In the last decade, the trading relationship between China
and Latin America has been outpaced by a dramatic increase in
Chinese foreign direct investments in Latin America motivated
by several political and financial factors. Most experts
predict Chinese investments in the region are about to enter a
period of substantial growth.
Due to the unfavourable tax treatment in China of foreign
source dividend income or capital gains, Chinese outbound
investments have usually been channelled through offshore
jurisdictions such as Hong Kong, the British Virgin Islands or
the Cayman Islands. However, these territories are considered
tax havens in most Latin American countries and are not tax
efficient for holding Latin American subsidiaries.
As described later, there are various reasons why it could
be more tax-efficient for Chinese companies to make their
outbound investments in Latin America through an offshore
holding company. In particular, there are tax advantages in
using Spanish holding companies in view of the new tax treaty
between Spain and Hong Kong.
Economic ties between Asia and Latin America
Asia and Latin America are among the world's fastest-growing
regions and there is little argument that, in relative terms,
they have shown great resilience to the global economic
According to the World Bank's forecast, the regional GDP in
Asia (of which China accounts for about 80%) will grow by 7.8%
in both 2012 and 2013, whereas growth in Latin America's GDP is
expected to ease to 3.5% in 2012, before picking up once more
to 4.1% in 2013. In contrast, the World Bank's projections for
the US and Europe look less promising: the US economy is
expected to grow by 2.1% in 2012 and 2.4% in 2013, while the
euro area will suffer a contraction of 0.3% of its GDP in 2012
and grow by 0.7% in 2013.
The sustained growth during recent years in Asia and Latin
America is attracting foreign investment from other regions
where domestic consumer demand is decreasing (notably, the US
and Europe) thereby seeking to profit from large and dynamic
Simultaneously, but at a much faster pace and on a larger
scale, the good economic prospects in these two regions are
boosting trade and investment ties between Asia (and, in
particular, China) and Latin America themselves. As the OECD
puts it in one of its papers on the subject, "Latin America is
looking towards China and Asia – and China and Asia
are looking right back".
From Christopher Columbus to the Zou chu
Trade between Asia and Latin America is not new. The
commercial relationship between these two continents can be
traced back to the late 15th century when Columbus accidentally
arrived at America when looking for a new route to East Asia.
However, the trading relationship did not develop substantially
until the period following World War II, when Japan's
export-led growth boosted the demand for raw materials supplied
by Latin American countries.
The emergence of China in the early 2000s marked a turning
point in the trade relationship between Asia and Latin America.
The correlation between a rapidly growing, resource-scarce
China on the one side and a resource-rich Latin America on the
other, has paved the way for bilateral trade that follows a
commodity-for-manufacturing pattern. In exchange for its demand
for raw materials and commodities, China exports manufactured
goods to Latin America.
Today, China is Latin America's second-largest trading
partner, after the US
The emergence of China as a leading investor in
The trading relationship between China and Latin America has
been outpaced by a dramatic increase of Chinese foreign direct
investments (FDI) in Latin America.
China's FDI spree began to take off in the past decade,
spurred on by several factors which will continue to drive an
increase in outward FDI in the years ahead and which will
ultimately lead to the emergence of China as a significant
global direct investor.
- The first factor is that in 2000, the Chinese government
launched its Zou chu qu ("going out") campaign to
promote overseas investments aimed at securing energy
resources, opening access for Chinese companies abroad and
diversifying the country's foreign exchange reserves. During
recent years, Chinese government agencies have progressively
eased and simplified the requirements and procedures Chinese
enterprises have to follow in order to invest overseas.
- Secondly, the rapid expansion of the Chinese economy in
recent decades has ended China's self-sufficiency with regard
to raw materials and forced state-owned enterprises to carry
out resource-seeking investments, promoting the outbound
investment to deploy the cash reserves accumulated through
exports and profit at home.
- Thirdly, and unlike in the past, Chinese corporations now
hold strong cash positions and quality investment
opportunities in the domestic overheated market are
- Finally, the current exchange rate encourages overseas
acquisitions as the appreciation of the renminbi
makes purchasing power higher in relative terms.
