In the second and last part of the series (click here for Part 1) we introduce additional considerations and risks associated with lending in Latin American jurisdictions. As previously noted, our observations are based on our interactions with Latin American counsel on cross-border transactions and surveys. However, we are not members of the bar in any such jurisdictions, and the considerations outlined herein should not be taken as legal advice.
1. Tax implications for lending in Latin American jurisdictions
Special attention needs to be given to the tax implications that a lending transaction to an individual located in a Latin American jurisdiction may trigger. In addition to any documentary taxes that may be applicable, withholding taxes may be imposed under the local laws of the jurisdiction in which the borrower is located in respect of the principal amount of the loan, interest payments and/or fees payable in connection with such a transaction. Similarly, local laws may impose particular requirements as to whether the borrower or the lender bears the burden of such tax and whether gross-up provisions would be enforceable under such laws.
2. Usury laws and consumer protection laws
When lending to an individual in a Latin American jurisdiction, a US lender needs to be aware that the local usury laws and other consumer protection laws may impose significant restrictions on the structuring of the transaction. Local usury laws may affect the enforceability of the interest rates and also the types of interest that may be charged (i.e. whether the interest can be paid in kind).
3. US Lender’s KYC requirements
Lending in a Latin American jurisdiction can present unique issues for a US lender trying to identify the client for purposes of its know-your-customer checks. This is particularly true when the borrower is a family owned business entity or similar entity that is indistinguishable from its members/shareholders and the local jurisdiction in which such entity is organized does not provide for strict corporate (or the equivalent thereof) organization requirements.
4. Enforcement in Latin American jurisdictions
Although the documentation for a particular lending transaction may be governed by the laws of the United State (including any State thereof) and a judgment would be sought from a state or federal court, enforcement in the Latin American jurisdiction in which the borrower is located will be important if that is where the borrower’s assets are located. Relevant considerations under the local laws of the Latin American jurisdiction would therefore include: (i) recognition of the choice of the laws of the United States (including any State thereof) as the governing law of the transaction documents; (ii) recognition of the submission to the jurisdiction of the federal and state courts in the United States by the obligors under the transaction documents; (iii) recognition and enforcement of a judgment obtained by a federal or state court in the United States by the courts in the Latin American jurisdiction; and (iv) enforcement of the US judgment in United States dollars as opposed to the local currency. The advice of local counsel is important in respect of these issues and US lenders should consider whether a legal opinion should be sought by local counsel in respect of these matters.