New Law on Disclosure of Foreign Currency

1. Legislative procedure

On May 7, 2013, the Argentine Executive Branch filed with Congress a bill that was approved by the Senate(1) on May 22, 2013 and by the House of Representatives on May 29, 2013 (the “New Law”). As of May 30, 2013, the New Law has not come into effect as it has not been promulgated by the Executive Branch or published in the Official Gazette.

The New Law provides for the creation of three new financial instruments and a disclosure regime of foreign currency held in Argentina or abroad. The disclosure regime provides for tax benefits to those joining such regime by declaring their holdings in foreign currency, provided such funds are used for the purchase of any of the financial instruments contemplated in the New Law.

In the filing message of the bill, the Argentine Executive Branch stated that the purpose of the New Law is to allocate “idle resources in the hands of the private sector towards a greater investment, granting the owners of such resources a safe and reasonable return.”

2. New Financial Instruments

2.a) Bond (BAADE) and Promissory Note for Economic Development
The New Law provides the issuance of two notes denominated in U.S. Dollars: the Argentine Bond for Economic Development (Bono Argentino de Ahorro para el Desarrollo Económico or “BAADE”) and the Promissory Note for Economic Development(Pagaré de Ahorro para el Desarrollo Económico). The issuer will be the Ministry of Economy and Public Finance and the proceeds of the issuance will be used for the financing of investment projects in strategic sectors, such as infrastructure and hydrocarbons.

Even though the financial terms of these notes (maturity, interest, specific use of proceeds) have not yet been set and, according to the New Law, will be determined upon their issuance, the Minister of Economy informed that they will pay interest semi-annually at a rate of 4% per year, they will mature in 2016 and their main use will be for investment in the energy sector.

2.b) Certificate of Deposit for Investment (CEDIN)
As the BAADE and the promissory note mentioned in the preceding paragraph will be used for investment in the energy sector, the New Law provides the issuance of the Certificate of Deposit for Investment(Certificado de Depósito para Inversión or “CEDIN”) in order to reactivate the real estate and construction markets, as this activity has been significantly reduced as a result of the restrictions to access the foreign exchange market. The CEDIN will be an endorsable order instrument denominated in U.S. dollars. The issuer will be the Central Bank of the Republic of Argentina (BCRA) and it shall be obtained in a financial entity.

The CEDIN consists of a certificate of deposit evidencing ownership of the U.S. dollars stated in such certificate, and therefore it will be a valid means to cancel payment obligations in U.S. dollars.

The mechanics of the CEDIN would be as follows: (i) anyone interested in obtaining the CEDIN shall go to a financial entity with his/her U.S. dollars in cash; (ii) the financial entity shall receive the funds on behalf of the BCRA and shall deposit them in the account specified by the BCRA within 24 hours after receipt; and (iii) the CEDIN shall be repaid in U.S. dollars, in cash, against presentation thereof by its holder or endorsee, provided he/she provides evidence that such CEDIN was used for any of the following real estate transactions: purchase of land, sheds, business premises, office spaces, parking spaces, lots of land, parcels and already constructed housing units and/or construction of new housing units and/or repair of real property.

The rest of CEDIN’s specific terms and the functioning thereof shall be regulated by the BCRA, which shall also act as the enforcement authority. Such regulation might be useful to answer some of the significant questions that have not been dealt with in the New Law. Some examples are:
1) The New Law provides that the CEDIN will be a suitable means to cancel payment obligations in U.S. dollars. Will the debtor be able to impose on the creditor a payment in CEDIN to cancel a debt that the parties have agreed to repay in foreign currency? In that event, will the payment be made at the nominal amount or at the market value of the CEDIN, assuming there is a market?
2) The New Law provides that to collect dollars in cash the CEDIN must be presented to the BCRA, providing evidence that it has been used for one of the authorized real estate transactions. How long will the BCRA take to make the payment? Will the payment be made immediately against presentation of the CEDIN at the BCRA?
3) Will sellers of real property or counterparties of real estate transactions be willing to assume the risk of collecting their money from the BCRA? Will they be willing to have the deed executed against delivery of CEDIN in lieu of dollars or another foreign currency?

