Countries the payment of the price and the transfer of the shares cannot be carried out until the antitrust authority clears the transaction (as in Colombia and Peru), in others the antitrust control does not impede the closing of the transaction. This is because the review is carried out as an ex-post control (as is generally the case in Argentina, Brazil, Chile, Uruguay and Venezuela).

Labour

General features

In general, Latam Countries share common features regarding labour matters. A common feature worth noting – which distinguishes Latam Countries from other Western countries (mostly European) – is that employees are not entitled to block, or even be consulted about, corporate transactions (mergers, acquisitions, etc). Mexico and Venezuela are a case apart and employees must be notified about such transactions and have the right to resign and be paid similar compensation to that for unfair dismissal.

Foreign employees require work permits and/or residence permits, which are easily obtained when the foreigner has an employment contract with a local company. However, when making a direct investment in any of the Latam Countries, Chinese investors should bear in mind that, except for limited cases such as Argentina and Uruguay, there are restrictions on hiring foreign employees. As the chart below shows, these restrictions are material:

However, the apparent materiality of the restrictions is somewhat mitigated by the fact that, in calculating the employee’s base, certain types of employees are excluded (for example, it is customary to exclude from the base those foreign employees with specialised technical capabilities, family ties with local citizens, key management, etc). Special rules also apply to foreigners of countries with which the Latam Country has entered into a treaty regarding labour reciprocity or double nationality (which is fairly common in the region with Spain and Italy and, in the case of Brazil, with Portugal). They also apply to employees of certain type of companies (in certain countries, small companies engaged in high-technology sectors or that are undergoing a corporate restructuring, contractors of the public sector, etc).

Typically, acquirers wish to restructure the payroll to maximise the returns or efficiency of the target company. In this regard, labour redundancy costs should be taken into account. However, these costs are not significant compared to those in China. The following chart compares these costs for each Latam Country and for China, using the same hypothetical case for all the jurisdictions:

(*) This Guide is a collective work. It draws upon the joint experience of our group of independent leading law firms advising foreign direct investors in Latin America and is the tangible outcome of a number of joint seminars and training programmes for our clients and associates, and the common know-how developed by our Sino-Latin American Multilateral Practice Group, which is reflected in a number of publications and briefings that our firms regularly prepare for Chinese clients and contacts. The authors acknowledge that their work in preparing this Guide was instrumental and was greatly facilitated by that shared pool of knowledge and resources, as well as by the contributions from other lawyers at Uría Menéndez’ European and Latin American offices (Buenos Aires, Chile, Sao Paulo, Lima and Mexico City) and from the leading independent firms of the group in Argentina (Marval O’Farrell & Mairal), Brazil (Dias Carneiro Avogados), Chile (Philippi Yrarrazaval Pulido & Brunner), Colombia (Prieto & Carrizosa and Brigard & Urrutia), Mexico (Galicia Abogados), Peru (Payet Rey Cauvi), Uruguay (Guyer & Regules) and Venezuela (Araque & Reyna) who dedicated their valuable time and constructive thoughts in reviewing, updating and improving this Guide. This Guide is intended for information purposes only and does not constitute legal advice. If any further clarifications are required, the authors, any of the contributing firms, or our Beijing office (tel +86 (10) 5965 0708 email china@uria.com) are available to contact.