Non-profit Entities: Amendments under the Tax Reform

Tax

Upon the enactment of Law No. 27,430 (Tax Reform Law), new provisions regarding the exemption of non-profit entities were included in subsection f), section 20, of the Income Tax Law (“ITL”).

Section 20, subsection f), as amended, establishes:

1. A new limitation to the exemption, by excluding from said exemption those entities that obtain their income, in whole or in part, from credit or financial activities, except the financial investments that could be made for the purpose of preserving the corporate equity, such as the ones performed by Professional Associations and Councils and Social Security Funds, created or recognized by national and provincial regulations.
    
2. Regarding the exclusion of the exemption already set forth for those foundations and associations or trade unions that carry out industrial or commercial activities, an exception was added to said exclusion, by providing that the limitation does not apply when such activities are related to the purpose of the entities and the income derived from them does not exceed the percentage determined by the relevant regulation in relation to the total revenues. The exemption will not be applicable to the income derived from these activities that exceed such percentage.
    

Recently,  a draft project of amendment of the Regulatory Decree No. 1,344/98 of the ITL was circulated. In relation to the matters analyzed here, the project incorporates two sections after section 35 of the decree, as it stands:

1. The first section sets forth an exception to the exclusion of the exemption to those entities which obtain their income from credit or financial activities, by establishing that the exclusion does not comprise microcredit institutions and activities (according to section 2 of Law No. 26,117 of Microcredit Promotion for the Development of Social Economy). Likewise, the exclusion neither comprises those entities that, totally or partially financed by the Argentine Public Administration or international, multilateral, bilateral or regional credit organisms, grant loans destined to low-income individuals, associative groups of the social economy and/or cooperatives.
   
   The regulation adds as a requirement that the loans must be intended to address needs related to the productive, commercial and service activities, as well as training and finance for the improvement of the family home, according to the Central Bank of the Argentine Republic’s regulations.
2. The second section establishes the maximum percentage of income derived from industrial and commercial activities, which must not exceed 30% of the total revenues.
    

The Tax Reform Law also included an amendment of subsection c) of section 81 of the ITL. This subsection states that taxpayers may deduct donations made to the non-profit entities included in subsection f) of section 20, as long as they are done in compliance with the relevant regulation and up to the limit of 5% of their net income made in the fiscal year. For the purpose of allowing the deduction, the non-profit entities must have as their main purpose any of those listed in points 1 to 4 of the mentioned regulation. These include  scientific and technological research with the quality certification of their research programs, scientific research focused on the development of political parties’ plans, and educational activities under certain conditions.

Point 1 of subsection c) of section 81 of the ITL was amended by the Tax Reform Law, which had its scope extended –in relation to its previous wording– to include within the institutions’ purposes the performance of social assistance activities or charity medical assistance, as well as care and protection activities addressed to infancy, the elderly and disabled individuals.