Resolution No 7/2003 of the Public Registry of Commerce and its possible tax consequences

1. Resolution No 7/03 of the Public Registry of Commerce

The Public Registry of Commerce (the “PRC”) issued Resolution No 7/2003 (the “Resolution”), published in the Official Gazette on September 25, 2003. Please refer to the article “Additional requirements to register foreign entities - Resolution No 7/2003”, in Marval News # 21, September 30, 2003.

The Resolution states different requirements to be fulfilled by foreign entities requesting their registration with the PRC under the third paragraph of Section 118 and Section 123 of Companies Law No 19,550 (the “CL”).

The third paragraph of Section 118 of the CL refers to foreign entities that conduct business on a permanent basis, set up a branch, an office or any other permanent representation in Argentina. Section 123 of the CL refers to foreign entities that participate as shareholders or partners in domestic companies.

The Resolution also establishes that agencies, branches or permanent representations of entities registered under the third paragraph of Section 118 of the CL, as well as representatives of registered entities under Section 123 of the CL, shall make additional filings on an annual basis. Basically, the obligation consists of filing a balance sheet or an accountant certificate showing the nature and value of the foreign company’s assets placed outside Argentina, classified as current and non-current assets.

Section 5 of the Resolution establishes that the PRC may, under Section 124 of the CL, request the foreign entities to amend their by-laws or articles of incorporation in order to adapt them to the CL. In other words, the PRC may request the amendment of the by-laws or articles of incorporation of a foreign entity in order to adapt them to the formalities stated for incorporating a local company under the CL, when any of the following situations is verified:

(i) absence of assets abroad;

(ii) the value of the non-current assets placed abroad is irrelevant with respect to the value of the participation of the foreign entity in the domestic company or companies and/or of the existing assets in Argentina or compared with the transactions informed pursuant to General Resolution No 1375/02, enacted by the Federal Tax Authorities;

(iii) the effective management or general administration of the foreign entity is located in its local domicile.

In the event that the company fails to comply with the requirement to amend its by-laws or articles of incorporation within 180 days, the PRC may judicially request the cancellation of the company’s registration, and, as the case may be, its liquidation.

As a complement of the Resolution, the PRC issued Resolution No 8/03 by which it creates a “registry of foreign company’s isolated acts”. Please see the article “Creation of the Registry of Isolated Acts of Foreign Companies - General Resolution PRC No 8/2003”, in the present edition of Marval News.

2. Section 124 of the CL and its possible tax consequences

The authority to ask foreign entities to amend their by-laws or articles of incorporation to the Argentine legislation arises from Section 124 of the CL. Such section establishes that:

“The company incorporated abroad and having its head office in the Republic or its principal purpose to be fulfilled in the same, shall be considered a local company for the purposes of complying with the formalities of incorporation or of amendments and supervision of its operation”.

It has been said that “...this is a police provision of Argentine international private law under which the applicability of Argentine law is protected when the corporate domicile or the principal corporate purpose is located in Argentina. On the other hand, if those elements are located abroad, the applicability of the law of the domicile or principal corporate purpose is not protected in Argentina but, instead, the applicability of the law of the place of incorporation is accepted. It is evident the unilateral nature of the police provision of Section 124, which only focuses in two alternative connections with the national territory: the domicile or the principal corporate purpose, and if any of those two hypothesese take place, the applicability of Argentine corporate law is peremptory and exclusive of the applicability of any other foreign law...”(1) .

It has also been said that “...this section tends to ensure the supervision under the economic reality and of the local law for acts that take place in Argentina...”(2) . In this cases, “...the Argentine legislator, based on objective facts (“corporate domicile located in Argentina” and “principal corporate purpose to be fulfilled in Argentina”), presumes that the incorporation of the company abroad was made to evade Argentine legislation”(3) .

As a consequence of the applicability of Section 124 of the CL, foreign companies are to be considered “as domestic companies”(4) , and that is why such provision “...imposes on them the obligation of incorporating again according to the requirements established in our corporate law...”(5) . That is because “...for the foreign company to exist with all its attributes and be able to act, it will have to be incorporated in our country...”(6) .

Hence, after its “re-incorporation” in Argentina as a domestic company, the activities carried out by the foreign entity could be considered as performed by an Argentine-resident company. That would be the direct consequence of the applicability of Section 124 of the CL and Section 69, subsection a) of the Income Tax Law. Thus, income obtained by the “re-incorporated” company could be considered as obtained by an Argentine-resident, subject to the obligation of filing tax returns and payment of the applicable taxes, and the withholding tax regime would not apply to payments made to such company(7) .

This could be the conclusion even if a tax treaty entered into between Argentina and the other country applies. As a general principle, local law can not modify the provisions of a treaty and, therefore, a foreign company incorporated in a country with which Argentina has a treaty in effect, would not change its condition of resident of such country even if such company is “re-incorporated” in Argentina under Section 124 of the CL. However, such “re-incorporation” could lead to a case of “double residency” under the treaty. In other words, that could lead to a case where the corporation would be considered as a resident of both contracting States under the general provisions of the treaty. In many cases, treaties solve the problem by considering that the corporation is a resident of the State where its place of effective management is situated(8) . Then, a foreign company “re-incorporated” in Argentina as a consequence of having “its effective management or general administration located in its local domicile”(9) could derive in the non-applicability of the limitations on withholding rates that treaties generally contain for interest or royalty payments. In other words, in that case the benefits arising from the treaties would not apply to payments made to the “re-incorporated” company, and those payments would be deemed to be made to an Argentine-resident. However, that could have no practical impact since a foreign corporation having its effective management or general administration located in Argentina would probably have a permanent establishment in Argentina.

If no tax treaty applies and the “re-incorporated” company transfers shares, bonds or other securities, the results of such transaction would be subject to income tax because the exemption provided for non-resident individuals and entities would not apply(10) .

3. Compliance with General Resolution No 1375/02 of the Federal Tax Authorities

Section 4.2 of the Resolution indicates that representatives of entities registered under Section 123 of the CL must prove, on an annual basis, “...the fulfillment with General Resolution No 1375/02, as amended, enacted by the Federal Tax Authorities, for the previous calendar year or lesser period, whichever corresponds...”

The Federal Tax Authorities enacted General Resolution No 1375/02(11) , which is an information regime with the purpose of getting information about economic transactions performed in Argentina, where one of the parties is a representative of a foreign entity or individual and the other party is an Argentine-resident. General Resolution No 1375/02 appoints as informing agents in the first place those who act in the transaction as representatives of parties or entities abroad, and in second place those who have taken part in the same transaction in their capacity as “service providers”.

If the situations that trigger the obligation to inform do not take place, could the PRC demand from the representatives of foreign entities registered under Section 123 of the CL, elements evidencing the fulfillment with the information regime? The Resolution seems to assume that in every case of a foreign entity registered under Section 123 of the CL: (i) an economic transaction exists as a consequence of the mere registrations, or (ii) economic transactions will take place which, in turn, will determine the obligation to inform under General Resolution No 1375/02. However, the mere registration under Section 123 of the CL does not seem to involve an “economic transaction” under General Resolution No 1375/02. On the other hand, if no “economic transactions” take place and, therefore, no obligation to inform exists under General Resolution No 1375/02, it would be enough to inform that circumstance to the PRC and that should be deemed as fulfillment with Section 4.2 of the Resolution. Under General Resolution No 1375/02(12) evidence of the fulfillment of a non-existing obligation cannot be demanded.