Although total Chinese outbound investment is still small
relative to the size of its economy, most analysts believe that
the country is on the verge of ramping up acquisitions and
investments in new greenfield facilities around the world in
the coming decades, continuing the trend initiated in the
mid-2000s. A recent study published by Rhodium Group and China
International Capital Corporation (China Invests in
Europe, June 2012) confirms this, as Chinese FDI into
Europe tripled in 2011 to $10 billion and Chinese companies are
in the early stages of a global shopping spree that could see
them spend as much as $250 to $500 billion in Europe by
By contrast, Chinese FDI in Latin America is quite a recent
phenomenon. Following an extended period of high commodity
prices, Chinese FDI has only really taken off only since 2010
(year in which China invested twice as much in Latin America
– $15 billion – as it did over the previous
two decades combined). China is now the third-largest investor
in the region, after the US and Europe.
While the FDI in the region in 1990s and 2000s were
predominantly originated in the U.S. and Europe, the subsequent
decade may see China overtake the leading role and become the
main foreign investor in Latin America. Brazil, Argentina,
Peru, Mexico, Chile and Colombia are the main recipient
countries of Chinese investments, of which over 90% has been
targeted at extractive industries. In the coming years,
following the same trend that Japanese and Korean outward FDI
had in the recent past, and which were also initially
concentrated on natural resources, it is expected that Chinese
FDI in Latin America will tap into other sectors such as
infrastructure and manufacture.
Tax structuring of Chinese investments in Latin
Going global requires proper legal and tax planning and
Chinese corporations must address challenging issues in Latin
America to avoid common pitfalls.
Traditionally, domestic tax laws in capital-importing
countries (developing nations) provide high withholding tax
rates on cross-border payments to foreign taxpayers. High
withholding tax rates help these countries 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 this region should
work on setting-up efficient tax structures from the outset
that allow for the repatriation of income (in the form of
dividends, interest, royalties or gains), reducing or
eliminating, where possible, the tax leakage in the source
country and hence increasing the after-tax return of their
One of the first questions that arises when working on the
legal structuring of the investment is whether the new
investment or acquisition of a existent business or company
should be made directly from China or whether it would be more
efficient to interpose an intermediate holding company. In most
cases, using a holding company will be the right choice. Of
course, when choosing the optimal holding jurisdiction, Chinese
investors will have to consider general anti-avoidance rules
(GAAR) that may serve the local or foreign tax authorities to
challenge the use of conduit companies on treaty shopping
grounds, or on the basis of lack of a valid business purpose
for structuring the investment through a third country.
Chinese investors can benefit from using Spain as a platform
to invest in Latin America by setting up a Spanish holding
company to hold their subsidiaries in the region (just as many
US, European and even Latin American multinationals have
successfully done in the recent past).
Benefits of using a holding company to invest in
Depending on the country of tax residence of the investor,
using an intermediate holding company to invest in Latin
America can maximise the tax efficiency of the structure and
ensure legal protection of the investment.
An ideal holding entity for investment would be resident for
tax purposes in a country that at least meets the following
First, it would have an extensive and favourable tax treaty
network with Latin American countries, under which taxation in
the country of source of income to be repatriated in the form
of dividends, interest, royalties or gains would be reduced (if
It would, secondly, have an attractive holding regime under
which dividends and capital gains derived from Latin American
subsidiaries would be exempt under the participation exemption
regime (thus avoiding the taxation of overseas profits and
creating a tax-free pool of funds to maximise reinvesting
capacity). Moreover, profits would be distributable to foreign
shareholders in the form of dividends without tax leakage (no
withholding tax on dividends) and capital gains on the transfer
of the holding shares would not be taxable in the country of
residence of the holding entity.
Third, it would have an extensive bilateral investment
treaty (BIT) network with Latin American countries that
protects against the unfair treatment of foreign investments,
inherently mitigating any possible political reaction. BITs are
agreements between two countries for the reciprocal
encouragement, promotion and protection of investments in each
other's territories by companies based in either country.
Treaties typically cover the following areas: scope and
definition of investment, admission and establishment, national
treatment, most-favoured-nation treatment, fair and equitable
treatment, compensation in the event of expropriation or damage
to the investment, guarantees of free transfers of funds, and
dispute settlement mechanisms (both state-state and
Logically, if the country of residence of the investor does
not fulfil these requirements, it is not an optimal platform
from which to directly invest in Latin America and the next
question in such cases is where the offshore holding company
should be incorporated.
China as a platform to invest in Latin America is
not tax efficient
Strictly from a tax perspective, China is not an optimal
jurisdiction from which to directly invest in Latin
Firstly, China has a poor tax treaty network in the region.
