2) TAX 

 

I.              TAX – LEGAL ENTITIES

 

The principal entities which can be used for carrying on business in Argentina are corporations (sociedad anónima), limited liability company (sociedad de responsabilidad limitada) and the branch of a foreign company.

 

1 Argentine Tax System

 

There are three levels of tax authorities in Argentina: the Federal, State and Municipal governments. The most important taxes collected by the Federal government are: Income Tax (IT), Value Added Tax (VAT), Personal Asset Tax (PAT), Tax on Presumed Minimum Income (TPMI), Debit and Credit Tax (DCT) and Custom Duties. On the other hand, the principal taxes collected by the Provinces (States) are the Turnover Tax (TT) and the Stamp Tax (ST). Municipalities taxing rights encompass those taxes granting permissions, taxes levied on security and health control of taxpayers’ activities, taxes on the right to use public spaces and taxes on advertisements made within the jurisdiction of the municipality.

 

1.1. Income Tax

 

This tax is levied on the worldwide income earned by Argentine residents, and only on the argentine-source income[1] derived by non-residents. Residents have the right to credit taxes of similar nature paid abroad against their income tax liability, to a maximum amount equal to the tax liability arising from such foreign-source income.

 

1.1.1 General Aspects

 

General Income Tax Rate. The general statutory corporate income tax rate for entities incorporated in Argentina, including branches or permanent establishments of foreign companies, is 35%.

 

Capital gains taxation. There are no special rules for capital gains obtained by corporate entities in Argentina. Gains from the sale or exchange of real estate and other capital assets (whether held short-term or long-term) are taxed at the ordinary corporate income tax rate (35%). As mentioned, corporate taxpayers are not allowed to use operating income to offset losses arising from the disposition of certain securities or derivative instruments. Such losses may only be applied against income from the same types of transaction within the respective basket.

 

Argentine does not recognise a participation exemption, nor any special relief for reinvestments[2]. However, certain features of the income tax regime might act as an indirect incentive for keeping profits in corporate solution; there is a 35% equalisation tax payable upon distributions whenever accounting profits exceed taxable income at the level of the distributing company.

 

Sale of Shares in Closely Held Corporations

For individuals, capital gains on the disposition of shares in closely held corporations are taxable at a reduced flat rate of 15%. The same tax treatment applies when the transferor is a foreign entity or Permanent Establishment, in which case the 15% rate applies on a presumed net income basis of 90%, thus resulting in an effective rate on gross gains of 13.5%.

 

In the case that the said taxable transactions are executed between nonresidents, the acquirer would be liable for the tax triggered. Further regulations are expected to address the procedure to be followed under these scenarios.

 

Sale of Shares in Publicly Traded Corporations

Capital gains on the disposition of shares in publicly traded corporations are expressly exempt in the case of resident individuals, but no similar exemption applies to foreign shareholders.

 

Corporate Income Tax Taxable Base. All revenues are subject to income tax unless otherwise excluded by law from the taxable base. Excluded Items of income are subtracted from Gross Income. The result is the Gross Taxable Income from which all expenses incurred in obtaining taxable income are deducted. The after-deductions result is the Net Taxable Income. The Exempted Items of Income are subtracted, resulting in the Taxable Base to which the 35% statutory corporate tax rate is applied. The result of applying the 35% tax rate is the Resulting Income Tax from which applicable Tax Credits are subtracted to find the Income Tax Liability.

 

Deductions. As a general rule, all costs and expenses incurred in obtaining taxable income may be deducted, including organization costs, taxes (other than income tax, except for the grossing up paid by a local resident on behalf of a foreign contracting party), and donations to certain entities, amongst others. Expenses are generally allocated to the fiscal year in which they accrue.

                 

Thin capitalization rules. The Argentine Income Tax Law (ITL) includes thin capitalization rules which impose limits on the deduction of interest payments made to affiliated parties in the cross-border context. In this regard, if debt/equity of the local company exceeds a 2:1 ratio, interest would not be deductible. 

