Freeing of dividends and debt payments to non-residents

As a consequence of the economic crisis at the beginning of 2002, after over ten years of exchange freedom the Central Bank of the Republic of Argentina (“CBRA”) imposed very tight exchange controls, curtailing the ability of local residents to buy foreign currency and transfer it abroad.

These measures were imposed to restrain capital flight and to limit the depletion of reserves, which had been significantly reduced in last semester of 2001. Simultaneously, exporters and service providers were compelled to sell the proceeds of exports of goods and services in the local market, within stated terms as from the shipment of the export or the collection of the service, to ensure a supply of foreign currency.

Payments of dividends and profit remittances to non-residents and payments of financial debts incurred abroad were subject to Central Bank approval unless certain conditions were met, inter alia, that the payment was to cancel financings from abroad whose proceeds were sold in the Argentine exchange market after February 11, 2002 .

In the last few months, the Central Bank has gradually flexibilized some of these controls.

In particular, on January 7, 2003 the CBRA issued Communication “A” 3859 pursuant to which Argentine companies have no limitation to purchase foreign currency and transfer it outside Argentina to pay dividends or profits, to the extent such dividends or profit remittances result from a closed financial statement certified by the external auditors.

Under the CBRA regulations, both companies and individuals need prior authorization from CBRA to purchase currency to be applied for certain purposes (e.g., investments in real estate outside Argentina, loans granted to persons domiciled outside Argentina, portfolio investments by individuals, investments outside Argentina by persons domiciled in Argentina) listed in such regulations, in excess of an aggregate amount of US$ 150,000 per calendar month. Such amount is calculated taking into account the aggregate purchases from all entities participating in the foreign exchange market.

Until the issuance of Communication “A” 3859, purchases of currency to pay dividends or profits outside Argentina were added up to the other items listed in the CBRA regulations. Communication “A” 3859 removed purchases of currency to pay dividends and profit outside Argentina from such list.

Also, Communication “A” 3859 expressly allows entities authorized to operate in the foreign exchange market to execute orders of payments outside Argentina of dividends or profit remittances resulting from closed financial statements certified by external auditors.

Therefore, presently there is no limitation as to the amount of US dollars that an Argentine company may purchase in the local market to pay dividends or profits to non-resident shareholders, nor is there any limitation on the transfer of such currency outside Argentina when the conditions described above are met.

Interest payments to foreign creditors are allowed if the following requirements are met: (i) payment is made not earlier than fifteen days before the payment is due; (ii) the debtor has made the filings required under Communication “A” 3602 and its implementing regulations; (iii) if the financing was disbursed between December 3, 2001 and February 10, 2002 (or between February 11, 2002 and September 3, 2002, if the funds were not exchanged for Pesos in the Argentine exchange market), and documentary evidence of its disbursement in Argentina is provided; and (iv) ensure that the funds to be transferred were adjusted in accordance with the pesification provisions of Decree No 214/02 and its implementing regulations, if applicable. The compliance with these requirements is verified by the financial entity executing the transfer order.

Principal payments to foreign creditors require prior Central Bank approval except in the case of (i) repayment of new financings disbursed within Argentina after February 11, 2002 and converted into Pesos, if repayment occurs at least 90 days after disbursement; (ii) financing granted by international agencies and multilateral organizations; and (iii) debt refinancing if certain requirements are met (Communications A” 3688 (5.2), “A” 3843 (1) and “A” 3880).

Repatriation of capital remains indirectly restricted due to the prohibition on purchases of foreign currency with Pesos by non-Argentine residents of more than US$ 5,000 per month (Communication “A” 3661), because the sale of the shares of an Argentine company by a non-Argentine resident for a price denominated in foreign currency is deemed by the Central Bank to be a currency exchange trade of the foreign shareholder (and not of the Argentine buyer).

With the exceptions noted below, all proceeds of exports of goods and services must still be repatriated and converted into Pesos (if the proceeds from the export exceed US$ 1,000,000, they must be sold directly to the Central Bank). Exceptions include (i) 70% of the proceeds of oil and gas exports and (ii) export proceeds applied to the repayment of export financing or payments in advance if the proceeds of the financing were originally transferred to Argentina and converted into Pesos.

With these measures the government intends to increase the demand of US dollars to prevent the exchange rate from piercing a predetermined floor.