Specifically, China has only signed tax treaties with Brazil,
Cuba, Mexico and Venezuela (the terms of which are not
particularly favourable). As a result, income directly flowing
from other Latin American countries to China is taxed at source
in accordance with domestic rates, which are generally higher
that the rates applicable under a tax treaty.
Secondly, China does not have an attractive holding regime.
In fact, the Chinese domestic tax treatment of income derived
from outbound investments in Latin America (generally, in the
form of dividends or capital gains upon divestment in the
overseas subsidiaries) is not efficient. Chinese corporations
are taxed on their world wide income at a rate of 25%. Foreign
source income is also subject to the 25% Corporate Income Tax
(CIT) rate, but the Chinese company is entitled to apply a
foreign tax credit for taxes paid abroad to avoid international
double taxation (that is, the same profits generated by the
Latin America subsidiary being taxed twice: initially, in the
country of source when the subsidiary earns operating profits
and, subsequently, in China when profits are received as
dividends by the Chinese parent company).
In practice, the foreign tax credit method implies that the
parent company still must pay taxes in China on dividends
received from foreign subsidiaries, or gains realised on their
transfer, if underlying taxes in the country of source have
been below the 25% Chinese CIT rate.
The inefficient tax treatment of foreign source income in
China is one of the reasons why Chinese corporations making
outbound investments usually invest through foreign vehicles
incorporated in offshore jurisdictions which have a territorial
tax system. Under a territorial tax system, income generated by
a company is only taxable if it has been generated within the
borders of a given jurisdiction (in other words, income
generated overseas is not subject to income tax). By
interposing a holding entity and postponing the payment of
dividends to the Chinese parent company, the tax burden of the
additional Chinese CIT can be easily deferred (conversely, if
dividends are received by the Chinese company, they become
immediately taxable up to 25%, enabling the application of a
foreign tax credit, as described).
For instance, in 2010, more than 70% of Chinese FDI outflows
were channelled through Hong Kong, the British Virgin Islands
and the Cayman Islands. The problem with Chinese companies
using these offshore vehicles to directly invest in Latin
America is that most countries regard them as tax havens.
Indeed, offshore territories are usually blacklisted in Latin
America and under domestic anti-abuse tax rules income flowing
to these territories is customarily subject to higher tax
rates. For instance, while Hong Kong does have an efficient
holding regime, it lacks a comprehensive tax treaty and an
extensive BIT network to underpin its holding regime.
Furthermore, Hong Kong is considered a tax haven by many Latin
American countries and therefore, generally speaking, using a
Hong Kong holding entity would not provide a tax-efficient
investment window into Latin America. Consequently, direct
investment by companies in Hong Kong and China into Latin
America is often not very tax efficient.
Finally, China has a relatively large BIT network in Latin
America (it has concluded investment treaties with nine
countries, namely, Argentina, Chile, Ecuador, Uruguay, Peru,
Bolivia, Cuba, Mexico and Colombia). Most of these BITs were,
however, negotiated and signed when China was predominantly a
destination for inbound investment and, in some cases, they
provide limited fair treatment rights and investment dispute
resolution mechanisms for outbound investments in Latin
Advantages of the Spanish holding
Unlike China, Spain meets the three requirements mentioned
above and therefore constitutes a tax efficient jurisdiction
from which to directly invest in Latin America.
Spain has the most extensive and favourable tax treaty
network with Latin American countries in the world (Spain has
entered into tax treaties with Argentina, Barbados, Bolivia,
Brazil, Chile, Colombia, Costa Rica, Cuba, Ecuador, El
Salvador, Jamaica, Mexico, Panama, Trinidad and Tobago, Uruguay
Spain boasts one of the most attractive holding regimes. A
Spanish holding company or Entidad de Tenencia de Valores
Extranjeros (better known by the Spanish acronym ETVE) is
a standard Spanish company which is subject to 30% tax on its
income, but entitled to a participation exemption on qualifying
foreign-sourced dividends and capital gains.
In addition to these standard features of a holding company,
the ETVE regime offers a substantial advantage with respect to
other appealing European holding company locations (such as the
Dutch or Luxembourg holdings), because dividends distributed by
the Spanish holding company to non-Spanish resident
shareholders are exempt from Spanish withholding tax on
dividends. In addition, capital gains triggered by a
non-resident shareholder on the transfer of its interest in a
Spanish holding company are not subject to the Spanish 21%
capital gains tax to the extent that such capital gains
(indirectly) arise from an increase in the value of the foreign
holdings of the Spanish holding company.