 

Proper capitalization of the Argentine entities is advisable to mitigate debt to equity re-characterization risks. As a result of the application of this rule interest exceeding the ratio should be re-characterized as a dividend and treated accordingly.

 

There are also some anti-avoidance rules that can limit interest deduction. In general interest payment can be deducted as they accrue. However, in the case of payments to related parties and/or entities located in non-cooperative jurisdictions that are deemed as argentine source income, the deduction would only be allowed when effectively paid.

 

Depreciation. Buildings used to generate taxable income may be deducted at a 2% annual rate calculated over the cost of such buildings. Other depreciation rates may be used if they are technically supported.

 

Annual depreciation of all other depreciable assets used to generate taxable income is determined by dividing the acquisition cost of the asset by its estimated years of useful life (straight line depreciation method). The ITL does not provide standard depreciation rates.

 

Other depreciation methods, such as those based on units of production or time of use, may be used if they are technically justified. Amortization of goodwill, trademarks and similar intangible assets is not deductible, except when they have a set useful life. At the taxpayer's option, organization costs may be deducted either in the year in which they are incurred or capitalized, and then amortized over a period not exceeding five years.

 

Tax Loss Carry-forward: Argentine taxpayers may carry-forward tax losses for a maximum term of 5 fiscal years. There is no carry-back possibility.

               

Losses arising from the sale or disposal of stock or shares may only be computed against capital gains of the same nature. Furthermore, losses arising from activities not considered to be Argentine source income may only be set off against foreign source income.

               

Tax losses cannot be transferred to other taxpayers (not even to the shareholders), except as provided in the cases of reorganizations.

 

Inflationary Adjustments. The deductibility of foreign exchange gains and losses was traditionally complemented (though working oppositely) by the inflationary adjustment norms. In this sense, taxpayers were conceptually allowed to net out differences incurred by foreign exchange differences with the inflationary adjustment.

               

The current scenario reflects an anomalous situation in which, in order to optimize income, the government has maintained norms referred to foreign exchange gains and losses but has ceased to publish inflationary adjustment indexes, so that the adjustment is no longer effective. There are a number of judicial claims on this matter.

 

1.1.2 Payment and Filing

               

For any given fiscal year the corresponding income tax return must be filed before the beginning of the fifth month following the end of the taxpayer’s fiscal year. Note that for corporations the tax year must not necessarily coincide with the calendar year as is the case with physical persons. Companies, in fact, do have a fiscal year that overlaps the financial statement’s year.

 

Corporations and foreign company branches are required to make ten monthly prepayments, as from the sixth month of the fiscal year. Prepayment amounts are established on the basis of the tax paid in the preceding fiscal year.

 

1.1.3 Penalties on Unpaid Tax or Tax Paid Belatedly.

               

The Tax Procedure Law (“TPL”) sets forth certain penalties for incompliance with formal requirements and for incompliance with substantial obligations. Penalties for incompliance with formal requirements include not only different type of fines but also the close down of the business.

 

Amongst penalties for incompliance with substantial obligations: i) tax omission is fined with a penalty from 50%-100% of the omitted tax, whenever the omission is by means of: a) lack of presentation of sworn statement; b) when the sworn statement is inexact; c) withholding agents failing to act as such; ii) furthermore, the TPL sets the penalty for tax fraud at 2 to 10 times the amount of the evaded tax. The fine amounts may be reduced whenever the incompliance is not repeated and upon rectification or voluntary filing of the tax.

               

The Criminal Tax Law also sets forth that in the case of tax fraud, evasion or willful misconduct the taxpayers are subject to prison, depending on the evaded amount, the type of willful conduct and whether third parties or supposed exemptions were used to evade the tax.

 

Interest rates are 3 % monthly and punitive interest rates are 4 % monthly.

 

1.1.4 Cross-border Payments - WHT

 

When Argentine source income is remitted abroad to a beneficiary that is a non-resident alien, individual, or entity, the payment should be subject to a withholding tax (WHT). In any of the cases set forth below, if the local payer assumes the obligation to pay the tax for the non-resident recipient, then the net amount must be grossed up in the amount of the tax. Note that the withholding rates set forth below are applicable in the absence of a pertinent DTT.

