SPAIN is making a push to persuade US power companies to run investments into Latin America through Spanish holding companies.

The country enacted a “participation exemption” regime similar to the one in Holland, and it has a wide network of tax treaties with Latin American countries.  Tax treaties often reduce the withholding taxes on cross-border payments.  They can make it less expensive to withdraw earnings from the project country.

The fact that Spain has a “participation exemption” means that it does not tax Spanish holding companies on their returns from equity investments outside Spain.  For example, a Spanish holding company owning all the shares in a project company in Mexico would not be taxed in Spain on dividends from the project company or on capital gains when shares in the project company are sold.

HOLLAND suggested a way to pull dividends out of a Dutch holding company without paying withholding taxes.

The suggestion is in a decree the Dutch state secretary of finance issued in early July.  It relies on Dutch tax law rather than tax treaties.

It works as follows: The key is that the foreign parent of a Dutch holding company must cause itself to have a “permanent establishment” in Holland to which shares in the Dutch holding company can be attributed.  There is no withholding tax on dividends paid by a Dutch holding company to the permanent establishment, or “PE,” of a foreign parent.  The foreign parent must have a genuine business in Holland.  This gives it a PE.  The activities of its Dutch holding companies should be directly related to the PE so that they can be attributed to it.  This could be done, for example, by having the foreign parent place a small staff in Holland to manage its investments or project development activity in Europe.  The staff would have to have independent decision-making authority.

The Dutch tax authorities will confirm by ruling that the technique works.

MEXICO should no longer collect withholding taxes on “grossed up” dividends.  The Mexican Supreme Court said the practice is unconstitutional.

Mexico collects a 5% withholding tax on dividends, but the tax is levied on 1.5835 times the dividend, resulting in an effective withholding tax of 7.69%.  Critics charge that the practice violates tax treaties limiting dividend withholding taxes to 5%.  The Supreme Court has now declared it unconstitutional.  Hacienda, the finance ministry, is analyzing whether it will make refunds to companies that have been withholding taxes at the higher effective rate.

CHILE is considering increasing its corporate tax rate from 15% to 17% over three years.  The government proposed the change to the Chilean Congress as a way to pay for lower tax rates for individuals.

Keith Martin