2014 Luxury & Fashion - Baker McKenzie

© 2014 Baker & McKenzie

2014 Luxury & Fashion Industry Conference for Multinationals

Trends and Nuances for

Emerging Markets

Michael Coleman

Raymundo Enriquez

Karyn Koiffman

Suchint Majmudar

Loke-Khoon Tan

Investing in the Maghreb,

Brazil, India and Mexico Michael L. Coleman

Raymundo Enriquez

Karyn Koiffman

Suchint Majmudar (BMR Advisors)

Overview of International

Trade Patterns

© 2014 Baker & McKenzie 4

Algeria, Morocco and Tunisia

‒ Location: Northwest Africa

‒ Population: 1% of the global population

38.7 million Algerians – the 4th largest economy in Africa

33.2 million Moroccans – the 5th economic strength in Africa

10.8 million Tunisians – among the top 15 destinations for Foreign

Direct Investment (FDI) flows in Africa


Foreign Direct Investments

Algeria USD 2.7 billion in 2012 and 2.8 billion in 2013

Main investor: Kuwait (23%) – U.S.: 13% in 2012

Morocco USD 2.8 billion in 2012 and 2.5 billion in 2013

Main investor: France (43%) – U.S.: 2% in 2013

Tunisia USD 1.1 billion in 2011 and 1.9 billion in 2012

Main investors: Qatar (31%) and France (15%)


Income Tax Treaties

Algeria Double taxation treaties entered into with more than 20 countries

worldwide (but NOT with the U.S.)

Withholding tax rates paid by resident taxpayers to non-resident companies applicable to:

- Dividends: 15% => 15% (Treaty with France)

- Interest: 10% => 10/12% (Treaty with France)

- Royalties: 24% (4.8% for the use of computer software) => 5/10/12% (Treaty with France)

Morocco Double taxation treaties entered into with more than 50 countries

worldwide (including the U.S.)


- Dividends: 15% => 15% (Treaty with France), 25/10% (Treaty with UK), 15/10% (Treaty with US)

- Interest: 10% => 10/15% (Treaty with France), 10% (Treaty with UK), 15% (Treaty with US)

- Royalties: 10% => 5/10% (Treaty with France), 10% (Treaty with UK), 10% (Treaty with US)

Tunisia Double taxation treaties entered into with more than 50 countries

worldwide (including the U.S.)


- Dividends: 5% => 20/12% (Treaty with UK), 20/14% (Treaty with US)

- Interest: 20% => 12% (Treaty with France), 10/12% (Treaty with UK), 15% (Treaty with US)

- Royalties: 15% => 5/10/15/20% (Treaty with France), 15% (Treaty with UK), 10/15% (Treaty with

US)


Customs Agreements

Algeria E.U. Partnership Agreement + Member of the Greater Arab

Free Trade Area (GAFTA) + Trade and Investment

Framework Agreement with the U.S.

Recently negotiated Association Agreement with EU which

provide for removal of all Customs duties on imports into

Algeria of goods manufactured in EU and vice versa by 2020

Morocco E.U. Association Agreement + Member of the GAFTA + Free

Trade Agreement with the U.S.

Tunisia E.U. Association Agreement + Member of the GAFTA +

Trade and Investment Framework Agreement with the U.S. +

Bilateral Agreement of Investments Promotion and

Protection with the U.S.


Favorable Customs Regime

‒ As part of the Euro-Mediterranean Partnership

(Euromed), Morocco and Tunisia have an Association

Agreement with the EU, which grants duty-free access to

the EU market for manufactured goods

Accordingly, textile and footwear manufactured in either

country can be imported duty free from Morocco/Tunisia.

Similarly, Morocco/Tunisia may import goods

manufactured in the EU free of Customs duties.

‒ Morocco and Tunisia are part of the Pan-Euro-

Mediterranean system of cumulation of origin, which makes

it simpler to import products from the EU that are

manufactured in more than one country throughout the

Mediterranean basin.