3. Foreign Currency Disclosure Regime

3.a) Scope
The disclosure regime provided for in the New Law is aimed at accomplishing disclosure of (i) foreign currency held in the country and abroad as of April 30, 2013, including that date; and (ii) foreign currency held in the country and abroad derived from the proceeds of property existing as of April 30, 2013. However, these terms may be extended according to the power conferred to the Argentine Executive Branch by the New Law.

Individuals, undivided estates and all persons covered by Section 49 of the Income Tax Law (Amended Text under Decree No. 649/97) may adhere to the regime, among which there are: companies, corporations, civil associations, sole proprietor businesses, trusts, mutual funds and certain commercial agents, among other persons included in the third category of income.

The New Law also provides for some excluded persons, who shall not be able to avail themselves of the regime:

1. anyone who has been declared bankrupt;
2. anyone who has been criminally sued or accused of crimes provided by the criminal tax regime (Laws No. 23,771 or 24,769), in respect of whom a final judgment has been issued prior to the coming into effect of the New Law;
3. anyone who has been criminally sued or accused of ordinary crimes in connection with the nonperformance of their own or third parties’ tax obligations, in respect of whom a final judgment has been issued prior to the coming into effect of the New Law;
4. anyone accused of crimes related to money laundering or financing of terrorism transactions, their spouses and blood or affinity relatives up to the second degree, both in ascending or descending lines;
5. legal entities (including cooperative associations) where their partners, managers, directors, statutory auditors or members of the supervisory committee have been sued or accused of crimes provided by the criminal tax regime or ordinary crimes related to the nonperformance of their own or third parties’ tax obligations, in respect of whom a final judgment has been issued prior to the coming into effect of the New Law; and
6. anyone holding a public office currently or in the past, their spouses and blood or affinity relatives up to the second degree, both in ascending or descending lines.

3.b) Disclosure procedure: deposit or transfer
The disclosure of holdings in foreign currency located in Argentina will be made by means of a deposit with a financial entity. If the foreign currency is located abroad, a transfer to the country must be made through a financial entity.

Both the deposit and the transfer, as the case may be, must be made within the term of three months after publication of the New Law.

3.c) Tax benefits and liability release
All those who disclose their holdings in foreign currency will be exempted from payment of the following taxes: Income Tax, Tax on the Transfer of Real Estate owned by Individuals or Undivided Estates, Tax on Debits and Credits on Bank Accounts and Other Transactions, Internal Taxes, Value Added Tax, Minimum Presumed Income Tax, Personal Assets Tax and Special Tax on the Assets of Cooperative Associations.

The release shall not benefit any amounts resulting from withholdings (“percepciones” or “retenciones”) that have already been made but not yet paid.
In all cases, the equivalent amount in Argentine pesos of the disclosed holdings at the bid exchange rate of Banco de la Nación Argentina as of the disclosing date shall be considered.

If the disclosure is made by companies, corporations or sole proprietor businesses located in Argentina, their partners shall be released from the Income Tax corresponding to their interests.

It is important to bear in mind that the tax benefits provided in the New Law correspond to taxes imposed by the Argentine Federal Government, and that provincial taxes are excluded from the regime. In the event the provinces do not adhere to the national regime, the disclosure would have consequences on the provincial taxes not paid in due time in relation to such funds.

The New Law provides that the amounts disclosed shall not be considered unjustified increases of assets and persons disclosing the funds shall be released from any civil, commercial, criminal tax, administrative, criminal exchange and professional action that could apply to them in connection with the funds disclosed. This liability exemption extends to, among others, the administrators, managers, statutory auditors and members of the supervisory committee of all legal entities availing themselves of the regime, but does not cover the actions that third parties may enforce for having been damaged by such irregularities.