ETVEs can benefit from rights deriving from European Union
Directives such as the Parent/Subsidiary Directive and the
Merger Directive and they are regarded as a Spanish resident
for tax purposes pursuant to Spain's 80 bilateral tax treaties.
Spain's broad tax-treaty network with Latin America and the
European character of the ETVE make it an attractive vehicle
for channelling capital investments into Latin America as well
as a tax-efficient exit route for European Union capital
The main tax features of the ETVE are that dividends
obtained from qualified non-resident subsidiaries, and capital
gains obtained on the transfer of the shares held by the ETVE
in qualified non-resident subsidiaries are exempt from Spanish
- the ETVE holds a minimum 5% interest in the equity of the
non-resident subsidiary (and any second-tier subsidiary) or,
alternatively, the acquisition value of the interest in the
non-resident subsidiary amounts to at least €6 million
($7.55 million) (the interest must be held directly or
indirectly for more than one year);
- the non-resident subsidiary is subject to and not exempt
from a tax similar in nature to the Spanish CIT and is not
resident in a tax-haven country or jurisdiction; and,
- the non-resident subsidiary is engaged in an active trade
Finally, Spain has ratified 18 BITs with Latin American
countries (Argentina, Bolivia, Chile, Colombia, Costa Rica,
Cuba, Ecuador, El Salvador, Mexico, Nicaragua, Panama, Peru,
Uruguay, Honduras, Paraguay, Venezuela, the Dominican Republic
The combination of the largest tax treaty network, an
attractive holding regime and a high number of BITs makes Spain
an unmatched platform to channel FDI into Latin America.
In fact, the volume of Spanish and non-Spanish FDI in Latin
America speaks for itself. According to the official statistics
of the Spanish government, during the period 1993-2012 (Q1),
Spanish FDI in Latin America accounted for more than €174
billion (of which more than €30 billion was invested by
Spanish holding companies in Latin America owned by non-Spanish
investors). In 2011, Spain was the second-biggest investor in
Latin America, after the US. Specifically, according to ECLA,
out of the total FDI received in 2011 by Latin America, 18% was
originated in the US, 14% in Spain and 8% in Japan.
Despite the appeal of the ETVE structures, traditionally,
unlike other Asian multinationals, Chinese international groups
have not invested in Latin America through ETVEs because, as
mentioned, they usually hold their foreign subsidiaries through
offshore territories (such as Hong Kong, the Cayman Islands and
the British Virgin Islands) which are also considered tax
havens for Spanish purposes. Direct investments from these
jurisdictions into ETVEs are not tax efficient because of the
anti-avoidance Spanish rules.
However, the entry into force in July this year of the
recent Spain-Hong Kong tax treaty has paved the way for Chinese
multinationals to invest in ETVEs through their Hong Kong tax
resident holdings and some Chinese multinationals are starting
to implement ETVE structures to hold their Latin American
The tax treaty between Spain and Hong
On April 1 2011, Hong Kong signed a tax treaty with Spain.
It entered into force in July 2012. The new tax treaty
represents the potential for new tax planning and investment
structure opportunities that would reduce the overall
tax-burden on Chinese investments in Latin America.
By virtue of the tax treaty, Hong Kong will cease to be
considered a tax haven for Spanish tax purposes. Consequently,
the tax treaty potentially opens the door to new tax
structuring opportunities for Chinese investors that will be
able to channel their outbound investments through Hong Kong to
structure their investments into Latin America by using Spanish
holding companies, provided the investment structure is based
on appropriate business reasons. By doing so, Hong Kong
investors may lawfully benefit from the Spanish tax treaty
network in Latin America and also from the attractive Spanish
holding regime. This will discernibly help reduce the overall
tax-burden on repatriated Latin American source income.
Chinese investors should seriously consider the
interposition of an intermediary Spanish ETVE in the overall
structure of Chinese and Hong Kong investment into Latin
America, provided that this investment structure is based on
appropriate business reasons.
Carlos Duran is a senior associate in the tax
practice Area of Uría Menéndez. He joined
the firm in 2003. From 2007 to 2010 he was responsible
for the tax practice in the New York office of the
He specialises in international taxation, regularly
advising on the tax planning of international
investment structures in Latin America by both foreign
and Spanish based multinationals. He is also actively
engaged on the tax planning of M&A transactions,
private equity deals and finance projects.
Duran is a regular speaker at seminars and
conferences on subjects pertaining to his field of
expertise and lectures on international business law
and taxation in the Executive MBA at ESADE.
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