International sponsors of private equity and real estate funds may choose from a variety of different fund structures when forming investment vehicles to acquire assets in Latin America. An increasingly popular choice among sponsors involves the use of Canadian limited partnerships.
While the laws of Latin American countries differ from country to country, many of these countries have adopted a civil law system that is quite similar in many respects. For instance, in many Latin American countries, limited partnerships may be formed under local laws. However, such limited partnerships are not ideal investment vehicles for private equity or real estate funds since such limited partnerships are not tax transparent and are subject to strict, and often out-dated, corporate governance rules. These limitations frequently lead international sponsors to establish their funds outside of Latin America, although the investment objective of the funds may be limited to investing in Latin America.
A number of jurisdictions that are ordinarily preferred for forming funds may not be ideal if the fund sponsor intends to invest primarily in Latin America. For instance, many US States, such as Delaware, have well established laws that are modern and flexible and ordinarily highly suitable for forming private equity and real estate funds. However, since the form of entity most commonly used to establish such funds is a limited partnership, and since limited partnerships are separate legal entities in many such jurisdictions, this can be problematic when investing in Latin America. This is because, while a limited partnership may be tax transparent under the laws governing the jurisdiction in which the partnership is domiciled, a limited partnership that is a separate legal entity will often not be tax transparent in Latin America. To ensure optimal tax treatment, it is therefore often necessary to form the fund in a jurisdiction in which the limited partnership is not a separate legal entity.
For a variety of reasons, some investors are hesitant to invest in jurisdictions perceived to be tax havens, which discourages some international sponsors from forming limited partnerships domiciled in these countries, even if such limited partnerships would otherwise satisfy the Latin American requirements to ensure tax transparency.
Fortunately, all Canadian provinces have limited partnership legislation that provides for the establishment of limited partnerships. This provides international sponsors with an opportunity to form investment vehicles in reputable jurisdictions, such as Ontario, Québec, British Columbia or Alberta, that offer flow-through tax treatment to investors while providing such investors with limited liability protection. The legislative framework governing limited partnerships in most Canadian provinces is also quite flexible, allowing fund sponsors the ability to customize the terms of limited partnership agreements to suit their particular preferences. Furthermore, these Canadian limited partnerships are not separate legal entities and are therefore suitable for investing in some Latin American countries since they preserve tax transparency.
Limited partnerships domiciled in Canada need not have a general partner that is incorporated under the laws of, or resident in, a Canadian province. Furthermore, since under Canadian tax law, income is typically taxed only to the extent that it originates from a Canadian source (in the case of passive income such as dividends, interest or royalties) or results from business carried on in Canada, most Canadian domiciled limited partnerships that carry on business primarily in Latin America and that earn no Canadian situs income, if structured properly, should not be taxed in Canada.
Easy to form, highly customizable, limited partnerships, in a stable, reputable jurisdiction with minimal tax consequences or administrative obligations may make Canada the ideal place to form your next Latin America-focused limited partnership.