Brazilian wealth seeks Cayman deals in complex environment

(CNS Business): The use of Cayman Islands funds as a wealth management tool for high net worth Latin American families was debated last week at the STEP LatAm Conference in Brazil, where kidnapping is a constant worry for the wealthy and demand for outbound investments is fuelled by privacy and security concerns as much as any other factor.

Outbound investments are attractive for Brazil’s wealthy for many reasons, including protection against political risk and the risk of holding assets in the local currency. Privacy and security protection is a huge concern in Brazil, where the threat of kidnap and even murder is just an everyday part of doing business. The stories about wealthy executives driving around in old, beaten up cars to avoid drawing attention to themselves are true, lawyers say, and are a good reason to seek asset protection offshore.

While Latin America presents significant opportunities for offshore firms to expand services into this fast growth region, structuring deals though Cayman for Brazilian investors, particularly downstream M&A from the explosion in private equity money, is not always straightforward. Exchange controls and other regulations on the movement of money in many Latin American countries complicate matters and Cayman’s Tax Information Exchange Agreement (TIEA) network in the region, while taking shape, is not complete.

As Andrew Miller, partner with Walkers, explained in his presentation on ‘Information Exchange from a Cayman Perspective’, Cayman has currently signed TIEAs with Argentina, Mexico and Brazil, but while the Argentinian and Mexican agreements came into force in 2012, the 2013 agreement with Brazil has yet to. Brazil also still classifies the Cayman Islands as a tax haven or “fiscal paradise”, as it is referred to.

Barriers to doing business present an additional layer of complexity for Cayman firms structuring deals, requiring clever manoeuvring to make them work, perhaps by introducing a Delaware entity into the corporate structure. The situation also has a knock-on effect in terms of capital efficiency and growth for developing countries in Latin America. By subjecting companies and individuals to additional barriers and obstacles when dealing with IFCs at a time of high competition for capital, Brazil is limiting its potential growth.

It is also leaving investors to consider more open emerging economies, such as those in Asia, where putting a Cayman company at the top of an acquisition vehicle is much more straightforward. The ability to dictate control of the corporate structure is crucial in order to provide comfort to lenders, with complex governance issues, as capital crosses multiple borders, perhaps due to the path of a gas pipeline, which exposes investors to additional risk from potentially unstable governments.

As one of the key events for the offshore industry in the region, there was a strong turnout from the local industry for the STEP event, with 13 individuals from ten firms in Cayman making the 7,500 mile round trip to São Paulo.

“We continue to see strong demand from sophisticated HNWs and family offices in Brazil that use Cayman Islands investment funds as an integral part of their wealth management and tax planning,” said Nicholas Pattman, senior counsel at Walkers, who participated in the discussion on funds for Brazilian outbound investment.

“As the leading offshore investment funds jurisdiction, the Cayman Islands’ fund products, its legal and regulatory framework and the quality of its service providers continue to ensure it is the offshore jurisdiction of choice for Brazil,” Pattman said. “The increased workflow out of the country of late has undoubtedly been fuelled by its current political and economic environment.”

Also featuring on the agenda at the STEP LatAm Conference 2015, which was held on October 22 and 23, were presentations on base erosion and profit shifting — the next big OECD project aimed at low tax jurisdictions — as well as business trusts for mega development projects in Latin America and the prospective tax amnesty programme for undeclared funds in Brazil.

“The conference was very well attended and sponsored and the feedback we have received from the delegates so far has been very positive,” Miller said. “Essentially the conference continues to go from strength to strength and is doing much to promote STEP in Latin America. It was well attended from banks, trust companies and law firms from Cayman.”