Regulation of Taxation on Income from Financial Transactions by Foreign Beneficiaries

1. Introduction

Decree No. 279/2018, published in the Official Gazette on April 7, 2018 (the “Decree”), regulated the income tax treatment applicable to non-Argentine residents ("Foreign Beneficiaries"), who receive income or obtain capital gains arising from the investment in financial assets in Argentina.

In turn, On April 11, 2018 the Argentine Tax Authority ("AFIP, " after its Spanish acronym) issued General Resolution No. 4227 (the “Resolution”), which main purpose was to supplement said Decree.

Law No. 27,430 (the "Tax Reform") modified several exemptions in favor of Foreign Beneficiaries that obtain income from Argentine source arising from government bond yields, negotiable obligations and debt securities of financial trust, as well as capital gains arising from the sale of those securities and shares issued by Argentine companies, to the extent that certain requirements are met, mainly related with the public offering of these securities (see Tax Reform: Taxation of Income from Financial Transactions).

These exemptions do not apply when the Foreign Beneficiary is a resident of or the funds invested come from jurisdictions that are not cooperative under exchange of information matters.

Income derived from the investment in LEBACs (Argentine Central Bank bills) obtained by Foreign Beneficiaries were beyond the scope of the exemption and, therefore, are subject to income tax.

The Decree and the Resolution regulate those issues related to the application of income tax according to the new regulatory scheme, to the Foreign Beneficiaries and set up the procedure for the withholding tax applicable to: i) those incomes that a Foreign Beneficiaries are not exempted, ii) the income obtained by Foreign Beneficiaries resident of or the funds invested that come from non-cooperative jurisdictions in the matter of exchange of information, and iii) the income originated by the investment in LEBACs.
 

2. Main Aspects

1. Profits and interests

The profits and interest arising from the following investments are subject to an income tax withholding:

a) Interest originated in fixed-term deposits made in entities subject to the financial entities Law No. 21,526.

b) Profits from Argentine Central Bank Bills (LEBAC, after its Spanish acronym).

c) Profits from negotiable obligations, shares of mutual funds, debt securities of financial trust and similar contracts, bonds and other securities, whose income is not exempt.

The withholding tax rates are 5% in the case of investments denominated in pesos or 15% for investments denominated in pesos with an adjustment clause or in foreign currency. A presumption of net income of 43% could be applicable or 100% depending on the characteristics of the issuer and the holder of the investments; which provides effective withholding rates between 2.15% to 15%.

The obliged subjects to act as a withholding agents depend on the investment:

a) Fixed-term deposits in financial entities: the financial entity that pays the interest on the deposit.

b) Argentine Central Bank Bills (LEBAC): the entity that holds the securities.

c) Negotiable obligations, debt securities of financial trust and similar contracts, bonds and other securities: the payer of the interest or profits arising from said securities.

d) Shares of mutual funds: the depository company or the Integral Distribution and Placement Agent (“ACDI”).
 

2. Capital gains

Capital gains arising from the sale of LEBACs, corporate bonds, debt securities of financial trust, shares of mutual funds included in the first paragraph of Article 1 of Law No. 24,083 and profit shares of mutual funds included in the second paragraph of said article, digital currencies, as well as any other kind of title or bond and other security holdings, were reached by the income tax.

The withholding tax rates are 5% in the case of investments in pesos or 15% for investments denominated in pesos with an adjustment clause or in foreign currency. These tax rates applies on: (i) an presumed net profit of 90% of the amounts paid for the acquisition of those securities (which shows effective rates of 4.5% or 13.5%); or (ii) the real profit determined by the gross profit obtained less the expenses incurred in Argentina to obtain that profit.

The withholding tax and / or the payment to the Argentine Tax Authority will be in charge of:

a) In the case of LEBACs and other securities placed through public offering with authorization by the Argentine Securities Exchange Commission (“CNV,” after its Spanish acronym), except shares of mutual funds, to the extent that the profit from their sale is not exempt from income tax: the entity that exercises the custody of the securities.

In the event that the entity that exercises custody of the securities is not involved in the payment, the withholding tax must be made by (i) the buyer resident in the country, or ii) when the buyer is a foreign beneficiary, the income tax will be paid by the legal representative domiciled in the country of the foreign beneficiary. If there is not a representative in the country, the payment will be made by the foreign beneficiary him or herself, by international bank transfer.

b) In the case of shares of mutual funds: the depository company or the Integral Distribution and Placement Agent (“ACDI”)
 

3. Foreign Beneficiaries - Non-cooperative jurisdictions

In the case of Foreign Beneficiaries resident in non-cooperative jurisdictions or the funds invested come from non-cooperative jurisdictions, the withholding tax rate arises to 35%.
 

3. Entry in force

The Resolution will become effective as of April 26, 2018.