 

Dividends: Distribution of dividends, profits or branches’ remittances are not subject to taxes in Argentina. However, whenever such profits are distributed in excess of a company’s net taxable income a withholding rate of 35% is applied (i.e. equalization tax).

 

Royalties: Unless otherwise provided in a tax treaty, royalty payments are subject to an effective withholding tax rate of 28% -35% of a presumed net income of 80%-, in the case of registered trademarks, patents, industrial know-how and other technology transfers.

 

In order to obtain the reduced withholding tax rate of 28% (38.89% with grossing up), the contracts must be registered before the National Institute of Industrial Property (“INPI”). Otherwise, a 31.5% effective tax rate would apply.

 

Technical Assistance, Engineering and Consulting Services: If the given contracts refer to services deemed unavailable in Argentina and provided that the contract is registered before the National Institute of Industrial Property (“INPI”) according to Transfer of Technology Law, such agreements are subject to a withholding of 21% (26.58% with grossing up). If the contracts are registered pursuant to the Transfer of Technology Law but the given contract is not included amongst the above, then a withholding rate of 28% applies (38.89% with grossing up). Unregistered transfers of technology are subject to 31.5% withholding.

 

Interest on Loans obtained abroad: Interest payments on loans obtained abroad are subject to a withholding rate of 35% (53.85% with grossing up). However, if the beneficiary is a bank or financial institution incorporated in a country not considered to be a low tax jurisdiction, or in a jurisdiction which signed agreements providing for the exchange of information and where bank secrecy or secrecy referring to stock exchange cannot be alleged upon request of information by the pertinent tax authorities, then the withholding rate is reduced to 15.05% (17.72% with grossing up).

 

Payments to non-resident individuals: Payments to non-resident individuals working on a temporary basis in Argentina for a period not exceeding 6 months are subject to a withholding of 24.5% (32.45% with grossing up).

 

Rental Payments on moveable property are subject to a withholding rate of 14% (16.28% with grossing up).

 

Rental Payments on real estate property are subject to a withholding rate of 21% (26.58% with grossing up).

 

Proceeds from the sale property (except shares/quotas/bonds/securities) are subject to a withholding rate of 17.5% (21.21% with grossing up).

 

Others: The general withholding rate applicable to other cross-border payments not included within those mentioned above are subject to a general withholding rate of 31.5% (45.99% with grossing up).

 

1.1.5 Transfer Pricing

 

Argentina has OECD like transfer pricing rules applicable to: i) transactions with related companies, ii) transactions with parties located in tax havens; iii) transactions between Argentine residents and their permanent establishments situated abroad; iv) transactions carried out by permanent establishments situated abroad (owned by Argentine residents) with companies incorporated in low tax jurisdictions.

 

In the case of exports of cereal, seeds, hydrocarbons or other commodities, with a set price in transparent markets, where an international middleman who is not the beneficial owner of the good takes part in the transaction, the best method deemed to assess the Argentine source income is the quotation of the value in the transparent market of the good on the day of shipment, or the price agreed upon with the middleman, only if this price was greater.

               

Under the OECD like transfer pricing rules, the Argentine party must keep and file supporting documentation with the tax authorities; it must also perform a transfer pricing study showing that its prices or profit margins on the transactions are within the comparable arm’s-length prices or profit margins ranges for its activity and similar transactions, with a detailed analysis as to the best method applicable to the taxpayer. Parties in tax havens are deemed as related parties for these purposes.

               

Law 11,683, as amended by Law 25,795, sets forth a wide range of penalties aimed at compelling taxpayers to comply with transfer pricing rules and regulations; be they compliance-type of provisions or substantive ones.

 

1.2 Value Added Tax (VAT)

 

1.2.1 General Aspects.

 

Tax Rates. The general VAT rate is 21%. There are reduced and increased rates for certain goods and services; e.g., a 10.5% rate applies on passenger transport services, health care and certain interest payments, amongst others, and an increased rate up to 27% applies on telecommunications, amongst others.

