NASSAU CONFERENCE

1. NASSAU CONFERENCE Brazil’s New CFC Legislation and Its Potential Impact on Clients and Their Offshore Structures October 2014

2. Brazilian Residents Investing Abroad – General overview • Remittance of Funds Abroad by Brazilian Investors • Central Bank’s regulation permits the remittance of funds abroad through foreign exchange transactions, without limitation on the amounts to be remitted. • Investors are required to provide evidence regarding (i) the legality of the funds and the investment; (ii) the economic purpose of the investment; and (iii) compliance with tax obligations. • Permitted Investments • Deposit in checking and saving accounts; • Direct investment, including through the international contribution of Brazilian asset; • Portfolio investments; • Unilateral transfers (donations, inheritances); • Other investments: real estate and any other assets and rights.

3. Brazilian Residents Investing Abroad – Reporting Obligations • Tax Reporting Obligations • Brazilian resident individuals are required to file a tax return until the last business day of April every year, in which they shall report not only all income and capital gains realized throughout the prior year, but also all rights, assets, and liabilities (indebtedness) held on December 31 of that year. • The rights and assets shall be reported at cost value (not market value). • Central Bank Reporting Obligations • Brazilian resident individuals are required to report assets held abroad to the Brazilian Central Bank, at market value, to the extent the aggregate value of the foreign assets exceeds US$100,000.00. • Such reporting must be made: • annually, between February 15th and April 5th, relating to all assets held abroad on December 31stof each year, in case the aggregate amount exceeds US$100,000.00; or • quarterly, if the resident individual owns assets in amounts exceeding in the aggregate US$100,000,000.00, in the following dates: • between April 30th and June 5th, regarding assets held on March 31st; • between July 31st and September 5th, regarding assets held on June 30th; • between October 31st and December 5th, regarding assets held on September 30th.

4. Brazilian Residents Investing Abroad – Fiscal aspects (current rules) • Worldwide Taxation • Brazilian resident individuals are subject to income taxes on a worldwide basis when acquiring legal or economic availability of assets, whether or not remitted to Brazil. • Income tax • Income received by Brazilian resident individuals from foreign sources is subject to income tax on a progressive basis (carnê-leão). • Applicable rates vary from 7.5% to 27.5%. • Capital gains tax • Capital gains realized by resident individuals are generally subject to income taxes in Brazil at a 15% flat rate, regardless of whether the relevant right or asset is located in Brazil or abroad. • The tax basis is the positive difference between the acquisition cost and the sales price, provided that: (i) if the asset or right is acquired with income earned originally in Brazilian currency, the tax basis takes into consideration the variation of the exchange rate during the period between the purchase and the sale of the investment; and (ii) if the asset or right is acquired with income earned originally in foreign currency, the exchange variation rate does not affect the basis for the calculation of the Brazilian income tax.

5. Brazilian Residents Investing Abroad – Fiscal aspects (current rules) • Capital gains tax (cont.) • The settlement, liquidation, or redemption of financial investments abroad, including, without limitation, interests in foreign investment funds, are deemed to be capital gains, and, thus, subject to tax at a 15% rate; provided, however, that distributions other than those relating to the settlement, liquidation or redemption of the asset shall be treated as regular income. • Special care must be taken when considering fund structures that differ from those available in Brazil, in special partnership, trusts, and tax transparent structures. • Foreign tax credit • Brazilian resident individuals are entitled to use the amount of taxes on income paid abroad as credit against income taxes due in Brazil, provided that the foreign country (i) has entered into a treaty with Brazil providing for such offsetting, or (ii) grants reciprocal treatment for taxes paid in Brazil by non-residents (such as the US). • The amount of such credit is limited to Brazilian income tax liability on the income received.

6. Brazilian Residents Investing Abroad – Tax deferral structures • Corporate structures allow tax deferral until actual distribution of cash or assets to the individual, which facilitates the tax administration of the investment. • Investments funds, companies and partnerships are commonly used by Brazilian resident individuals to: • defer taxes in Brazil; • mitigate reporting obligation; • facilitate tax compliance; • combine succession planning alternatives; • in case of investment funds, reduce the tax burden. • Some corporate and partnership structures abroad may be organized in such a fashion as to include succession planning solutions.

7. Brazilian Residents Investing Abroad – Foreign trusts • General Overview: Foreign Trusts in Brazil • Brazilian resident individuals may settle trusts abroad for estate planning and asset protection reasons. • Uncertainties relating to trusts in Brazil: • lack of legal provision; • Brazil is not a party to the Hague Convention on Trusts for Civil Law Countries; • similarities between the trust and some civil law concepts, such as gift encumbered with charges, agency, deposit, contracts for the benefit of third parties, usufruct and fideicomissium, but none encompasses the essential features of a trust; • lack of specific tax regulation in respect to trusts and distributions from trusts in Brazil; • lack of case law or administrative precedents. • The specific aspects of each trust must be considered to determine applicable consequences. Different tax consequences apply depending on how Brazilian tax authorities will qualify the trust. • Relevant concepts of Brazilian Private law: • the assets are subject to the law of the country in which they are located; • the obligations are subject to the law of the country in which they are undertaken; however, in order to be enforceable in Brazil, formalities required by Brazilian law must be previously complied with.

