Amendments to the Income Tax Law Regulatory Decree

Decree No. 1170/2018 published in the Official Gazette on December 27, 2018 incorporated amendments to the Income Tax Law. .  We will comment on some of the amendments,  focusing on the following topics: (i) permanent establishment; (ii) derivative instruments; (iii) dividends; (iv) indirect sale of assets located in Argentina and sale of real estate; (v) indebtedness between related local or foreign related parties; (vi) disposition of funds in favor of third parties; and (vii) enforceable accrual (devengado exigible).  This article complements those referring to transfer pricing rules and financial income.

1. Permanent establishment

The following aspects stand out:

• The extent of the term “company” (empresa) used in the unnumbered section following section 16 of the Income Tax Law (“LIG” after its Spanish acronym) is explained.  It refers to the development of industrial, commercial, financial, service, professional, agricultural activities, or of any other kind, using for such performance a capital investment and/or labor contribution, assuming in the process of obtaining benefits the risks associated to the performance of the activity.
• In connection with transactions between related parties, it means the performance of any of the abovementioned activities between related parties pursuant to the provisions set forth in section 15 of the Income Tax Law (parties subject to a same control, or power of decision).
• Some precisions in connection with the expression “place of business” (lugar de negocios) used in the first paragraph of the unnumbered section following section 16 of the LIG are included.  It will be understood as existent despite the existence of an agreement allowing the foreign entity to have any space where it may perform its activity.
• The 6month period within any 12-month period (subsection bof the third paragraph of the unnumbered section following section 16 of theLIG , referring to the provision of services by a foreign entity) will be counted from when the provision starts effectively, and will be considered finished when such provision ends or is abandoned effectively.
• Some precisions on the existence of a permanent establishment as a consequence of the performance of subject on behalf of a foreign entity are also included (sixth paragraph of the unnumbered section following section 16). ).
• It is understood that the agent acting on behalf of the foreign entity plays a significant role leading to the execution of agreements for the benefit of the foreign entity, whenever the agreement is executed by the agent or, if it was not executed by the agent, the terms negotiated by the agent were not substantially modified.
• In the situation contemplated in subsections d) and f) of the sixth paragraph of the unnumbered section following section 16 of the LIG (a subject acting following detailed instructions or subject to general control by a foreign entity; or else receiving a remuneration independently of the results of the activities performed), the local resident may prove its operation in an independent manner.  For this purpose, it will need to prove it acts as a commission or sales agent, or an intermediary of the foreign entity, under similar terms applicable to independent agents; as well as the fact that it operates for more than one independent foreign entities.

2. Derivative instruments

Some details referring to the requirements to be met by the derivative instruments and/or contracts so as to be considered hedge transactions (operaciones de cobertura) are included.  To this end, the instruments and/or contracts should meet all of the following requirements:

• their purpose is the mitigation of the effect of future fluctuations in market prices or rates, of goods, debts and result of the main economic activity or activities of the taxpayer;
• they have a direct link with the main economic activity or activities of the taxpayer, and the underlying element also has such link;
• they are quantitatively and temporally in accordance with  the risk that they intend to mitigate totally or partially- and that under no circumstance exceed it (if the position or transaction covered expired, was discontinued or else any other circumstance by means of which the exposure to the risk disappeared or ceased to exist, the operation will lose its hedge nature as of the moment when this circumstance occurred); and
• they are expressly identified from the beginning with the risk that is intended to be mitigated.

