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I am a UK taxpayer. I plan to provide 150000 to a Brazilian…

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I am a UK taxpayer...
I am a UK taxpayer. I plan to provide £150000 to a Brazilian company for a small property development.The investment is repayable within 12 months at £150000 +20% or £150000+ 45% of the profit whichever is the greater.
I could make a loan but would it not be more tax-efficient to subscribe for 20% Redeemable Participating Preference Shares?
Richard Norman.Or what would you advise?
Submitted: 8 years ago.Category: UK Property Law
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Customer reply replied 8 years ago
Relist: No answer yet.
Answered in 6 days by:
8/9/2010
Solicitor: SPG31,
 replied 8 years ago
SPG31
Category: UK Property Law
Satisfied Customers: 36
Verified
Hi Richard

In theory, it should be more tax-efficient to go for the redeemable participating preference shares because you are only taxed on fixed rate 20% dividends as they arise, and dividend tax rates are lower. The right to participate in profits does not itself trigger any tax event, although there will be a taxable distribution when the shares are redeemed. Contrast this with a loan, where you could potentially be taxed on interest equivalent to 45% of profits. This would be at 40% if you are a higher rate taxpayer, or 50% if your total income (including savings income) pushes you above the £150,000 threshold.

As for dividend tax rates, if your total income (including dividends) exceeds the basic rate limit for 2010-11 (£37,400) dividends will be taxed at 32.5%. If your total income (incl dividends) exceeds £150,000, the rate is 42.5%. The only note of caution I would mention re dividends is that there is currently no double tax treaty in force between Brazil and the UK, so you are unlikely to get a tax credit (normally, distributions made by companies in tax treaty jurisdictions carry a 10% tax credit for equity holders under UK domestic rules).

In the absence of any numbers or documentation I am unable to categorically state whether you will be financially better off using the prefs, taking into account the length of the term, interest/ dividend payments, redemption proceeds etc. But I hope this at least provides some useful guidance in helping you reach a decision. Good luck!
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Customer reply replied 8 years ago
1.Please explain''you are only taxed on fixed rate 20% dividends as they arise and dividend rates are lower''.What does this mean?2.I read on your Tax Laws website that 0% tax is deducted from dividend payments to non-residents.Is that not correct?3Why will there be ''a taxable distribution when the shares are redeemed"?Unless there has been a loss on the project the shares will pay a dividend of 20%[£30,000] or more if the project makes a profit in excess of £66,666 and the shares will be redeemed at par.

There is no documentation yet although the £150,000 is in Brazil and the development is well advanced.The term of the investment is likely to be one year with some penalty for late redemption such as an increase in the rate of dividend of 1% per month .The dividend would be payable at the same time as redemption of the Red.Participating Pref. Shares at par.

I am a 40% UK taxpayer.Is there anything else you need to know? Regards,Richard Norman.
Solicitor: SPG31,
 replied 8 years ago
Hi

To address each of your queries:

1. Redeemable Participating Preference Shares entail a right to receive dividends at a fixed rate (20% in this case) plus a further right to participate in the profits of the company. My understanding (from what you say) is that you would be receiving less cash by way of dividends than interest - the latter being potentially 45% of profits. This is what I had in mind when I said ' you are only taxed on fixed rate 20% dividends' - I was merely trying to make a comparison between dividends vs interest.

Also, when dividends become due and payable to UK residents, they become taxable in the hands of the UK resident - hence 'taxed as they arise'. The rates of taxation for dividends are lower than those for interest i.e. 32.5% instead of 40% (for a 40% taxpayer).

2. Which Tax Laws website are you referring to? Dividends paid by a UK company, whether paid to UK residents or non-residents, do not attract withholding taxes (i.e. UK income tax deducted at source). However, we are dealing with a Brazilian company payer, and Brazil may be required under its own laws to deduct Brazilian tax at source when it pays you a dividend. (I do not know what the Brazilian position is but can try and find out for you).

3. If the shares are to be redeemed at par, then the share redemption itself is likely to be a repayment of share capital rather than a dividend, and hence not a distribution for income tax purposes. Any dividends paid over and above that, such as the late redemption penalty you mention, will be taxable distributions and hence subject to income tax at the rates I mentioned earlier.

4. As you are a 40% UK taxpayer, any dividends should attract a rate of 32.5%. You will not be entitled to a 10% tax credit under the UK rules as there is currently no UK-Brazil tax treaty, but you may be able to get credit for Brazilian taxes (if any) under the UK's 'unilateral relief' provisions.

Please let me know if any of this is not clear. Regards, S

Edited by Sarah G on 8/10/2010 at 8:00 AM EST
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Customer reply replied 8 years ago
We are slightly at cross purposes,I think.I am pretty well acquainted with UK personal tax and corporate finance which is why I suggested a Redeemable Participating Preference Share capital structure.I had assumed you had the Brazilian tax expertise as my problem is knowing whether what would be a good idea in the UK makes sense when investing in Brazil.The position of the Brazilian company [owned by my business partner] is also relevant.

I found Brazil Tax Laws and Tax Sytem and www.worldwide-tax.com.

Deduction of Tax at Source
In Brazil tax is deducted from the following paymentsto non residents:

Dividend 0%
Interest 15/25%
Royalties 15%
Services 15%

The site also said there are tax agreements with many countries but not with the United States.
Can you see where I need help?
Regards
Richard Norman 01483 564424
Solicitor: SPG31,
 replied 8 years ago
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Customer reply replied 8 years ago
Is there someone else at this site who has the Brazilian knowledge to answer my question,please?
Customer reply replied 7 years ago
How does a UK taxpayer invest tax-efficiently in a small property company in Brazil?The R 5OO,OOO investment is for a single development ;the return is R100,000 or 45% of the profit whichever is the greater.In UK you would probably issue Redeemable Participating Preference Shares but what financial structure would be best for investing in Brazil?
Solicitor: Fran-mod,
 replied 7 years ago
Fran-mod
Category: UK Property Law
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My name is XXXXX XXXXX I am a moderator at JustAnswer.

You have asked a legal question about a country that we do not have active Experts in. We do wish to be able to supply you with an answer, and we plan on opening new categories on the site in the very near future. But for now, however, as much as we would like to assist you, we have to be honest and say that the best we may be able do is provide a legal Internet researcher who might be able to find your answer. We realize that option is not ideal.

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Customer reply replied 7 years ago

Thank you,Fran.It looks as though I had better take a refund and look elsewhere for the necessary advice.
Can you arrange the refund?

Richard Norman.
Solicitor: Fran-mod,
 replied 7 years ago

Hi Richard,

Sorry we could not assist you this time. I have just gone ahead and processed your refund.

Please allow 3 to 5 business days for your funding source to make your refund available to you.


You're currently still signed up for an unlimited subscription at JustAnswer.com. If you ever decide to cancel your subscription for any reason, you may log into your account, click on My Account, and turn the subscription off under Payment Information. Your account will then be converted to a regular account and you will pay for each individual question whenever you visit the site in the future.


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