Tax Reform: Taxation of Income from Financial Transactions

1. Introduction

On December 29, 2017, the Argentine President enacted, through Decree No. 1112/2017 Law No. 27,430 (the “Tax Reform”) that was approved by the Argentine Senate two days before. The Tax Reform modifies the Income Tax Law ("ITL") and will tax the income derived from financial transactions of individuals and undivided estates resident in Argentina.

Previously, the ITL provided an exemption for those operations of sale and disposal of securities listed under public offer, including shares, public securities and bonds.

Within the initiative proposed by the Argentine Executive (“PEN”) and approved by the Argentine Congress, the assumptions included in the exemption provided for in the ITL are modified and the taxability of those operations that are not included in it is established.

We emphasize that the amendment has been enacted, but has not yet been regulated by the PEN.

2. Main changes

a. Exemption of capital gains for individuals in the transfer of shares

Before the Tax Reform, subsection w) of Section 20, of the ITL provided that the results from operations of sale, transfer or disposition of participations, bonds and other securities obtained by individuals and undivided estates located in Argentina, were exempt from income tax whenever they were listed on stock exchanges or securities markets and had public offer authorization.

The Tax Reform modifies the aforementioned subsection and establishes that only the results from sale, transfer or disposition of shares, securities representing shares and certificates of deposit of shares that are carried out through stock exchanges or stock markets authorized by the Argentine Securities and Exchange Commission will be exempt.

b. Exemption of capital gains from non-residents for sale of securities

As a novelty, the foregoing exemption will also be applicable to foreign beneficiaries to the extent that said beneficiaries do not reside in and the funds do not come from non-cooperative jurisdictions. The exemption will also be applicable to public securities issued by the National, Provincial, Municipal or the City of Buenos Aires governments, negotiable obligations and representative shares or deposit certificates shares and other securities provided that such securities have been issued by entities domiciled or located in Argentina. Notwithstanding the above, the exemption would not be applicable for LEBACs.

c. Progressive tax rate

For transfer of shares, representative securities and deposit certificates shares and any type of corporate participations, including mutual funds shares and rights over trusts and similar contracts, digital currencies, securities, bonds and other securities, the tax rate willl be 15%.

The sale of real estate or transfers of property rights is included in the tax rate.

d. Schedular tax

i. Performance on the placement of equity

A tax will be applicable to net income from Argentine source of individuals and undivided estates arising from profits related to interest or return on the placement of deposits made in financial institutions, public securities, negotiable obligations, share of mutual funds, debt securities of financial trusts, bonds and other securities, would be reached at the tax rate of 5% if it is issued in Argentine currency without an adjustment clause or 15% in the case of Argentine currency with adjustment clause or if it has been issued in foreign currency.

It should be noted that it has been provided that the 5% rate can be increased by the PEN and that the provisions also apply to foreign beneficiaries as long as they do not reside in non-cooperative jurisdictions nor do the funds invested come from non-cooperative jurisdictions.

ii. Dividends

Section 75 of the Law No. 27,260 abrogated the so-called “tax on the distribution of dividends or profits”, which had been established in 2013 by Law No. 26,893 through the amendment of Section 90 of the ITL and which levied a special tax rate of 10% on distribution of dividends or profits (in cash or in kind) made by corporations, limited partnerships and companies by-shares, limited liability companies, trusts and branches of foreign entities, by way of withholdings made by the entity to the moment of the payment of such profits.

With the Tax Reform, dividends and other similar income, obtained by individuals and undivided estates, will be taxed at the rate of 13% (7% during 2018 and 2019) on net income.

It will also be applicable for dividends and profits that will be paid to foreign beneficiaries by way of withholdings made by the Argentine entity at the moment of payment.

iii. Disposal of securities

The net profits of Argentine source of the individual and undivided estates of results from transfer of securities will be subject to the tax rate of 5% in the case of securities issued in Argentine currency without an adjustment clause or 15% if there were an adjustment clause or they have been issued in foreign currency.

In the case of 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 shares of mutual funds, which do not meet the conditions referred in subsection w) of Section 20, a 15% tax rate will be applicable.