                               

Taxable Transactions. Transactions subject to VAT are the sale of goods and the provision of services in Argentina and the importation of goods. In some cases, services rendered outside Argentina are deemed as subject to VAT because they are effectively used or exploited in Argentina. Imports of services are taxable when the importer is a VAT registered taxpayer. VAT is paid at each stage of the production or distribution of goods and services on the value added during each of the stages.

 

Taxable Base. The taxable base is the price or value of the consideration paid for the goods or services.

 

Creditable VAT. As a general rule, VAT indicated in the invoices of the suppliers of goods and services is creditable against payable VAT. The VAT paid in the acquisition of goods that the company destines to exempt operations is not creditable against VAT. Acquisition of cars and services rendered by restaurants and hotels are not creditable against VAT either.

 

1.2.2 Payment and Filing.

               

VAT returns must be filed on a per month basis. In the case of definitive imports, the tax is determined and paid along with custom duties.

 

1.3 Other Taxes

 

1.3.1. Tax on Presumed Minimum Income (Federal Tax)

 

This is a 1% tax levying company assets (liabilities cannot be deducted). Some assets are tax-exempt, e.g. stocks and other capital share of other entities subject to taxation, or assets of mining companies. The acquisition of new fixed assets –except for automobiles- as well as investments in the construction of new buildings or refurbishing (for the first two years) is excluded from this tax.

 

IT determined for the same fiscal year is considered payment on account of TPMI provided the income tax obligation does not exceed the amount of the presumed minimum income tax. Otherwise the excess of income tax does not constitute a tax credit. The excess minimum presumed income tax of a given year over the income tax liability may be carried forward to offset income taxes.

 

A recent ruling by Federal Tax Authority[3] established that companies do not have to pay the tax if they can accredit losses in the accounting balance and fiscal losses in the Income Tax Affidavit.

 

According to a recent tax reform this tax would be repealed by 2019[4]. Another aspect to point out is that, according to Law Nº 27,264, the tax does not apply for micro, small and medium companies for fiscal periods starting from January 1st, 2017.

 

1.3.2 Personal Assets Tax (Federal Tax)

 

The Personal Assets Tax (“PAT”) is a tax levied on the non-productive assets held by physical persons or undivided estates domiciled in Argentina by December 31, both within the country and abroad. Currently, the tax rate is flat: 0,75% for the fiscal year 2016 (the taxable minimum amount is AR$ 800.000), 0,50% for 2017 (the taxable minimum amount is AR$ 950.000) and 0,25% from 2018 onwards (the taxable minimum amount is AR$ 1.050.000). Taxable assets include both assets held within the country and abroad.

 

As regards individuals domiciled abroad (not living in Argentina), Argentina imposes a PAT with the same percent tax rates that applies to individuals domiciled in Argentina  but only on assets held in our country at the end of the year. For these the non-taxable minimum amounts are lower: a non-taxable minimum of AR$ 34.100 for fiscal year 2016, a non-taxable minimum of AR$ 51.150 for fiscal year 2017 and a non-taxable minimum of AR$ 102.300 from fiscal year 2018 onwards.

 

Despite this tax has been designed to tax individual, in practice it does apply to foreign entities that own equity in Argentine companies. Non-resident aliens, in general, are subject to an annual 0.25% levied on the net-equity value of their participations in Argentine companies and branches[5] of foreign entities. The same tax applies on Argentine resident individuals -other than local companies- who are required to exclude their equity participations in Argentine companies from their annual PAT tax returns. Participation in the capital of a local entity by another local entity is not subject to PAT and is exempt of MPIT (Section 3, e) of the MPIT act).

 

The companies, who issue the stock or shares, or the branches, as the case may be, are responsible to collect and pay the tax to the government. In turn, such withholding agents are entitled to a refund from the equity holders.

 

1.3.3 Debits and Credits in Bank Accounts Tax (Federal Tax)

               

This tax is a federal level tax withheld by Argentine banks (and other savings institutions). It applies on any deposited funds that are either withdrawn or transferred from checking or savings account.