Brazil ‒ The largest and most populous country in South America

(population of over 202 million - 6th largest population in the

world)

‒ Growing middle class

‒ Despite recent years' slow down in economy, South America's

leading economic power


Brazil – Customs Agreements

‒ MERCOSUR

‒ Free trade agreements between MERCOSUR and

over 10 countries

‒ Duty preference agreements with 5 countries

‒ Preferential Regional Tariff Agreements (between

certain countries in Latin America)

‒ Other agreements in negotiation

‒ No customs agreements with the U.S.


India


Mexico

Structuring Strategic

Investments


Algeria, Morocco & Tunisia –

Structure of Investment Inbound Algeria 49/51 rule => requirement of at least 51% Algerian resident

ownership of foreign investments for all activities

Morocco 1995 Investment Charter with foreign exchange provisions

favoring foreign investors => foreign investment permitted in

nearly every sector, with restrictions in specific industries

(essentially agriculture and fisheries). The percentage of

foreign ownership does not affect the status of the company.

Tunisia In principle, no limitation (up to 100% foreign equity)

- Service activities other than totally exporting: foreign equity

must be lower than 50%, an authorization of the Superior

Commission of Investment being required beyond.

Distribution (wholesale and retail) activities qualify as

services for 51/49 requirement.

- Agricultural sector: foreign equity up to 66%


‒ In regard to each of Algeria, Morocco and Tunisia, but

particularly Morocco, the new local foreign-owned

entity may redeploy its financial and human resources

into other jurisdictions (such as sub-Sahara or the

Arab/Gulf region) with which the jurisdiction of the

original investor does not have double taxation or

trade/Customs treaties.

‒ In most cases, redeployment of capital would be

subject to foreign exchange controls on export of

capital.

What needs to/could be done once

investment is inbound?


Repatriation Funds Outbound

Algeria In principle, foreign investors can repatriate dividends, profits,

and real net income out of their assets through transfers or

liquidation. In practice, due to the 51/49 % equity

requirement, It may take longer to obtain official permission

from the Central Bank to make transfers/payments or for the

local bank to proceed with the transfer.

Morocco Freedom of repatriation of funds (free transfer of foreign

capital invested, dividends and capital gains) once all

accrued taxes in force in Morocco have been paid or settled.

Tunisia Freedom of repatriation of funds without taxation and further

restrictions, except for investments in non-export activities

where an authorization of the Central Bank of Tunisia is

required.


Brazil – Structure of Investment Inbound

‒ Foreign investment restrictions in certain specific

industries only

‒ Foreign investments are subject to control of Brazilian

Central Bank, but NO prior approval required

‒ Foreign direct investment and investment in capital

markets are subject to registration with Brazilian

Central Bank and annual disclosure (if applicable

thresholds are met) to enable remittance of dividends,

repatriation of capital, etc.

‒ Attorney in fact needs to be appointed (and financial

institution in case of investment in capital markets)

‒ Restrictions of flow of funds in foreign currency


Brazil – Repatriation Funds Outbound

‒ No authorization required – accounting and corporate

rules apply with regard to distribution of dividends and

repatriation; distribution of interest on equity possible in

Brazil


India


Mexico: Presence and Vehicles

20

Tax Considerations and

Repatriation of Profits


Corporate

Income Tax

Of 19% or 25% (trade and services) on profits from business carried on in

Algeria (draft Finance law for 2015 provides for a uniform 23% rate).

Reduced rate for investment capital companies and listed companies

Dividends Exempt from withholding tax if received by other resident companies but

subject to withholding tax (15%) when distributed to resident individuals or

non-residents.

Capital Gains Realized by resident companies subject to corporate income tax at the

standard rate.

Royalties Subject to corporate income tax if derived by residents. Royalties paid to

nonresidents subject to a withholding tax (24%) in full satisfaction of the

tax liability.

VAT At a standard rate of 17% and reduced rate of 7%.

Customs

Duties

From 0% to 30%

Exemptions For qualifying new investments.

