(EMPRESA MULTINACIONAL ANDINA – “EMA”)
This article, by Paul Tadros, was originally published in Practical Latin American Tax Strategies by WorldTrade Executive Inc. and has not been updated for any subsequent changes. All rights reserved©.

INTRODUCTION
The EMA regime is akin to a holding company regime and is found only in the laws of Bolivia, Colombia, Ecuador, Peru, and Venezuela, the member countries of Decision 578, the multilateral tax agreement called “Agreement To Avoid Double Taxation and Prevent Fiscal Evasion”. Decision 578 is the successor to Decision 40 of the Andean Pact. On April 22, 2006, the Government of Venezuela notified the Secretary General of
the Andean Community of Nations (“CAN”) that it is withdrawing from the Cartagena Accord. While it is clear that Venezuela will no longer be part of the Free Trade Agreement between the aforementioned countries comprising CAN, it is not clear whether Venezuela’s action also applies to Decision 578. Even if Venezuela’s
action does not apply to Decision 578, the other member countries may take the position that they will not apply Decision 578 to Venezuela.

One of the key requirements is that at least sixty percent (60%) of the capital of an EMA must be owned by national investors from two (2) or more member countries. In Bolivia, Ecuador and Peru, a company incorporated therein qualifies as a national investor regardless of the ownership of such corporation. For example, a corporation organized under the laws of Bolivia and a corporation organized under the laws of Ecuador are shareholders in a corporation organized under the laws of Peru. As a result, the Peruvian
corporation can qualify as an EMA.

COMPARISON TO THE HOLDING COMPANY REGIME IN CHILE
In the broader context, the Chilean holding company regime is more useful since it applies to all of Latin America. However, in the narrower context, given the source-based principle of taxation in Decision 578 and the reduced administrative burdens, the EMA regime should be more useful.

Under the Chilean holding company regime, quarterly audited financial statements prepared in accordance with Chilean principles must be timely filed. There is similar requirement under the EMA regime. As a result, the use of the Chilean holding company regime has been sparse.

Example
There are two (2) main factors which give the EMA regime unique advantages. The first arises from the provisions of Decision 578 and the second from the EMA regime itself.

Decision 578
Under Decision 578, payments such as dividends, interest, royalties, and fees for services from a resident of a member state (“payer”) to a resident of another member state (“recipient”) are subject to tax in the payer’s country of residence only. Such income is not subject to further tax in the recipient’s hands. However, the disadvantage is that there are no reduced rates of withholding in Decision 578 i.e. the domestic withholding rates of the payer’s country of residence apply. In some countries, these rates can range from zero percent (0%) for dividends (e.g. Ecuador) to 39.55% for royalties in Colombia.

In addition, income earned through a permanent establishment in another member state is subject to tax only in the state in which the permanent establishment is situated.

The EMA
Under the EMA regime, dividends paid by the EMA to a nonresident are not subject to a withholding tax regardless of the EMA’s country of incorporation. For example, while Peru currently imposes a withholding tax of 4.1% on dividends paid by a Peruvian corporation to its nonresident shareholders, the EMA formed under the laws of Peru and qualifying as such therein is exempt from the withholding tax on dividends.

Example
Like any planning undertaken, all of the facts and circumstances must be considered. While the following example is an abridged version of an implemented plan, it is not a “one size fits all” type.

Although Venezuela is used in the example below, it must be read in light of the uncertainty created due to Venezuela’s action noted above.
A company (“P”) organized under the laws of Peru qualifies as an EMA and operates  active trades and businesses through branches in Bolivia, Colombia, Ecuador, and Venezuela. For this purpose, the following assumptions are made: the two shareholders of P are an Ecuadorian and a Venezuelan corporation; the ultimate parent of the group is a U.S. “C” corporation; the entities formed in the local jurisdictions were all eligible entities for check-the-box purposes [Regulation section 301.7701 of the Internal Revenue Code, 1986, as amended, (“Code”)]; and, the sales branch and manufacturing branch  rules under Regulation section 1.954-3 of the Code were inapplicable.

The results were as follows:

• The income earned in Bolivia, Colombia, Ecuador, and Venezuela are not subject to tax in Peru (Decision 578).
• Branch remittance taxes of 12.5%, 7%, 0%, and 0%, respectively.
• On the payments of dividends from P to its shareholders: no withholding tax in
• Peru (EMA regime) and not taxable in Ecuador and Venezuela (Decision 578).
• On the payments of dividends from Ecuador and Venezuela to their parent, notwithholding taxes in Ecuador and Venezuela (domestic laws).
• Given the tax rates in the countries in which the businesses are conducted (these range from 25% to 35%), there were no incremental U.S. taxes on the repatriated income.

CONCLUSION
The objective was to illustrate one of the many planning opportunities available and did not address certain other advantageous elements in Decision 578.