Leasing in Latin America

There are some important legal issues that leasing and financing companies should consider before doing business in Latin America. Some apply to doing business in any given country, others on what type of transactions can be offered, and how the terms of its offerings must be adjusted to be locally enforced.

Doing Business In-Country

First, companies must determine whether to engage in cross-border transactions or to form a local entity. In making this decision, companies should consider the expected portfolio in a particular country. Cross-border transactions could make sense when the volume of the local portfolio is limited and does not justify the costs of forming and managing a local entity. Additionally, companies must take into account the challenges that cross-border dealings imply for tax purposes, such as understanding complex tax treatment under different laws. Some Latin American countries authorize foreign companies to enter into transactions with their citizens, so long as a notice to the local authorities is filed.

On the other hand, forming a local entity can open the door to certain tax benefits, such as expense deductions. The type of entity to be formed can have different consequences in the limitation of liability of the shareholder-investor and the thin capitalization rules (these rules determine the deductibility above certain debt level of the interest generated in the funding of local entities through loans), which should also be considered.

Type of Transactions

The second question relates to the requirements or restrictions imposed by the target countries to engage in leasing and financings. Generally, lease transactions can be entered into by regular commercial entities, while financing transactions tend to be available only to entities that have a special license. For example, Chile and Mexico authorize non-regulated companies to engage in both leases and loans (if not made with funds from the general public); however, many countries like Puerto Rico impose special requirements that a financing entity must adhere to in order to offer financing on a recurrent basis. Also, some countries (e.g., Brazil) limit the type of entities that can engage in financial leases (e.g., leases where rent exceeds 90% of the cost of the asset).

Companies should also consider the compliance burdens that arise from engaging in lease or financing transactions. In addition to corporate regulations, many Latin American countries have enacted anti-money laundering and anti-corruption legislation requiring the preparation of manuals, procedures, and reports to detect “suspicious activities” in accordance to local standards. Such requirements sometimes deviate from the requirements imposed by U.S. or European laws.

Drafting and Enforcing Agreements

Once companies understand which products they can offer in each country, they should determine how to draft their agreements. Drafting the agreements requires a holistic understanding of the legal system, judicial practices and commercial custom in the target country.

An initial step would be to determine whether to draft the agreements in English or the local language, which should be decided by taking into account the type of customers the company will have in the country. Spanish is the predominant language in Latin America, except in a couple of countries (like Brazil, where Portuguese is the official language). If the company does not expect litigation and intends to deal mostly with global customers, then an agreement in English would make sense. Otherwise, companies should consider that, although many countries allow parties to enter into agreements in other languages, they may be required to translate the agreements into the official language for litigation, government filings or audits.

Additionally, companies should understand the laws and practices that would affect their enforcement of remedies with local courts. For example, many civil law countries do not allow for an extensive discovery stage prior to trial, requiring parties to find and gather evidence before bringing the legal action. This may call for additional attention to record-keeping and following proper formalities. Another difference with the U.S. system is that most Latin American countries do not allow parties to recover consequential damages, but allow prevailing parties in a litigation to recover reasonable judicial expenses. Finally, lessors in many Latin American countries are used to requesting promissory notes from their customers, in addition the standard set of lease documents. The enforcement of a promissory note, rather than the lease documentation, would allow companies to benefit from expedited trials. In Mexico, the enforcement of a valid promissory note opens the door to an expedited trial where companies can seize debtors' assets as soon as the defendant is served.

Exploring Possibilities

Companies looking to invest outside the U.S. should look at Latin America and adapt their strategy according to the local practices of the target country. Getting proper legal and accounting advice is critical to ensure the creation of a successful business model.

Emiliano Baidenbaum is in-house counsel for the Financial Services business unit of Hewlett Packard Enterprise in the Americas Region. This article also appeared in Corporate Counsel, an ALM sibling publication of this newsletter. This article is for informational purposes only. Before investing, please consult with your legal and tax advisers.