Preliminary Bill of the Income Tax Law Reform: main changes

In the following link you can find the presentation prepared by the Ministry of the Treasury.

On the same day, an unofficial draft of what it appears to be a preliminary bill that modifies the Income Tax Law started to circulate but it has not been submitted to the Congress yet. In such document, most of the issues that have been publicly discussed by the Minister were addressed. Below you will find the most relevant aspects.

1. Digital services provided through internet

Unless proved otherwise, it is presumed that  50% of the price paid for digital services rendered through the internet or from any adaptation or application of the protocols, platforms or technology used by the internet or any other network through which equivalent services are rendered, constitutes income from Argentine source, when the service is economically used in the country.

2. Indirect sale of shares and other values located in Argentina

Under certain conditions, income arising from the sale of shares and other securities or values, over a legal entity or other entities domiciled abroad will be considered from Argentine source obtained by non-resident individuals (i.e. the market value of the transferred shares is based on at least 30% of one or more assets located in Argentina, that the transferred shares represent at least 10% of the assets of the foreign entity, etc.).

3. Transfer pricing

When import or export of goods is made through an international intermediary, participation of the intermediary must be justified

 There are14 possible  scenarios considered as transactions between related parties.

4. Definitions of non-cooperative, low or no taxation jurisdictions, and permanent establishment

In line with the concept introduced in recent agreements to avoid double taxation signed by Argentina, a definition of a permanent establishment is included.

The concept of low or non-tax jurisdictions is revisited, but with a new definition in line with the OECD trends, according to which a jurisdiction is to be considered as a low or non-tax jurisdiction if the rate of related regimes or of special tax regimes that establish a maximum tax rate on companies’ profits is lower than 60% (SIXTY) per cent of the tax rate provided for in Section 69, Subsection a) of the current Income Tax Law.

-Cooperating jurisdictions continue to be those with which Argentina has entered into information exchange agreements. One change is that in addition to those jurisdictions that have not executed bilateral agreements with Argentina, all jurisdictions that —in practice— do not exchange information, despite the existence of such agreements, will be deemed as non-cooperating jurisdictions.

5. Dividends for individuals

Dividends and other similar income, obtained by individuals and undivided estates, will be taxed at the rate of 13% (7% in the first three fiscal periods beginning as of 1/1/2019) over the net income.

If the dividends or other income are paid to foreign beneficiaries, the company making the payment will have to practice the corresponding withholding.

A presumption -which does not admit evidence to the contrary- of distribution of dividends, is included under certain conditions. (i.e. when withdrawals of funds are made or when there are fees or compensations in which the service or other obligations is not effectively supported by evidence).

6. Equalization tax

The equalization tax, provided for in the first article added after article 69, is abrogated.

7. Corporate tax

The tax rate for corporations will be reduced to 25% (30% for the first three fiscal periods started as of 1/1/2019). The same tax rate will be applied to the so-called SAS.

Permanent establishments will pay an additional tax rate of 13% at the time of remitting the profits to their head office (7% for the first three years).

8. Financial trusts and closed-end mutual funds: Transparency

The amendment provides that financial trusts and closed-end mutual funds will be subject to income tax to the extent that certificates of participation and/or debt securities issued are not being placed by public offering. If such placement exists, it will be taxed only in proportion to the investments not made in Argentina.

If these trusts or mutual funds are not subject to tax, the investor who receives the distributed income must incorporate said profits in their own tax return. In the case of foreign beneficiaries, the trustee or the management company must practice a withholding over their income.

The interest accrued by the debt securities issued by the financial trusts will be deducted from the profits distributed, even when such trusts do not have to pay the tax.

9. Thin capitalization

Thin capitalization rules are modified. Interest arising from financial debts –not including those arising from the acquisition of goods, leasing or rendering of services related with the scope of the business- agreed with related parties (either resident or not) will be deductible up to the annual amount to be established by the Government or up to the equivalent of 30% of the net income corresponding to the fiscal before deducting interest and depreciation, whichever is the highest.

Accumulated interest during the previous 3 fiscal periods may be added if the amount of interest effectively deducted is lower than the applicable limit. Interest that could not be deducted in a particular fiscal period, may be added to those of the following 5 fiscal periods.

Financial entities, financial trusts and companies whose main corporate purpose is based on the celebration of leasing agreements are excluded from these rules. Under certain conditions, these limits would not be applicable.

The definition of “interest” includes exchange rate differences and, as the case may be, monetary adjustments arising from the original debts.

10. Sale of real estate by individual or undivided states

An effective tax rate of 15% is provided in the case of sale or transfer of rights over of real estate. Deduction of the adjusted acquisition cost is allowed.

11. Schedular tax. (Impuesto cedular)

Net income from Argentine source obtained by individual or undivided states arising from the profits of the placement in bank deposits made in financial entities, public securities, negotiable obligations, quotas of investment funds, debt securities of financial trusts and similar agreements, bonds and other securities, will be subject to a 5% or 15% tax respectively, whether those securities are in national or foreign currency or an adjustment clause is in those currencies.

12. Income arising from financial transactions

Net income obtained by individuals and undivided states arising from the sale of shares, representative securities and deposit certificates of shares, quotas and other participations –including participation in financial trusts and any other right over trusts and similar agreements-, digital currencies and other values are subject to the following tax rates:

a) Public securities, negotiable obligations, debt securities, shares of mutual funds not included in subsection c) below, certificates of participation of financial trusts and any other right over trusts and similar contracts, as well as any other kind of title or bond and other values, in all cases in Argentine currency without adjustment clause: 5%.

b) Public securities, negotiable obligations, debt securities, shares of mutual funds not included in subparagraph c) below, digital currencies, as well as any other type of bond or title and other values, in all cases in Argentine currency with a clause of adjustment or in foreign currency: 15%.

c) Shares, representative securities and certificates of deposits of shares and other securities, certificates of participation of financial trusts and any other right over trusts and similar contracts and condominium quotas of mutual funds, which: (i) are listed on stock exchanges or markets. securities authorized by the National Argentine Securities and Exchange Commission that do not meet the conditions referred to in subsection w) of article 20, or that (ii) are not listed in the relevant stock exchanges or markets: 15%.

13. Allocation of income and expenses: Anti-deferral rules.

Argentine residents who control trusts, trusts and other similar structures, constituted or domiciled abroad, whose main purpose is the administration of financial assets, must allocate the profits obtained in each fiscal year.

The same situation occurs in the case of participation in companies and similar entities that do not have a “fiscal personality” in the jurisdiction where the company is located, and for holders of direct or indirect participation in foreign entities as long as certain requirements are met; including for example,  that the target company has more than 50% of its profits arising from passive income.