The taxable base is the amount withdrawn or transferred. The tax rate is 6 per thousand. There are very limited exemptions. The tax rate gets doubled in set cases where the elusion of the use of banks accounts is deemed to take place. This tax is partially creditable against other Federal Taxes.

 

1.3.4 Gross Turnover Tax (State tax)

 

The Gross Turnover Tax is a local tax applicable on gross income. Although the rate may vary from jurisdiction to jurisdiction (States), the general rate is 3%, being burdensome tax rates on other activities, like financial intermediation. The different jurisdictions have signed an agreement (the “Multilateral Agreement”) in order to avoid double taxation whenever activities subject to taxation have been carried out in more than one jurisdiction. The Multilateral Agreement sets forth a formula in order to allocate income between the different provinces.

 

1.3.5 Stamp Tax (State Tax)

           

The Stamp Tax is a local tax levying the instrumentation of onerous contracts. In the City of Buenos Aires, the tax applies on all contracts and monetary operations as of 1.1.09. Although the rate may vary from jurisdiction to jurisdiction, the general rate is 1% (except in the sale of real estate property where the rate is increased in most jurisdictions to about 4%). The tax is paid by means of sworn statements or fiscal stamps. During 2004, several Federal Supreme Court rulings have decreed the inapplicability of the tax whenever acceptance of the contract takes place through unwritten means (e.g. the written offer provides that the contract will be considered accepted if the party performs a certain activity) or if in the acceptance there is no transcription of the main parts of the contract.

 

1.3.4 Customs Regime

 

Custom Duties: Importation of goods and the rendering of services abroad which are effectively utilized in Argentina are subject to import VAT at a general rate of 21% plus 10.5% VAT withholding and 3% Income Tax withholding. In addition to import VAT, imports of goods are also subject to custom duties that range between 0% and 35% (i.e. standard ones), also depending on the type of asset imported, and except for assets with special treatment. The Ministry of Economic Affairs may alter rates and does so frequently. Other taxes include a statistics tax, established on the CIF value of the good and excise taxes.

 

Taxable Base: As a member of the WTO and having subscribed the Agreement for the Application of Section VII of the GATT, the value of the goods is established on account of the price paid. If this is not possible, other methods of valuation and the corresponding adjustments are applied. Duties are computed on the CIF value of the goods.

 

1.4 Tax incentives / benefits (national wide or regional wide) for the implementation and maintenance of our presence in Argentina

 

There are several benefits for the acquisition of capital goods and infrastructure, like the following ones:

 

·         Investment Promotion Law –N° 26,360:

·         Accelerated reimbursement of VAT paid on purchases of capital goods related to investment projects,

·         Accelerated depreciation for machinery and equipment related to investment projects,

·         Accelerated depreciation reduces the tax burden during first years of the project.

·         Exemption from import duties on capital goods – Decree N° 509/2007:

·         Free import of capital goods

·         Reduced VAT on capital goods – Decree N° 493/01:

·         Reduced VAT (10% compared to 21%) on the sale or import of finished capital goods and computer hardware.

 

Additionally, Provinces have specific schemes to promote productive investment in their jurisdiction. In general, the benefits include exemptions for a certain period of time, reduced utility rates and exemption of some provincial taxes.

 

Other general tax incentives could be applicable depending on the type of investment and the business plan moving forward which should be scrutinized at a later stage. 

 

1.5 Other relevant tax matters and recommendations

 

DTT signed (in force): Argentina has tax treaties presently in force with the following countries: Australia, Belgium, Bolivia, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Italy, Norway, Spain, Sweden, Switzerland, The Netherlands, The Russian Federation, Uruguay and the United Kingdom.

 

Fiscal unity: Argentine tax laws do not provide for the taxation of groups of companies or economic groups.

 

Holding corporations: Argentina tax law does not have a holding corporation regime.

 

Rulings: Argentina does not have a ruling system in place, but there is a binding consultation regime that requires the compliance of certain requirements.

 

IFRS: Argentina has already adopted IFRSs for all companies whose securities are publicly traded and that are regulated by the CNV.

 

Exit. Foreign exchange regulations: Please see our responses on the Financial Section on this regard.