As a requirement to obtain the referred benefits, the disclosing person must have complied with the filing and payment, as of May 31, 2013, of his/her obligations under the Income Tax, Minimum Presume Income Tax and Personal Assets Tax for all fiscal years ended before and including December 31, 2012. The amounts disclosed shall be included in the sworn statements for fiscal year 2013.

Benefits will only be obtained if the amounts disclosed are used to purchase any of the financial instruments created by the New Law (see paragraph 2).

3.e) Statute of limitations and legal actions
The New Law provides for suspension of the running of the statute of limitations for the term of one (1) year. As the law is written, the suspension will be applicable on a general basis, covering even those persons that have not adhered to the disclosure regime.

Therefore, the Argentine Tax Authority (Administración Federal de Ingresos Públicos or “AFIP”) shall have one additional year to determine or demand payment of the taxes enforced by it and the lapsing of all outstanding tax enforcement suits or appeals shall be extended for an equal term.

4. Connection with Asset Laundering Rules

The New Law provides that all persons that have reporting obligations to the Financial Information Unit(Unidad de Información Financiera or UIF) on the terms of Law No. 25,246, as amended (Asset Laundering Prevention Law) shall not be released from their obligation to report suspicious transactions that could constitute money laundering or terrorism financing conducts.

The benefits set forth in the New Law only apply to cases of tax evasion, whereas all persons disclosing money derived from conducts that could be qualified as asset laundering are excluded from the regime and its benefits. The New Law sets forth that anyone who intends to adhere to the disclosure regime must execute an affidavit for such purposes.

In line with the above, all persons accused of crimes relating to money laundering or terrorism financing transactions and their relatives (spouses and blood or affinity relatives up to the second degree) will not be able to adhere to the regime (see paragraph 3.a).

5. Comparison with the Disclosure Regime Implemented in the Year 2009

At the end of 2008, Law No. 26,476 came into force, which created a disclosure and repatriation of capital regime which was implemented during the year 2009. On the basis of this precedent, the New Law repeated several elements of such law, with some differences.

The similarities between the New Law and Law No. 24,476 are the following: (i) eligible and non eligible persons for the disclosure regime are the same (the New Law adds as non eligible persons those accused of crimes relating to money laundering transactions); (ii) tax benefits and liability release are the same (the New Law adds the release of criminal exchange actions).

However, the New Law has some differences with the regulations of 2009 in the following aspects:

1. Object to be disclosed: The New Law only allows the disclosure of holdings in foreign currency, whereas Law No. 26,476 also allowed disclosing holdings in national currency and other assets.
2. Way to disclose holdings located abroad: The New Law requires holdings located abroad to be disclosed by means of the transfer to a local banking entity, whereas under Law No. 26,476 funds were allowed to remain deposited abroad (it sufficed to declare that the funds were deposited in a foreign banking entity).
3. Requirements to obtain the benefits: The New Law requires, as a condition to obtain the tax and liability exemption benefits, that the funds declared be used for the acquisition of any of the instruments created by the New Law (BAADE, Promissory Note or CEDIN), but does not require payment of any special tax in connection with the amounts disclosed under the regime. Law No. 26,476, on the other hand, did not create any financial instrument, but required payment of a special tax with rates ranging from 1% to 8% over the amount disclosed, depending on the type of asset disclosed and the use of the funds.

According to the information provided by AFIP in 2009, with the disclosure regime of such year assets for 18,113 million Argentine pesos (equivalent to approximately 4,700 million U.S. dollars at the exchange rate of September, 2009) were regularized.

6. Conclusion

The New Law will be promulgated by the Executive Branch probably without changes and shall enter into effect upon publication in the Official Gazette in the coming days. The AFIP and the BCRA shall have to regulate the disclosure regime and the CEDIN, respectively. The success of the forgiveness regime proposed by the New Law will depend significantly on how it is regulated.