Income Tax Regulation on Disposal of Real Estate and Payments Made to Executives and Directors, Derived from the Termination of their Employment Relationship

Decree No. 976/2018 (the “Decree”) regulated when the “acquisition” of real estate is deemed to occur as of January 1, 2018, as per the taxability set forth by Law No. 27,430 on income derived from the disposal or transfer of rights of real estate acquired as of said date, except in the case of households.

It also regulated the second paragraph of Section 79 of Income Tax Law (the “ITL”), by means of which the sums received for administrator or executive positions in public and private companies which were derived from the termination of the employment relationship were included within the scope of the tax, provided that they exceeded the minimums established in the applicable labor regulations. The Decree establishes objective and subjective parameters to determine which employees are considered "administrator or executive positions."

Income Tax: When are the disposal and transfer of rights of real estate taxed?

Law No. 27,430 levied the income obtained by individuals derived from the disposal and transfer of rights of real estate, except in the case of households. In addition, said Law established that the tax would be applicable as long as the transferor had acquired the real estate as of January 1, 2018. Said profits are subject to a tax rate of 15%,  which must be calculated by offsetting the restated cost basis from the transfer price (including the deducted amortizations if the real estate was affected to obtain taxable income) and other expenses incurred for the purpose of acquiring the real estate.

Among the main aspects regulated by the Decree, we highlight the following:

- The acquisition or transfer of rights of real estate is deemed to occur when, as of January 1, 2018 inclusive: (i) the transfer property deed has been executed; (ii) a bill of sale or similar document is executed, provided that possession is obtained; (iii) possession is obtained, even if the bill of sale or similar document was previously executed; (iv) the bill of sale or similar document has been acquired -without having possession- or otherwise real estate rights have been acquired; or (v) in the case of real estate or rights on real estate received by inheritance, legacy or donation, any of the events above listed occur in relation to the deceased or donor.

-  In the case of building construction on owned real estate as of January 1, 2018, the disposal of the built real estate will be only taxed, if applicable, by the Real Estate Transfer Tax at a tax rate of 1.5%. The same tax treatment is applicable if, as of December 31, 2017, a bill of sale or similar document was executed and, at that time, at least 75% of the price has been paid.

- If the acquisition value of the real estate cannot be determined, the decree establishes the guidelines to be followed, which consist of: (i) in the case of real estate located in Argentina, the market value at the time of its acquisition by the transferor should be considered, which must come from a certificate issued by a real estate broker, a professional with qualifying title for that purpose, or by a bank belonging to the National, Provincial or the City of Buenos Aires Governments; and (ii) in the case of real estate located abroad, the valuation must come from two certificates issued by a real estate broker or an insurance or banking entity of the respective country, in which case the valuation of the lesser value must be considered.

- Regarding the exemption provided for the gain resulting from the disposal of the household, the Decree clarifies that for the real estate to be deemed as such, it must be destined to be the unique, family and permanent house of the taxpayer.

- The gain resulting from the transfer of real estate located in Argentina is considered to be an Argentine source of income, regardless of the residence of the parties involved in the transaction as well as the place of execution of the agreement.

- In the event that the transferor is a non-Argentine resident individual, the profit obtained from the transfer of real estate located in Argentina will be levied at the tax rate of 15%. The income subject to taxation is determined following the same rules that apply to Argentine resident individuals; however, non-Argentine resident individuals may only deduct the expenses incurred in the country related to the transfer of the property. If the buyer is an Argentine resident, such buyer must withhold and pay the tax and, if both parties are non-Argentine residents, the tax must be directly paid by the transferor, either personally or through its legal representative in the country.

Treatment of payments made to executives and directors, derived from the termination of their employment relationship

The legal reform introduced to Section 79 of the Income Tax Law (the "LIG", after its acronym in Spanish) was analyzed in Marval News No. 180. In this regard, the situation that preceded the reform and the questions it raised were commented in that article, evidencing the need for regulation.

In particular, it was necessary to determine: (i) which employees fell within the definition of “administrator or executive positions”? and (ii) how the minimum indemnity provided by the "applicable labor regulations" should be calculated? The absence of regulation since the publication of the legal reform not only generated a lack of response to these questions but also interpretative doubts as to the operability, scope and validity of the amendments.

The Decree clarified that the income included in the second paragraph of Section 79 of the ITL is the one generated due to the termination of the employment relationship of employees in "administrator or executive positions”, provided that they, concurrently:

1. have occupied or performed effectively, continuously or not continuously, within the twelve (12) months immediately prior to the date of the termination of the employment relationship, positions in directories, councils, boards, executive or management commissions, corporate bodies that can be assimilated, or administrator positions that involve decision-making or the execution of policies and directives adopted by the aforementioned shareholders, partners or bodies; and
2. whose gross monthly remuneration, taken as the basis for calculating the compensation provided by the applicable labor regulations, exceeds the Minimum Wage in force at the time of the termination (the "SMVM" after its acronym in Spanish) by at least fifteen (15) times. The SMVM in force until November 31, 2018 for employees who work full-time (on a monthly basis) is ARS 10,700, so the current threshold until that date would be ARS 160,500.

Likewise, the Decree clarifies that when Section 79 of the ITL refers to "administrator or executive positions " in "public companies", it refers to those companies mentioned in Section 8, subsection b) of Law No. 24.156, that is, state-owned companies, stock corporations with majority government ownership, mixed economy companies and all those business organizations where the Argentine Government has a controlling interest in the capital or in the corporate decision-making.

The Decree enters into force as of November 2, 2018 and now allows analyzing in each case whether an employee can be classified as "administrator or executive positions "; therefore, if the employer should act as a withholding agent over the sums derived from the termination of the employment relationship in the amount exceeding the "minimum compensation provided by the applicable labor regulations”. The Decree establishes two concurrent requirements, first of all, that the employee qualifies as "administrator" or "executive" according to the above-mentioned details and secondly, that they receive on the date of their termination, a gross monthly remuneration of more than fifteen (15) times the SMVM. In the event that either of these requirements is not met, the sum received with exclusive cause in employment termination, even if it exceeds the compensation for seniority, will not be taxed.

Finally, the Decree does not clarify the scope of the term "minimum compensation provided by the applicable labor regulations", so in certain cases there could be doubts about the criteria for determining the basis for calculating the compensation for seniority that in all cases will not be taxed.