A good way to do business

Friday, 01 January 2010

Most English-speaking practitioners and scholars are led to think that there is no actual relevance to the trust in Latin America. Nevertheless, today there is an extensive use of business trusts and guarantee trusts. Therefore, anyone wishing to do business in the region (i.e., as an investor, a creditor, or as a purchaser of goods from Latin American providers) will benefit from knowing how to use a trust as a business vehicle or a guarantee scheme.

Adoption of the trust in Latin America

The first Latin American jurisdiction to adopt the trust, as it is known today, was Mexico, and it did so in 1932 (Panama enacted a law based on the work of the prestigious scholar Ricardo J. Alfaro in 1925, but it was not actually used). Based on the Mexican experience, trust has made its way from north to south in the following order: Colombia (1941), Honduras (1950), Venezuela (1956), Costa Rica (1961), Brazil (1965), Guatemala and El Salvador (1970), Bolivia (1977), Panama (1984), Ecuador (1993), Argentina (1995), Peru and Paraguay (1996), and Uruguay (2003).

The procedure by which the trust has been introduced in these countries is the enactment of a trust act or the modification of the civil or commercial code. These rules allow the creation of business trusts, guarantee trusts, or trusts with any other purpose, with a wide range of possibilities and flexibility. The notable exceptions to the general trust regulation trend are Brazil and Chile.

Brazil adopted several kinds of guarantee trusts that can only be applied for specific purposes (i.e., a guarantee trust over real estate assets and a guarantee trust over movable assets), and there is no law regulating trusts for a purpose other than guarantee. Put differently, in Brazil there is no general regulation of administration trusts that could be used for several purposes, but there exists a specific set of rules for guarantee trusts.

In the case of Chile, there is no legal regulation of the trust at all. This does not mean that administration trusts are forbidden or illegal. Nevertheless, such ‘trusts’ do not enjoy the necessary legal protections and would probably be transactions based exclusively in the confidence that the grantor places on the trustee and not special-purpose patrimony.

Although at first glance it could be thought that the Latin American trust was derived directly from the Roman fiducia or fideicomissum, the current Latin American trust was actually inspired by the US trust, and it is a relatively ‘new‘ creature under the system of law prevailing in Latin American (‘continental law’). The differences between common law and continental law have led to an ‘adaptation‘ process.

Comparison of US and Latin American Trust

The main differences between Latin American and US trusts are listed as follows:

Trusts in Latin America are mainly business trusts (schemes such as the Massachusetts Trusts) and guarantee trusts, whereas in the United States, most practitioners consider trusts as an institution in the field of gratuitous transfers. Taking into account that several States have business trust acts, the difference is not so remarkable. Testamentary trusts are almost unknown in most countries in Latin America (mainly because of forced heirship rules). As Latin American continental law never had a separation like the one that used to exist between common law and equity, it is simply impossible to regard the Latin American trust as a relationship under which a beneficiary has a right ‘in equity’ or equivalent. Furthermore, the rule in civil law tradition is that jus in rem can only be created by an Act of Congress. In other words, if there is no statute that provides for the existence of trust property, such a concept cannot be created by agreement between parties. From a practical perspective, the trust generates a division of the property in the formal ownership of the trustee (or legal title) and benefits flowing hence (or beneficial interest) in the hands of the beneficiary. From a legal perspective, the trustee is the owner of real right of fiduciary, also called ‘trust property‘, and the beneficiary is the holder of a personal right to a credit against the trust.

The only form of trust contemplated in Latin American is the express trust. Furthermore, in several countries a trust can only be created by a written instrument. There is neither implied trust in the trust acts, nor case law creation of implied trusts. Compare with paragraph 407 of the US Uniform Trust Code, which provides that ‘except as required by a statute other than this [Code], a trust need not be evidenced by a trust instrument, but the creation of an oral trust and its terms may be established only by clear and convincing evidence.’ The US code allows the trust in favour of an animal (in re Trust for Care of Animal 408), which would not be valid under most Latin American laws.

The Uniform Trust Code 602(a) establishes that ‘unless the terms of a trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust.’ Latin American law provides that for inter vivos trusts, the rule is that they are irrevocable unless the settlor expressly reserves the right to revoke the trust.

Another practical difference is that in several countries of Latin America only banks or special-purpose companies can be trustees, whereas in the United States the rule is that any person can be a trustee.

A great difference between the trust model in the United States and in Latin America is that in the United States the general rule is that the settlor can be the trustee. This is because US law permits the creation of a trust by a unilateral act, i.e. there is no obstacle to the existence of a trust in which the grantor and the trustee are the same person. In Latin America, some jurisdictions, such as Bolivia, Brazil, Chile, and Peru allow securitisation companies, given certain conditions are met, to create trusts in which they are settlors and trustees. Nevertheless, the general rule is that the grantor and the trustee cannot be the same person.

The legislation in Latin America does not foresee the protector concept. Nevertheless, the creation of one is not forbidden and, for example, in Mexico, the existence of a ‘technical committee‘, whose functions are determined by the grantor, is foreseen by the law.

Finally, many Latin American laws provide in an express and clear fashion that the agreement that created a trust is a contract (nevertheless, this is not the case in all jurisdictions, and there is some debate as to the nature of the trust agreement). Conversely, the second Restatement of 1959 declares ‘the creation of a trust is conceived of as a conveyance of the beneficial interest in the trust property rather than as a contract.

Tax treatment of trusts in Latin America

The first aspect to be considered in tax matters is that Latin America comprehends centralised as well as federal countries. In countries belonging to the first group, two levels of taxation may be observed, i.e. the municipal and the national levels. On the other hand, federal countries (Argentina, Brazil and Mexico) exhibit three levels of taxation: the national or federal, the state or provincial and the municipal.

Secondly, it must be noted that most countries tax worldwide source income, whereas others (Costa Rica, Panama and Uruguay) only tax national source income. If a trust is located in a jurisdiction taxing worldwide source income, it must pay taxes on its profits in that jurisdiction, as well as on those originating in its activities performed, or capital placed, outside that jurisdiction.

Regarding the status of the trust as an income tax taxpayer, or pass-through entity, Latin American countries have not adopted a common solution. For example, in Colombia, Ecuador and Mexico the trust is a pass-through entity that attributes profits to the beneficiaries, Peru attributes profits to the settlor. Argentina offers a mixed solution, the trust being subject to taxation unless the settlor is the same person as the beneficiary, in which case taxation is attributed to said subjects. Finally, in Guatemala, Uruguay, and Honduras the trust is considered a taxpayer.

The trust is a useful legal vehicle or guarantee scheme for doing business in or with companies based in Latin American countries, with more flexibility and, in some countries, a more advantageous tax treatment. As a matter of fact, it is successfully used in forestry, agriculture, mining, real estate and the wine making industry, among others, and it is gaining momentum in the estate planning field.

Author block
Right
Nicolas Malumian

Nicolas Malumian TEP is a Partner at Estudio Malumian & Fossat.

Topic
Trusts
Section
STEP Journal
Country
Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Panama
Paraguay
Peru
Uruguay
Venezuela

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