8. Brazilian Residents Investing Abroad – Foreign trusts (cont.) • Treatment for tax purposes • Irrevocable trusts: If settled by a Brazilian resident, gift tax must be paid. In such case, there will be no reporting obligations, but Brazilian tax authorities will most likely classify distribution of either income or capital to Brazilian resident individuals as general income, subject to the progressive rates (up to 27.5%); • Revocable trusts: Gift taxes should not be paid. It is suggested to report, in the annual tax return, the underlying assets and rights as investments held through a trust. Trusts may be considered transparent entities and applicable taxation will depend on the nature of the underlying assets or rights. Two possible approaches: • report the trust and the amount of capital contributed (i.e., right); • report underlying assets (i.e., shares of companies etc.). • Transfer of Assets to a Trust • Brazilian tax authorities may qualify the contribution of assets by a Brazilian resident individual to a trust as: • gift: subject to gift tax at rates that may reach 8% (in the States of São Paulo and Rio de Janeiro the current rate is 4%); • onerous assignment: subject to capital gains tax (15%) if the value of such transfer is higher than the acquisition cost of the asset reported by the individual in his tax return. • Payment of Income to Beneficiaries • Income paid to beneficiaries is taxed and reported pursuant to the applicable laws of the country of residence of each beneficiary.

9. Brazilian Residents Investing Abroad – Foreign trusts (cont.) • Mitigation of uncertainties regarding trusts in Brazil: Settlement of Trust by a Foreign Company • Direct investment by Brazilian resident individuals into a foreign company or partnership, which would (directly or indirectly) act as the settlor of the trust. • Reporting obligation of the Brazilian resident individual (tax and Central Bank of Brazil) in respect to the shares or interests held in such company or partnership. • The trust would be able to distribute capital or income to the company or the partnership structure, as the settlor, or directly to beneficiaries. • This alternative could add more certainty to asset protection structures specially if combined with succession planning arrangements at the level of the company or partnership.

10. Brazilian Residents Investing Abroad – Possible structures (current rules) Individual Individual Redemption of Interests - 15% Distribution of income - 27.5% Dividends - 27.5% Capital reduction - 0% Brazil Brazil Abroad Abroad Company Fund Assets Assets • The contribution of assets to the share capital of the Company does not trigger taxable capital gains in Brazil, provided that the transaction is carried out by the value assigned to the asset in the individual’s tax return (transfer at cost). • Otherwise, the positive difference between capital subscription and the assigned asset value is subject to tax as capital gain at a 15% rate. • The capital return (or reduction, as such transactions are commonly referred to in Brazil) to the individual is not subject to taxation. • In general, assets transferred to investment funds at cost value should not trigger income taxation in Brazil. • However, the Federal Revenue Service (“RFB”) has issued Declaratory Act No. 7/07, which states that securities used to pay up investment fund’s interests shall be transferred at market value. Thus, the positive difference between the securities’ market value and the value assigned to it at the individual’s tax return is subject to income tax as capital gain at a 15% rate. • In light of the above, it is possible that RFB will try to sustain that all assets transferred to foreign funds must be done at market value.

11. Brazilian Residents Investing Abroad – Possible structures (current rules) • Comments made in slide 10 are applicable. Individual Capital reduction - 0% Dividends - 27.5% Brazil Abroad Company Trust Distribution of capital or income - 27.5% Company Assets

12. Brazilian Residents Investing Abroad – MP 627/13 • Provisional Measure 627/13 and CFC rules for individuals • Provisional Measure No. 627/13 (“MP 627/13”), published in November 2013, introduced new rules regarding taxation on worldwide income for individuals. • As a rule, provisional measures have immediate effect, but they also function as bills, which means the Congress may sanction or reject them, either entirely or partially. • The provisions of MP 627/13 regarding the CFC rules for individuals was not sanctioned by the Congress; thus, the law resulting from MP 627/13 did not provide for a CFC regime for natural persons. • In spite of that, it is more likely than not that, in the (near?) future, Brazil will impose CFC rules for individuals, which would lead to the necessity to review how Brazilian resident individuals invest abroad.

13. Brazilian Residents Investing Abroad – MP 627/13 • Provisional Measure 627/13 and CFC rules for individuals (cont.): the purported new regime • Profits derived by controlledcompanies domiciled abroad are deemed available to the Brazilian resident individual on the date of the balance sheet on which such profits are recorded. • Control – The individual is considered to control the company if he/she, together with other individuals or legal entities (Brazilian resident or otherwise) considered related to him/her, holds more than 50% of the voting shares of the foreign company. • Other Requirements – At least one of the following conditions must be present: • the controlled company(i) is located in a country or dependent territory/area considered as a jurisdiction with favorable taxation (“tax haven”); or(ii) benefits from a privileged tax regime (such as US LLCs) – both defined by law; • the controlled company is subject to a “subtaxation regime”, defined as the one in which companies are subject to income tax at rates lower than 20%; • the Brazilian resident individual does not possess the articles of incorporation of the foreign legal entity and its corresponding amendments, publicly registered with the relevant competent authorities, identifying all other shareholders and their stake in the company. • The taxable basis is the profits attributable to the individual in proportion to his participation in the capital of the company, at progressive rates that may reach 27.5%. • MP 627/13 explicitly excluded investments held abroad in regulated investment funds from the CFC regime.

