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 On June 23, 2008, Brazil's Congress published Law 11,727/2008, which, effective as of January 1, 2009, will amend Brazil's transfer pricing regulations and expand the legal definition of tax havens. The surprising news in all of this is that it is widely believed that these changes were made specifically so that the exotic state of Delaware could be designated as a tax haven, or at least a jurisdiction with the characteristics of one.
Yes, you read that right - Delaware - the second-smallest state in the United States. The state which elected Joe Biden, Barack Obama's vice presidential running mate, as a United States senator, may be designated by Brazil as a fiscal paradise, just like the Cayman Islands, Panama, the British Virgin Islands and Bermuda. At this point, Brazil's tax authorities still need to adopt an expanded definition of tax havens, review its existing list of blacklisted jurisdictions and decide if it wants to add or remove any countries or locations. So, until Brazil's IRS issues a new list of tax havens to implement this legislation, something which it is expected to do by the end of this year, Delaware will remain something of a tax haven in waiting, or at least in the minds of many Brazilian lawyers and tax advisors. Now that you've wrapped your head around the seeming absurdity of Delaware being designated a tax haven, particularly if you happen to live there, you're no doubt wondering why in the world would Brazil want to designate Delaware as a tax haven. Before we address that issue, let's first take a look at what I'm calling the so what aspect of this legislation or why do I care if Brazil designates Delaware as a tax haven. Well, Delaware being designated a tax haven or a jurisdiction with the characteristics of one, would have a dramatic impact on the tax rates Brazil levies on certain payments made to persons or companies located in Delaware. Interest and royalty payments, as well as payments for service fees to companies or persons located in Delaware would be subject to 25% withholding tax rather than the general 15% rate. Capital gains taxes applicable to the sale of the shares of Brazilian companies by residents of Delaware would also be increased. And payments made to non-related parties located in Delaware would be treated as if they were payments made to related parties, and be subject to higher tax rates as well. Those are some of the consequences of Delaware being blacklisted. Now let's take a look at how Brazil expanded the definition of tax havens. Prior to the enactment of this legislation, tax havens were defined as countries or locations that didn't tax income or taxed it at a maximum rate of up to 20%. Law 11,727/2008 broadens this definition to include jurisdictions which don't permit access to information about a legal entity's shareholders, members or partners, how much equity they own, or the identity of its nonresident beneficial owners. Basically, if a jurisdiction doesn't require and permit access to a registry of the shareholder, members and partners of legal entities located there, then such jurisdiction may be designated as a jurisdiction with favored taxation or a tax haven. Well, as it turns out Delaware is such a jurisdiction. For instance, when you create a limited liability company or LLC in Delaware you are not required to list the equity participants, called members, in the document you file with the state to form the LLC. Nor are you required to file, register or disclose the LLC Agreement in which the members and their equity participation in the LLC are designated. So, unless the members of the LLC decide to disclose this information, or a governmental agency such as the IRS or the Securities Exchange Commission decides to cause or require the LLC or its members to disclose it, you can't access it. Alright, Delaware amazing fits Brazil's broadened definition of a tax haven. Let's now turn to what I refer to as the what's the deal with Delaware question or what does Delaware have to do with Brazil. Well, plenty it would seem. It just so happens that Delaware LLCs are popping up all over the place in Brazil as the partners and equity holders of Brazilian companies. And it seems that the Brazilian investors and Brazilian investment funds are in many cases the members of these Delaware LLCs. So, presumably Brazilian authorities have concluded that Brazilian investors and investment funds are using Delaware LLCs as part of some sort of tax planning scheme designed to conceal their identity and avoid paying taxes. You see, in Brazil you can access information about the shareholders of a Brazilian company. In fact, if you create a sociedade limitada, the most common form of legal entity used in Brazil, you are required to list the shareholders, called quotaholders, in the document you file at the commercial registry to create the limitada. You must amend this document whenever new shares, called quotas, are issued or a quotaholder transfers his quotas to another quotaholder or a third party. Each amendment must also be filed at the commercial registry. And once filed, this document and each amendment becomes a public document. So any one, including the Brazilian IRS, can obtain information about a limitada's quotaholder and how many quotas they own. But if you invest in a limitada through a Delaware LLC, it's the LLC that shows up as the quotaholder, not the members of the LLC, whose identity, as we have seen, is difficult if not impossible to access. Now while there are many reasons why someone, including a Brazilian investor, may want to use a Delaware LLC as an investment vehicle, including the predictability of Delaware law, the availability of pass-through taxation and limited liability protection for members, its not entirely clear that the primary reason for doing so is because Delaware does not permit access to information about the members of the LLC or the identity of their nonresident members. Yet, this is the focus Brazil's legislation broadening the definition of tax havens. Ironically, it may also turn out it be its pitfall. This is because while using Delaware LLCs may at the moment be in vogue in Brazil, as are driving bullet proof SUVs and using unlocked iPhones purchased in the U.S., Brazilian investors and investment funds could just as easy use LLCs from the state of Nevada or Wyoming, two states that are well known for not having any state or corporate tax, and which also do not permit access to information about shareholders, members or partners of legal entities. While I admit that I have not done a 50 state survey, I think its safe to say that no other state in the U.S. requires the members of an LLC to be listed in the certificate of formation used to create it, nor requires the registration, filing or disclosure of the LLC Agreement, sometime referred to as an Operating Agreement, in which the members of the LLC and their participation therein are designated. So, while Delaware, undoubtedly much to the surprise of its residents, would appear to be a tax haven in waiting, it's quite possible that once Brazil has blacklisted this state, and Brazilian investors and investment funds start using LLCs formed in other equally exotic U.S. states, the Brazilian IRS will be quite busy updating its list of blacklisted jurisdictions for years to come, always seemingly one or two steps behind the times in terms of what's in vogue as far as LLCs go. For all we know, Wyoming, a state most Brazilians have probably never even heard of, may be next on its list. Now, that would be something that Vice President Dick Cheney, who grew up there, could really feel proud about. Robert Eugene DiPaolo is the founder and managing director of The Fidelis Law Group, a legal consultancy offering U.S. and Brazil legal capacity. Robert can be reach by email at
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