 

I.                   BUSINESS TAXATION

Argentine tax residents are subject to tax on worldwide income, with a tax credit granted for tax paid abroad on their foreign income. Nonresidents without a permanent establishment in Argentina pay tax only on argentine-source income (in this case, tax is usually levied in the form of a final withholding tax at various rates depending on the type of income).

 

1.      Business taxation of subsidiaries (corporations and limited liability companies)

 

Income tax: Corporations and Limited Liability Companies incorporated in the country would be taxed on their worldwide income at a 35% income tax rate. Foreign Tax credit is admitted on taxes paid abroad (as long as it qualifies as foreign source income) against their income tax liability, with limitations.

 

Distribution of dividends to foreign entities or individuals is taxed at a 10% rate. Distribution to local entities is not taxed. Equalization tax could apply in certain cases.

 

A 15% rate applies to capital gains realized on the sale of shares of Corporations and quotas of Limited Liability Companies.

 

VAT: Transactions subject to VAT are the sale of goods and the provision of services in Argentina and the importation of goods. In some cases, services rendered outside Argentina are deemed as subject to VAT because they are effectively used or exploited in Argentina. Imports of services are taxable when the importer is a VAT registered taxpayer. VAT is paid at each stage of the production or distribution of goods and services on the value added during each of the stages.

 

Debits and Credits in Bank Accounts Tax: this tax is withheld by Argentine banks (and other savings institutions). It applies on any deposited funds that are either withdrawn or transferred from checking or savings account. The taxable base is the amount withdrawn or transferred. The tax rate is 6 per thousand.

 

Turnover Tax: All Argentine provinces, as well as the City of Buenos Aires, levy Turnover Tax on the gross income of any company that carries on commercial, industrial or professional activities in its jurisdiction. Rates vary depending on the activity and the jurisdiction, but in general it is applied a 3% rate.

 

2.      Business taxation of branches

 

The basic tax burden on branches and subsidiaries is similar. However, the following difference may be remarked:

 

-          Start-up losses of an Argentine subsidiary may be offset against its subsequent profits over a five-year period. However, generally such losses may not be offset against the foreign parent company's income from other activities. Conversely, start-up losses of a local branch may be also offset against the head office's other profits if so allowed by the law applicable in such jurisdiction.

-          Taxable income of a branch or subsidiary is determined by deducting all allowable expenses from the entity's gross income. Expenses incurred abroad may also be deducted provided that the taxpayer demonstrates that they were incurred for purposes of generating taxable income in Argentina. Although this is a general principle applicable to domestic corporations and branches as well, in the case of overhead charges on a branch, they are subject to a stricter control by the tax authorities. Thus, the tax authorities may object the deductibility of various head office expenses such as research and development, administrative support, and similar items, in the proportion attributable to the local branch, unless it is properly evidenced that such expenses have been incurred on behalf of the local branch.

-          Until September 23rd, 2013 there were some differences under an exit scenario: the transfer of a going concern by the branch was subject to income tax, while the sale of the Argentine-subsidiary stock (only shares of corporations, not limited liability companies) by a foreign shareholder was exempted. Nowadays all three situations are taxed.

 

Branches of foreign entities are subject to IT in the same terms and conditions as local corporations. Consequently, the flat corporate income tax rate of 35% applies. Further, branches are subject to the same reporting and payment obligations as local corporations. Their activities are also subject to VAT and Turn over Tax.

 

A branch must carry out separate accounting from its head office, as well as to file annual financial statements with the Public Registry of Commerce. Profit distributions from the branch to the foreign head office are allowed when they are based on closed and audited financial statements. Distribution is subject to a 10% IT tax rate.

 

3.      Conditions under which a PE is configured – relevant tax effects

 

The existence of a permanent establishment (“PE”) in Argentina determines a minimum threshold of activity that enables the source country to tax a foreign entity similarly to its residents.

 

The IT law does not provide for a definition of PE, but refers to any "commercial, industrial, agricultural, mining or otherwise, organized as a fixed place of business, belonging to associations, companies or firms, whatever their nature, incorporated abroad or to individual residing abroad".

