I have for some time now discussed the lack of rule of law and security and the political instability that has taken over Latin America, and the consequences it implies.
A 2021 world risk map[i] classified all Latin American countries as “lacking security”. Moreover, this reality has only become worse with time. It is a fact that the lack of security may reach all corners in the globe, but is it just coincidence that not a single Latin American country is considered favourably?
And because they are closely related, I would like to mention another concept: legal uncertainty. A country with legal certainty abides by the Constitution and all applicable legal norms, leaving the enforcement of such norms to the competent authority, and preserving the independence of the State’s various powers, without changes to the rules by the government in office. This is obviously not the case with Latin American countries.
The reason for such legal uncertainty is the enormous political instability currently affecting Latin American countries. Amidst constant back-and-forth Argentina deals with over 160 different taxes, high unemployment and endless “dollar types”, amongst other issues, Colombia has an authoritarian leader who is a former guerilla member and the promoter of one of the most harmful tax reforms in that country’s history.
Despite its different basis, Chile is also experiencing strong political instability that has been on the rise since 2019. In 2022, Peru’s overwhelming tax voracity reached the maximum burden since 1980 and the same happened with other countries, such as Bolivia. At the same time, there are discussions in many countries in Central America to adopt a global tax system (as opposed to a territorial based one) and to approve wealth taxes. And, in addition to all of the above, with Lula presiding, Brazil has become one of the most risky models in the region.
None of this, expressed as just some examples of political instability, proves harmless because, as said: political instability leads to legal uncertainty, causing difficulties not only in providing for the future -which is simply impossible - but also in overcoming the present. Under such circumstances, the citizens of Latin America have no option but to devise alternatives.
Such is the case of many taxpayers who decide to move abroad (Uruguay, Spain, and Miami are some of the most preferred destinations), while others opt for protecting their assets with secure structures and proven tools that come with the benefits of offshore jurisdictions.
Why Opt For Offshore Jurisdictions?
Offshore jurisdictions are an alternative that, at times, might prove necessary and adequate. They offer cutting-edge tools and legal systems useful for guaranteeing licit businesses, structuring wealth, and protecting assets, amongst other purposes.
But, the renowned offshore jurisdictions, spitefully called “tax paradises”, are nothing but a fair and healthy solution for insatiable tax voracity, and most of all for the huge legal uncertainty that citizens must face daily.
Indeed, and contrary to common belief, the main benefit sought by those who resort to offshore jurisdictions is in fact legal certainty, which is an aspect increasingly distant from most Latin American countries.
Offshore jurisdictions are territories with a low tax burden and a high degree of legal certainty, where the privacy and the proprietary rights of individuals are respected. Even when described as sinful venues, they are just alternatives, 100 per cent legal, for those who suffer constant attacks against their capital.
In fact, the wrongfully called “tax paradises” are battled against because they set limits to the taxes that high-taxing states may apply, and because they are examples of how it is possible for states to survive without applying taxes on the income of individuals, without the need to incur national debt, or - in many cases - having to issue currency.
The situation reigning in most Latin American countries today prompts citizens to opt for offshore jurisdictions, as an alternative to countries that are constantly applying new and unjustified taxes, worsened by the fact that they offer no legal certainties.
New Trends In Wealth Structuring
Although it is common talk that those searching for options to structure their wealth are millionaires or the owners of successful companies, reality shows that there is an increasing number of people that are far from being rich seeking to protect their estates, particularly so in Latin America; and this has become an issue of concern for anyone willing to safeguard their savings.
Additionally, there are many - again, not necessarily millionaires - who question the growing violations of both the privacy and freedom of citizens, for the sake of transparency and the application of taxes. For the continent’s growing population who are feeling worrisome about this matter - with good reason - offshore jurisdictions are the best-known alternative. However, they are not the only option.
Usual tools used by those who seek to protect their estates include trusts, family investment funds, offshore companies, different types of insurance, private interest foundations; and even international relocation or the acquisition of certain fixed assets - such as works of art, precious minerals and other collectible luxury items – which in many cases provide the privacy clients are looking for.
Reality is clear: there is an increasing number of people worldwide - and particularly in Latin America - who seek to protect their capital, not only from unjustified taxes but also against growing legal uncertainty.
Martín A. Litwak
Lawyer specialised in wealth structuring and investment funds. Martín has focused on providing advice to high net worth (HNW), ultra-high net worth (UHNW) and institutional families domiciled in Latin America. His expertise in setting up and/or managing fiduciary structures designed to tackle issues related to the lack of rule of law, the lack of privacy and the fiscal voracity of the countries in which they reside and/or conduct their business activities, as well as his experience in resolving succession issues and/or to ensure that the family assets are well protected makes him one of the foremost lawyers in this field. He has also assisted several Latin American based fund managers with the establishment and licensing of hundreds of investment funds, the majority of them in the British Virgin Islands and the Cayman Islands. Finally, Martín has been very active in multi-jurisdictional mergers and acquisitions, international financial transactions of several types (i.e. private equity/venture capital deals, project financing, structured finance, IPOs, etc.), tax amnesties and the provision of advice in transactions involving crypto-assets and Blockchain (ICOs, STOs, etc.)