3. Dividends

The following aspects stand out:

• Share premiums (primas de emisión) should not be considered In order to establish the computable cost of each share (fifth paragraph of section 46 of the Income Tax Law).
• In the event of redemption of shares with a premium, or the distribution of such prime, if the beneficiary of the redemption or the distribution is the original subscriber of the shares that paid for the premium, it may deduct from the redemption dividend or the distributed prime, the amount of the contribution that constituted share premium in the proportion of the redeemed shares or the distributed prime with respect to the total amount of shares or the total premium, respectively.
• If the result of the redemption of shares acquired from other shareholders was a loss, it may be offset against the amount of the redemption dividend as well as the distribution premium.  Any outstanding amount will be subject to the general rule for the offset of losses against income set forth in section 19 of the LIG.
• The 7% tax in force in fiscal years 2018 and 2019; and 13% tax applicable in force in fiscal year 2020 and onwards will not be applicable to the extent the distributed dividends or profits refer to accumulated income until the end of the fiscal year prior to the one started on January 1, 2018, that was subject to Income Tax at the 35% rate. 
• This rule also applies to distributed dividends and profits that applies to accumulated income in fiscal years 2018 and 2019.  In this case, the applicable rate will be 7 %.

4. Indirect transfer of assets located in Argentina and transfer of real estate

4.1 Indirect transfer of assets located in Argentina

As per the amendments introduced to the Income Tax Law by Law No. 27,430, this regime is not applicable if the transfer is done within an economic group and the requirements to be established by the regulations are fulfilled. In this sense, section 10 of the Decree clarifies that a transfer is deemed to occur within an economic group when: (i) the transferor/s of the shares hold/s, directly or indirectly, 80% or more of the equity of the purchaser entity, or vice versa; or (ii) one or more entities hold/s, directly or indirectly, 80% or more of the equity of both the transferor and the purchaser. 

Such holdings should be verified during, at least, the two previous years as of the moment of the transfer. If a later transfer is made to a third party, the cost of acquisition is equivalent to the one that the original acquirer of the shares should have computed when the transfer was made within the economic group.

Notwithstanding the abovementioned, income derived from the indirect transfer of shares is subject to taxation if the transfer within an economic group is done for the sole purpose of obtaining fiscal benefits.

4.2 Transfer of real estate

Section 61 of the Decree includes a section following section 94 of the regulatory decree of the Income Tax Law. The tax rate of 15% is not applicable to the results derived from the disposal and transfer of rights of real estate obtained by resident individuals that qualify as an “individual enterprise”. Such individuals are taken as entities and subject the general tax rate.

5. Indebtedness between local or foreign related companies

Section 73 of the Decree contains certain rules applicable to the indebtedness between local or foreign-related companies

In particular, the Decree includes an eighth section following section 121 of the regulatory decree of the LIG, which sets forth that a local entity is considered part of an economic group if at least 80% of its equity belongs, directly or indirectly, to a same owner, whether Argentine resident or not, as long as such ownership is maintained during the time that the entity owes the sums that generate the interest and similar deductible items.

In relation to the indebtedness ratio of the economic group referred to in the seventh paragraph of section 81, subsection a) of the LIG, the Decree establishes that it must be validated by a special report to be prepared and signed by an Argentine independent accountant.

6. Disposition of funds in favor of third parties

It is set forth, mainly, that:

• In the event of disposition of funds, presumed interest will be determined taking into consideration the total financial cost or the effective compensatory annual interest rate published by the Banco de la Nación Argentina for loans in ARS or foreign currency, applicable following the characteristics of the operation and the subject receiving the funds.
• In the event of disposition of goods, any amounts the third party may have paid during the same fiscal year in connection with its use or enjoyment may be deducted from the presumed income (an annual 8 % of their market value in case of real estate / 20 % of their market value in case of any other goods).
• The assignment of presumed interest or income will cease when the funds or the goods are returned.  It will be considered that such return implies the cancellation of the loan with all accrued interest and income, capitalized or not, that were generated as a result of the disposition.
• The assignment will not be applicable if the disposition of funds or goods was made at a lower rate than the one published by the Banco de la Nación Argentina, or if an income lower than 8 % or 20 % was obtained; and proof showing the transactions were made under market terms could be produced.

7. Enforceable accrual (devengado exigible)

Following the amendment and within the framework for the promotion of investments, any subsidies granted by the Argentine Government under any name, as long as their enforceability occurs in one or more fiscal years following their accrual, should be assigned pursuant to the enforceable accrual criteria.