14. Brazilian Residents Investing Abroad – MP 627/13 • Provisional Decree 627/13 and CFC rules for individuals (cont.) • It would be possible to avoid the CFC regime by: • (i) ensuring the controlled foreign company is not domiciled in a tax haven or is subject to a favorable taxation regime or subtaxation regime; and (ii) keeping all relevant corporate documents of the foreign company that are able to identify its shareholders; • relinquishing control of the foreign company; or • investing in regulated investment funds. 1. Brazil has income tax treaties in force with the following countries: Argentina; Austria; Belgium; Canada; Chile; China; the Czech Republic; Denmark; Ecuador; Finland; France; Hungary; India; Israel; Italy; Japan; South Korea; Luxembourg; Mexico; the Netherlands; Norway; Peru; the Philippines; Portugal; Slovakia; South Africa; Spain; Sweden; Turkey; and Ukraine. Double tax treaties signed and not in force include: Paraguay; Russia; Trinidad and Tobago; and Venezuela..

15. Brazilian Residents Investing Abroad – MP 627/13 • Provisional Decree 627/13 and CFC rules for individuals (cont.) • The “Vale Case” – the Brazilian Superior Court of Justice has recently ruled that: • double tax treaties must be complied with by tax authorities; • non-distributed profits deriving from companies located in treaty partner jurisdictions cannot be taxed in Brazil1. • ADI 2,588 – the BrazilianSupreme Court ruled that the law which established the automatic taxation of profits generated abroad does not reach profits earned abroad before the effectiveness of the relevant law. • Both precedents refer to CFC legislation applicable to Brazilian companies. However, such precedents are also applicable to Brazilian resident individuals. 1. Brazil has income tax treaties in force with the following countries: Argentina; Austria; Belgium; Canada; Chile; China; the Czech Republic; Denmark; Ecuador; Finland; France; Hungary; India; Israel; Italy; Japan; South Korea; Luxembourg; Mexico; the Netherlands; Norway; Peru; the Philippines; Portugal; Slovakia; South Africa; Spain; Sweden; Turkey; and Ukraine. Double tax treaties signed and not in force include: Paraguay; Russia; Trinidad and Tobago; and Venezuela.

16. Brazilian Residents Investing Abroad – Possible structures (MP 627/13) • Comments made in slide 10 are applicable. • In this scenario, where the CFC regime for individuals is in force, the investment through a foreign investment fund is not subject to the automatic taxation established in MP 627/13. • If, however, instead of the Fund, the Individual invested in a foreign Company, its profits would be subject to taxation in Brazil at rates varying up to 27.5%, whenever the Company records profits in its balance sheet. Individual Distribution of income – 27.5% Redemption of Interests - 15% Brazil Abroad Fund Assets

17. Brazilian Residents Investing Abroad – Possible structures (MP 627/13) • If the invested Company (or Partnership) is not controlled by the individual, taxation of its profits would be deferred to the moment when such profits are made available to the individual. • Even if the Company (or Partnership) is controlledby the individual, provisions of MP 627/13 would not apply, if: • the controlled Company (or Partnership) is not located in a tax haven and does not benefit from a Privileged Tax Regime; • the controlled Company (or Partnership) is not subject to a “subtaxation regime”; and • the Brazilian resident individual possesses the articles of incorporation of the foreign legal entity and its corresponding amendments, publicly registered with the relevant competent authorities, identifying all other shareholders and their stake in the company. • If the invested Company (or Partnership) is established in a country that has entered into a double taxation treaty with Brazil (“treaty partner”), and if it does not fall under MP 627/13, profits derived by the Company would only be subject to taxation in Brazil upon distribution to the individual. • Income made available to the individual is subject to taxation in Brazil at rates varying up to 27.5%, unless the relevant treaty provides otherwise. • The application of the relevant double tax treaty may be jeopardized if the Company does not possess economic substance. Brazilian tax authorities may try to disregard the treaty, or even the Company, arguing that its existence lacks business purposes and that it was set up with the exclusive purpose of benefitting from the Brazilian treaty network. In that sense, tax authorities may resort to arguments like “treaty shopping”, “conduit companies”, “base companies”, among others. Individual Capital reduction - 0% Dividends - 27.5% Brazil Abroad Company/Partnership Assets

18. Humberto de HaroSanches hsanches@ulhoacanto.com.br ULHÔA CANTO, REZENDE E GUERRA ADVOGADOS Av. BrigadeiroFaria Lima, 1847 São Paulo – SP – CEP 01452-001 – Brasil Tel 55 11 3066 3072 – Fax 55 11 3066 3047