Productive Financing Law: Tax Aspects

 I. Introduction

On May 11, 2018, the Productive Financing Law that established several amendments to Laws No. 26,831 (“Capital Markets Law”), No. 24,083 (“Mutual Funds Law”), No. 20,643 (“Purchase of Private Securities Law”), No. 23,576 (“Negotiable Obligations Law”) and the Civil and Commercial Code1 was published in the Official Gazette.

The Productive Financing Law modified the tax treatment of several financial instruments: i) negotiable obligations, ii) financial trusts and closed mutual funds and iii) financial trusts whose objective are to foster real estate developments for social housing of medium and low-income populations. These amendments must be analyzed jointly with the tax reform introduced by Law No. 27,430.
 

II. Negotiable Obligations

Negotiable obligations have several tax benefits as long as they comply with the requirements established in Law No. 23,576. For example, the funds collected as a result of the negotiable obligations must be used for specific purposes. Law No. 27,440 amplifies these purposes.

According to new article 36 of Law No. 23,576, the issuer of the negotiable obligations, in order to obtain the tax benefits, must guarantee that funds are used for investments of assets and capital goods located in Argentina, for working capital in Argentina or refinancing of liabilities, for capital contributions in controlled companies, acquisition of shares or commercial financing as long as the result is applied to the previous purposes according to the resolution that enables the offer of the negotiable obligation and is disclosed to the public through a prospectus.
 

III. Financial Trusts and Mutual Funds

In order to make the current tax treatment more transparent, the trusts and the mutual funds referred to in subsections 6 and 7 of section a) of article 69 of the Income Tax Law (this includes financial trusts, and closed mutual funds) must pay income tax as long as the certificates of participation and/or debt securities or the shares they offer have not been placed by public offering with the authorization of the Argentine Securities and Exchange Commission. If such offering exists, they will be taxed only in proportion to the investments not made in Argentina.

Therefore, if there is placement by public offering and the investments are made in the country, the fund or the trust will be considered transparent for Income Tax purposes.

When the trusts and mutual funds do not have to pay income tax, the investor that receives the profits that they distribute must incorporate the profits in their own affidavit, according to the general regulation of the type of profit.

In the case of foreign beneficiaries, the trustee or the management entity, as appropriate, must make a withholding to beneficiaries abroad to the extent that the profits distributed by the trust or mutual fund, respectively, are taxed for said beneficiaries.

The regulation establishes the procedures that are applicable for the purpose of fulfilling the enclosed provisions.

The treatment explained above is applicable with respect to the profits generated in the years beginning on or after January 1, 2018.
 

IV. Housing development

In order to encourage the development of housing construction for low and medium income population, mutual funds or financial trusts, whose investment objectives are (a) real estate developments for social housing of medium and low-income populations; and / or (b) mortgage loans; and / or (c) mortgage securities, distributions originated in rental or the result of the sale of the assets, will taxed at a rate of fifteen percent (15%), subject to the following conditions:

a) That the beneficiaries of said results are humans, undivided estates or foreign beneficiaries.

b) That the closed mutual fund or the financial trust fund had been placed by public offering with authorization from the Argentine Securities and Exchange Commission with a term of not less than five (5) years, and distributed among a number of at least 20 (twenty) investors;

c) That no investor or shareholder has a participation greater than twenty-five percent (25%) of the offered securities;

d) In the case of sales that are made through markets duly authorized by the Argentine Securities and Exchange Commission. If the offering was made in foreign currency or local currency with an adjustment clause, the exchange differences or updates according to the emission clauses, will not be part of the gross profit subject to tax. If the offered securities had been made in Argentine currency without an adjustment clause, the cost of acquisition or subscription may be updated by applying the index mentioned in the second paragraph of article 89 of the Income Tax Law;

e) In the case of redemption by final liquidation as long as a minimum of five (5) years have passed. If this period has not been reached, the applicable rate will be the general rate for the beneficiary. For the determination of the final profit by redemption or liquidation, the exchange differences according to the adjustment clauses, will not be part of the gross profit subject to tax. If the offering had been made in Argentine currency without an adjustment clause, the cost of acquisition or subscription may be updated by applying the index mentioned in the second paragraph of article 89 of the Income Tax Law.

Distributions made by the mutual funds at after the tenth anniversary of the subscription associated with their original offering, a zero percent (0%) rate will be applied for the beneficiaries mentioned in section a), and also for institutional investors’ arrangements in accordance with the regulations.

f) That the Mutual Fund or the Financial Trust complies, from the time of the offering and throughout its term, with the requirements demanded by Argentine Securities and Exchange Commission to access to said treatment.