The Latin American Tech Scene and Its Relationship with the U.S.

International Services | Ricardo Aramburo Williams | Apr 04, 2022

During the last year, we’ve seen significant U.S. investment and funding flowing into Latin America for technology development companies that are planning to enter the U.S. market. It doesn’t matter if it’s a Colombian company performing cutting-edge pharma biotech investigation, a Costa Rican company specializing in SaaS cybersecurity, or a Mexican company revolutionizing plant-based foods. Obtaining funding and initiating operations in a new market requires an analysis of the tax obligations that will result.

Technology development and related services were already emerging in the Latin American region. The talent has always been there. What kept the region from becoming globally relevant in this space were the lack of investment and platforms that allow digital monetary transactions or services across the Latin American markets. These days we have multiple examples of both across the region.

Now U.S. investors are extrapolating what is being done locally in Latin America to determine what is possible in the U.S. market. With the digital economy, investors no longer have to move talent to the U.S. They’re on the hunt for the best talent and most innovative technology, regardless of where they are.

Of course, the interest is mutual, as many Latin American tech companies – both startups and established organizations – are developing services with an eye on the U.S. market. Many form U.S. holding companies and subsidiaries across Latin America for their multinational operations.

There is money to be made from all sides of the equation. There is also a layer of tax obligations associated with U.S. investment vehicles or foreign investment vehicles used by U.S. investors to fund Latin American tech companies and, of course, with the operative vehicles of those companies for entering into the U.S. market.

Knowing Your Tax Obligations

If you form a U.S. legal entity, you have some type of U.S. tax obligation. This applies to entities taxed as partnerships and corporations, including U.S. holding entities of Latin American companies, as well as to the investment vehicles used by these companies.

Investors might assume they can avoid U.S. tax obligations by forming entities in other jurisdictions. That’s often incorrect. Depending on the residency of the investors and the location, operation, and form of the targeted investments, and their relationship to the U.S., numerous tax obligations could arise.

Similarly, small startups and entrepreneurs are not immune from U.S. taxes. You don’t have to be backed by millions of dollars in investments to pay taxes. You still have to make sure you’re compliant.

The bottom line is that you should find out what your U.S. tax obligations will be before you determine the international funding and operative structure of your company. Tax obligations could be very different depending on the entity’s structure, shareholders, investors, subsidiaries, locations of subsidiaries, and other factors.

How Prager Metis CPAs Can Help

As U.S. investors continue to pour money into Latin American tech companies and these companies continue to enter the U.S. market, there should be a case-by-case analysis to establish a clear understanding of tax obligations in the U.S. and other relevant countries to each operation.

As important as tax obligations are, the primary driver of the decision about how to structure the entity should be business needs and opportunities. This is where the business acumen of the Prager Metis team comes into play. We help businesses match the structure with business needs and opportunities to not only foresee tax implications but to optimize how the business functions.

Through in-depth consultation, research, and experience with international groups, we can assist the business stakeholders with the analysis of options for structuring the company. Each alternative will likely result in different tax obligations.

This is an exciting time in the Latin American technology development sector. There are tremendous opportunities for both Latin American companies and U.S. investors to bring these products and services to new markets. Structuring the investment and operation of a multinational tech company in an optimal way is a critical factor in achieving the desired result from the business operation.