22

General Rules for Tax – Algeria


Corporate Tax Ordinary rate of 30% - discounted rate of 17.5% for exporting

companies. Foreign contractors carrying out engineering, construction or

assembly projects relating to industrial installations may opt for a 8%

rate on gross revenues. Other favorable tax provisions apply to export

zones (zones franches) and hydrocarbons.

Capital Gains

Tax

30% (subject to certain exceptions).

VAT Standard rate of 20% - reduced rates of 7, 10 and 14%

Royalties Royalties derived by non-resident legal persons are subject to a final

withholding tax at the rate of 10% on the gross amount, unless a lower

treaty rate applies: e.g. 5% (for copyright royalties in respect of the

production/reproduction of literary, artistic or dramatic work) or 10% (for

other types of royalties) if the recipient IP licensor is located in France;

the rate remaining 10% for the UK and the US.

Favorable Tax

Provisions

Export zones (zones franches), hydrocarbons

Exemptions 23

General Rules for Tax – Morocco


General Rules for Tax – Tunisia

Classical Corporate

Taxation System

Corporate Tax (25%) on income from activities carried on in Tunisia.

Increased rate (35%) for banks, insurance, factoring, hydrocarbon

services companies, telecommunication operators.

Reduced rate (10%) for export companies.

Dividends Not subject to tax. As from 01/01/15: withholding tax of 5% on the

distribution of dividends to non-resident persons.

Capital Gains Subject to corporate tax at the standard rate. Capital gains on

shares realized by non-residents subject to tax in Tunisia.

Exemptions may apply subject to certain conditions.

Royalties Subject to corporate tax if derived by residents. Royalties paid to

non-residents subject to a 15% withholding tax in full satisfaction of

the tax liability if no treaty. US treaty rate: 10/15%; UK treaty rate:

15%; France treaty rate: 5/10/15/20%.

Favorable Tax

Provisions

Standard rate of 18%.

Exemptions From 0% to 43%



Profit Repatriation Rules

Algeria Foreign investors can repatriate profits through transfers or

liquidation. It may take longer to obtain official permission

from the Central Bank to make transfers, or for the local bank

to proceed with the transfer.

Morocco Free repatriation of profits (only for foreign residents, non-

residents and Moroccans residing abroad)

Tunisia Freedom of repatriation of profits without taxation and

restriction, except for investments in non-export activities

where an authorization of the Central Bank of Tunisia is

required


‒ Morocco and Tunisia have bilateral investment treaties

with US

‒ No bilateral investment treaty between US and Algeria

(although Trade and Investment Framework Agreement

exists)


Investment Protection Rules


Brazil – General Rules for Tax

Foreign direct investments in Brazilian companies

Dividends Exempt from withholding income tax. IOF-Exchange currently at a zero

rate.

Payment of Interest

on equity

Withholding income tax at 15% rate (increased to 25% in case of

beneficiaries located or domiciled in low tax jurisdictions) on the amount of

interest paid, credited or capitalized. IOF-Exchange currently at a zero

rate.

Return of Capital

In case the amount in foreign currency remitted proportionally exceeds the

amount in foreign currency registered with the SISBACEN, this will be

considered a capital gain subject to 15% tax rate. Capital reduction subject

to waiting period (90 days for limited liability companies and 60 days for

corporations) for opposition by third parties (creditors).


Brazil – General Rules for Tax

Investments in capital market

Withholding Income

Tax

In case of portfolio investments carried out by foreign investors investing in

the stock exchange, commodities, future or similar markets, gains are

exempt from withholding income tax provided that the investor is not

domiciled in a low tax jurisdiction.

However, this exemption does not apply to certain combined operations

which give rise to predetermined revenues, which are subject to withholding

income tax at a 15% rate (i.e. (i) options of purchase and sale at the stock

exchange, commodities or future market, (ii) term transactions, at the stock

exchange, commodities or future market, in case of covered sales and

without daily adjustments, and (iii) operations at the over the counter

market)

IOF-Exchange

According to Decree No. 6,306/07 (as amended), the remittance of gains

resulting from investments in capital market is subject to the IOF-Exchange

at a zero rate.


