As a result of the new check the box regulations, U.S. tax advisors are increasingly advising their clients to use a Sociedad de Responsabilidad Limitada ("SRL") in Latin America, rather than the more conventional Sociedad Anonima ("SA"). While SAs in most countries are considered to be per se corporations, U.S. taxpayers may elect to have SRLs treated by the U.S. taxing authorities as partnerships or branches. The U.S. federal income tax advantages of such an election are several, including the following:

• The U.S. partner may deduct, on its U.S. federal income tax return, losses incurred by the SRL.



• There will only be one level of tax on the income of the SRL. Since the SRL is treated as a partnership, the U.S. partner will include its share of the profits on its return as they are earned, and any distributions will simply be treated as non-taxable distributions from a partnership.



• Any local tax imposed on the SRL will immediately be creditable in the United States against the U.S. partner's taxable income.



• Foreign tax credits will be included in the general basket under Section 904(d) of the Internal Revenue Code (the "Tax Code"), rather than in the non-controlled Section 902 corporation basket in the case of joint ventures which are less than 50% owned by the U.S. partner.



• Where the U.S. partner uses an off-shore holding company to hold its off-shore operations with a view to deferring the U.S. federal tax on income of such operations, the income of an electing SRL will be treated as branch income of the off-shore holding company and, in most situations, will not be Subpart F income; as opposed to the situation where an SA is used, in which case dividends from the SA will be Subpart F dividend income.



• Tax Code Section 367 will not apply to transfers of appreciated assets to the SRL.

From the standpoint of the local Latin American law, the implications of using an SRL as opposed to an SA are not substantial, since the SRL operates under the same general principals as the SA - (i) limited liability for the partners, (ii) deemed an entity separate from its partners, (iii) taxed as a per se corporation, (iv) can have varying types of interest and can issue debt, (v) may engage in any commercial activity that a per se corporation can engage in and can have a similar capital structure.

There are, however, some important differences between an SA and an SRL. First, a typical SRL is managed by the partners who can regulate, by way of a personal agreement, the manner in which the Board will operate. The partners have the same liability as the Board Members in an SA. Second, the partners of an SRL may not sell or pledge their interest in the SRL without prior approval by the other partners. Third, the SRL may not be publicly held and typically is limited in the number of partners. Fourth, the SRL is not as thoroughly regulated as the SA, making it more flexible when implementing certain transactions that may be barred by the SA statutory limitations. However, certain limitations make the use of an SRL more restrictive. For example, in Brazil, an SRL may not issue debentures. In Venezuela, the maximum authorized capital of an SRL may not exceed 2,000,000 Bolivares. In Mexico, an SRL may not engage in activities related to the finance sector, including banking, insurance and brokerage activities.

For all practical purposes, the SRL is treated in the same legal manner as the SA. The differences that exist relate to the relationship amongst the partners, rather than the relationship between the SRL and the government or third parties. The benefits of the check the box regulations, however, make the SRL an attractive alternative for those interested in doing business in Latin America.