           

In absence of a clear definition, courts usually refers to definitions provided under the TPMI: fixed place of business which includes a branch, sole proprietorship, agency, permanent representation, rural immovable property (even if it is not exploited), construction or assembly site, and fixed place of business for acquiring goods or for collecting information for the enterprise.

 

DTTs signed by Argentina in general provide definitions for Permanent Establishments.

 

4.      Specific tax procedures and impacts for operating under the figure of a Consortium

 

Argentina’s legislation regulates the UTE which are allowed to develop or execute a specific task or service. Their duration is therefore limited to that particular task. They are not separate legal entities in their own right. Agreements are entered through private or public deeds. Participants may be resident businessmen, locally constituted entities, or non-resident companies that have established a separate branch or other type of presence in Argentina.

 

UTEs are not treated as independent legal entities, although they are treated as such for certain purposes including labor law, social security contributions and for VAT, Turn over Tax. With regards to other taxes, such as IT, UTEs are considered as look through entities, and such taxes are therefore payable in the head of the members.

 

5.      Sub-contracts – tax cascade impacts vs. tax credits (including cash flow impact – offset methodology)

 

 

Tax

Cascade effect

Comments

IT

No

Deductions of expenses are admitted. Expense should be reasonable, ordinary and necessary for the income-producing source. In the case of contracting with a foreign related party, methods for the avoidance of double taxation are provided under the Argentina-Russia DTT

VAT

No

Argentina follows the credit-invoice method

Turnover tax

Yes

It applies to all activities and stages without any credit for the taxes paid in the previous  production chain

Debits and Credits

Yes

This tax is partially creditable against other Federal Taxes.

Stamp tax

Yes

This tax is payable in each contract executed

 

 

II.                TAX – INDIVIDUALS

 

Residents are taxed on their worldwide income while non residents are taxed only on the argentine source income. Foreign individuals are considered residents for tax purposes if they have been granted a permanent residence visa or have remained in Argentina for more than six months (automatic criteria). Temporary absences will be disregarded to the extent they do not cumulatively exceed 90 days in a 12-month period.

           

Foreign individuals with a temporary visa, who are required to remain in Argentina by reason of their employment for a period not exceeding five years, are not considered Argentine residents for tax purposes.

Employment income, including most employment benefits, is taxable, as is income derived from the carrying on of any business or profession. Rental and interest income also is subject to tax. Most argentine-source financial income is exempt (i.e. interest on deposits in local banks, interest from bonds, etc.). Dividends paid by local companies are taxed at a 10% rate and capital gains from the sale of shares/quotas/bonds and securities are subject to a 15% tax rate.

 

Resident employees: salaries earned in Argentina are subject to income tax at progressive rates which takes into account facts including whether the employee is single or married, with or without children. Tax rates vary from 9% up to 35%. Lower salaries are exempt from IT.

 

Non-resident employees: Generally, non-resident employees working for up to six months do not have to register with the Argentine tax authorities or to file income tax returns as their income tax liability is withheld by the Argentine employer. The withholding tax rate for non-resident employees is 24.5%. Foreign employees temporarily performing activities in Argentina and receiving salaries, fees, wages and similar compensation for more than six months are considered tax resident.

 

Deductions and reliefs: A number of personal allowances may be deducted in computing taxable income (i.e.: a special employee deduction, an additional deduction for a spouse or child, etc.), but certain requirements must be met.  

 

Subject to restrictions, deductions are granted for, among other things, medical expenses, medic care, certain donations, mortgage interest, retirement annuities and the cost of domestic help.

 

Tax returns and similar tax obligations for individuals:

Individuals with only employment income (that does not exceed an annual threshold) are not required to file an income tax return to the extent tax is withheld at source by the employer.

 

Individuals with other types of income must make five prepayments at bimonthly intervals beginning in June of the tax year. Final payments of tax are made when the tax return is submitted (on an annual basis) in April or May of the year following the year in which the income was derived.

 

Foreign taxpayers are not required to file tax returns if their income tax liability is fully satisfied by tax withheld on their income from Argentine sources.