India


Mexico

Practical Tips


Risk/Benefit Assessment Chart – Algeria

Risks Benefits

- Protectionist measures with

restrictive foreign investment

rules

- Bureaucracy

- Corruption; however, abatement

programs are in progress

- Weakness of financial/banking

sector

- Legal uncertainty regarding IP

rights, particularly in regard to

new technologies

- Complex legislation

- Instability

- Strategic location

- Low cost of energy inputs

- Skilled and cheap labor force

- Emerging/growing consumer

market - growing demand for

modern infrastructure and

consumer products


Risk/Benefit Assessment Chart – Morocco

Risks Benefits

- Excessive dependence

vis-à-vis agriculture and

vulnerability to oil and

gas prices

- Bureaucracy


- Stability

- Favorable legal framework (Investment

Charter; protection of IP rights; extensive

tax and Customs network)

- Tax advantages

- Low wages

- Young and well-educated population

- Strong growth

- Liberalization of Moroccan economy

- Liberalization of external financing

- Freedom of repatriation of funds/profits

- Generally pro-business attitude of

governmental decision makers


Risk/Benefit Assessment Chart – Tunisia

Risks Benefits

- Heavy bureaucracy

- Corruption


- Stability

- Tax incentives and grants

- Repatriation of capital and dividends

- Coverage of social contributions

- Coverage of vocational training

- Coverage of infrastructure spendings

- Benefits granted to investment support

- Employment incentives

- Qualified, productive workforce at

competitive salary levels

- Additional benefits when investments

are of importance or interest to the

national economy or education


What is the most efficient strategy to get back investment in a foreign

country?

‒ If JV is created, whether for resale or manufacturing, it is critical that the

JV partner be reliable and cooperative. Exit rights should be clearly

defined in JVA.

‒ Monitor continuously contractual performance of local contractual party

(whether distributor/sales representative, IP licensee/JV partner).

‒ Investment may be structured so as to be held by country having

favorable double taxation treaty provisions.

‒ Judicious transfer pricing combined, where possible, with IP royalties

licensing.

‒ If pass-through of start-up and/or subsequent operating losses is

important for U.S. tax planning purposes , select the limited liability type

of entity (SARL) which is officially recognized in each of the 3 host

jurisdictions.


Tips on Planning an Exit Strategy


‒ Stringent consumer protection rules and e-commerce restrictions (E-

commerce Law enacted in 2013)

‒ Other tax considerations:

High tax burden over imports of good

Complex set of rules and numerous layers of taxes, which restrains the

development of local industries

ICMS tax war between various states which unilaterally grant tax

incentives for purposes of attracting new companies and more

investments

Limitation for the tax deduction of payments relating to patents, know-

how and technical assistance of up to 5% of net sales and payments

relating to trademarks of up to 1% of net sales. Limitation of remittance

abroad for payment of royalties to foreign affiliated entity (5% for patents,

know-how and technical assistance and 1% for trademarks)

Thin capitalization, transfer pricing and NOLs

Brazil


India ‒ Structure: LLP vs Company

‒ Functions: Sourcing vs Manufacture

‒ Use of debt instruments

ECBs

CCDs

‒ Certainty on TP and tax positions

APA

AAR

‒ Exit Planning

Recapitalisation

Debt-pussh down

37

Facilitates repatriation


Mexico

Trends in Hong Kong /

China Loke-Khoon Tan

IP Trends


Asian Brands Going Global

41


3D Printing


Risks of Passing Off

43


Investment in Luxury Brands in Asia

45


Supply Chain & Customs


Anti-corruption Initiatives

47


Accessible / Affordable Luxury

48


Digital Branding


Chinese Platforms

50

Baker & McKenzie International is a Swiss Verein with member law firms around the

world. In accordance with the common terminology used in professional service

organizations, reference to a “partner” means a person who is a partner, or

equivalent, in such a law firm. Similarly, reference to an “office” means an office of

any such law firm.


All rights reserved.

2014 Luxury & Fashion Industry Conference for Multinationals

4 September 2014

The Harvard Club, New York, NY

Documents

2014 Luxury & Fashion - Baker McKenzie