The Argentine Congress approved a comprehensive tax reform in Argentina, effective in general January 1st, 2018. This summary describes some of the main changes:
A. Corporate income tax rate and dividend withholding tax
The corporate income tax rate is decreased from 35% to 30% for fiscal years starting 1 January 2018 to 31 December 2019, and to 25% for fiscal years starting 1 January 2020, and onwards. Dividend withholding tax rates of 7% for profits accrued during fiscal years starting 1 January 2018 to 31 December 2019, and 13% for profits accrued in fiscal years starting 1 January 2020 and onwards. The new withholding rates would apply to distributions made to shareholders qualifying as resident individuals or nonresidents. Additionally, the reform repeals the 35% “equalization tax” as from 1 January 2018.
B. Thin-capitalization rules (TCR)
Current 2:1 debt-to-equity ratio is repealed. There is a new limit for the deduction of interest arising from financial loans. The new limit is equal to 30% of earnings (EBITDA) or a certain amount to be determined by the Executive Power by implementing decree, whichever is higher. If certain interest amount is not deductible in a given year, it will be carried forward for five fiscal years. There are also certain exemptions to TCR.
C. Permanent establishment
A permanent establishment (PE) definition is passed, which in general follows the OECD definition. It includes some provisions that need to be analyzed on a case by case basis.
D. Tax-havens policy and Transparency rules
The Executive Power will pass a list of “non-cooperating” jurisdictions, including jurisdictions that do not have a TIEA (Tax Information Exchange Agreement) or a Convention for the Avoidance of Double Taxation with Argentina, or that actually refrain from exchanging information. Additionally, a category of low or no tax jurisdictions is created, comprising countries, territories or tax regimes that establish a maximum corporate income tax rate that is lower than 60% of the Argentine corporate income tax rate. In addition, new tax transparency rules apply with regards to foreign trusts, foundations, and entities, that realize passive income, or that lack tax personality, among many other situations.
E. Transfer pricing
Related-party transactions in which a foreign intermediary is used are targeted. The intermediary needs to prove that its fee is in line with the risks it assumes, the functions it carries out and assets involved. In addition, for certain exports of goods in which an intermediary is used (either related, or located in “non-cooperating” or low or no tax jurisdictions), the reform requires the Argentine exporter to submit with the AFIP (Federal Tax Authorities) the agreements supporting the transactions. Tough consequences will derive from failing the file the agreements. 2
F. Nonresident’s capital gains tax
15% capital gains tax rate applies on the sale of shares. An exemption for foreign beneficiaries applies on the sale of Argentine publicly traded securities. In case of sale of privately-traded shares, the reform appoints the foreign seller, through a representative appointed in Argentina, as the withholding agent.
G. Indirect transfers made by nonresidents
Tax on the indirect sale of assets located in Argentina was passed. The 15% tax (a nominal 35% rate shall apply when the seller resides in a non-cooperative jurisdiction) will be triggered on the sale of shares in foreign entities when the following two conditions are met: (i) at least 30% of the value of the foreign entity derives from assets located in Argentina; and (ii) the participation being transferred represents (at the moment of the sale or during the 12 prior months) at least 10% of the equity of the foreign entity.
H. Personal income tax
Exemptions on financial income derived by Argentine individuals are removed. Income derived from certain Argentine financial investments will be subject to tax at rates of 5% or 15%, depending on the investment. The 1.5% tax on sale of real estate (ITI) is replaced with a 15% net capital gains tax on the sale of real estate (except for housing and property bought before January 1st, 2018)).
A shorter timeline applies for refunds of input VAT derived from investments. It will be refundable to all companies that are not able to generate offsetting profits within six months of the investment. The tax reform also taxes digital services provided by non-residents.
J. Social security contributions
The tax reform establishes a new ARS 12,000 non-taxable amount. Employer’s contributions are unified to a single rate of 19.5%, gradually.
K. Other changes
Amendments are made to tax proceeding regulations (e.g., the chance to negotiate the tax debt in certain scenarios),. It also implements the Mutual Agreement Procedure provided in Treaties to Avoid Double Taxation and Advance Pricing Agreements. The Criminal Tax Act is also amended.
Please feel free to ask us about the details of these of other new tax regulations.