 

Other relevant tax matters and recommendations:

The worldwide assets of individuals domiciled in Argentina held as of 31 December each year are subject to the personal assets tax (PAT) to the extent the aggregate value of such assets exceeds AR$ 305,000. Deposits in local banks and public bonds are exempt. Tax rates varies from 0.5% up to 1.25%.

 

With respect to holdings of shares in an Argentine company, however, the local entities deduct a final withholding tax at the rate of 0.5%.

 

Foreign individuals coming to Argentina for employment purposes for a period not exceeding five years are not considered domiciled in Argentina and, thus, are taxed only on their Argentine assets. Argentine and foreign individuals domiciled abroad are subject to personal assets tax only on their Argentine assets. Payments are made through a substitute taxpayer.

 

III.             TAX – INTERNATIONAL LOANS

 

1.       Withholding rate.

 

The general  withholding tax rate applicable to interest paid in international financial transactions is 35%. It could be reduced to 15,05% if:

o   The borrower is a financial institution;

o   The lender is a bank or financial institution located in a cooperative country;

o   The interest relates to certain bonds that are registered in countries that have concluded an investment protection agreement with Argentina; or

o   The transaction involves the financing by a seller of depreciable movable property.

 

Notwithstanding the foregoing, according to DTT between Argentina and Russia, loans tax rate cannot exceed 15% of gross income.

 

2.       Deductions allowed – Thin capitalization rules.

 

Interest payments may be deducted unless the thin capitalization rules apply. Thin capitalization rules operate to deny an interest deduction if a company’s debt-to-equity ratio exceeds 2:1 and interest is paid to a controlling financial institution. The excess interest is recharacterized as dividend payment. These rules apply despite of the existence of the DTT.

 

3.      Transfer pricing rules.

Transfer pricing rules apply when transactions are entered into with foreign affiliates, entities in tax havens and foreign entities with an economic link. Under Argentina’s transfer pricing rules, transactions between related resident affiliates must be at arm’s length. 

 

4.       Value Added Tax (VAT).

Financing by foreign parties to Argentine taxpayers whose activities are subject to VAT and are registered as VAT-responsible are taxed by VAT. The general tax rate is 21%. However, a reduced 10.5% tax rate applies with regard to the following financial transactions:

  1. Interest on loans granted by Argentine financial entities provided borrower is a VAT registered taxpayer;
  2. Interest on loans obtained abroad, provided lender is a financial entity incorporated in countries that have adopted the Basle Banking Standards.

 

3.5.5 Important considerations.

In general, if it is properly implemented, for financing the project the use of debt would be preferable to equity as: (i) interest payments could be deducted at source as long they were related to the generation of taxable income; (ii) lower withholding rates may apply in a DTT context; (iii) in a country with regular devaluation of the currency debt would also be preferable over equity as foreign exchange losses could be deducted as well. Furthermore, for the time being, there is no countervailing effect of the inflationary adjustment which could have jeopardized those forex losses[1].

 

Nevertheless, foreign exchange regulations should also be considered and should be scrutinized specifically. Generally speaking, funds from a financial loan with a non-resident party should be transferred into an Argentine bank account (i.e. it would preclude payment abroad) and have a minimum term of 365 days as from the date the loan proceeds are transferred into Argentina. Except in some restrictive situations, the abovementioned compulsory non-transferable deposit of at least 30 % of the loan must be made in an Argentine bank (this mandatory deposit will not earn interest, will have a minimum term of 365 days, and cannot be used as collateral for any transaction).

 

Finally, it is worth mentioning that the ARS is very aggressive in re-characterizing loans to equity due to the above mentioned pros. Proper implementation of inter-company debt is a must in order to avoid such risks.


[1] Generally speaking, since transactions are to be valued in Argentine currency for income tax purposes, fluctuations in foreign exchange currencies generate foreign exchange gains or losses. ITL provisions that govern the tax treatment of foreign exchange differences require Argentine resident companies to account both foreign exchange gains and losses on an annual basis, disregarding whether there has been realization or not of the underlying assets or liabilities that trigger such foreign exchange results.