Knowledge-Economy Promotional Regime

On May 22, 2019 the Argentine Congress enacted Law No. 27,506 which provides for a promotional regime for the Knowledge Economy (the “Regime”). The Regime aims to promote economic activities that apply the use of knowledge and the digitalization of information (supported by progress in science and technology) to obtain goods, provision of services and/or improvements in processes. The Regime will become effective as of January 1, 2020 and will be valid until December 31, 2029.

The Law promotes many activities, among others: software, computer and digital services; audiovisual production and post-production; biotechnology, neurotechnology and genetic engineering; geological and  prospecting services and others related with electronic and communications; professional services as long as they are exported; nanotechnology and nanoscience; aerospace and satellite industry; nuclear industrial engineering; artificial intelligence, robotic and industrial internet, the internet of things, augmented and virtual reality. In addition, the Law establishes the creation of a National Registry of Beneficiaries, where those who want to have access to the Regime should register.

To enjoy the benefits of the Regime, potential beneficiaries must perform any of the promoted activities, register in the Registry and prove that they comply with at least two of the requirements provided for in the Law. Such requirements are: (i) Performance of continuous improvements in the quality of the services, products and/or processes, or through a quality norm suitable to their services, products and/or processes; and/or (ii) Expenditures in research and development activities for at least 3 % of the total revenue and/or training of employees assigned to the performance of the promoted activities for at least 8 % of the total payroll; and/or (iii) Exports of goods and/or services derived from the performance of any of the promoted activities for at least a certain percentage, which varies depending on the kind of activity and the beneficiary.

Regarding the tax benefits, we highlight the following:

• Fiscal stability: As of the moment of the registration and for the term of validity of the Regime. Fiscal stability means that beneficiaries will not see any increase in their Argentine total tax burden at a federal level, which will be determined at the moment the beneficiary requests its registration. This benefit may be also extended to provincial and municipal taxes, as long as such jurisdictions adhere to this Law.
• Income Tax: The general corporate tax rate is reduced to 15%, to the extent that the beneficiaries maintain their payroll in accordance with the conditions provided for in the regulations.

In addition, beneficiaries will be allowed to deduct a tax credit derived from any payment or withholding of foreign taxes, if the taxed income constitutes an Argentine source of income. This benefit is particularly interesting provided that, in accordance with the Argentine general tax regime, services rendered in Argentina are deemed to be an Argentine source of income; thus, in such cases, taxes paid abroad do not generate a tax credit applicable against the Argentine tax.

• Value Added Tax (VAT): Beneficiaries are not subject to any withholding and/or collection VAT regimes.
• Employer social security contributions: Beneficiaries will be able to detract from their employer social security contributions, in relation to each employee, an amount equal to the maximum established in article 4 of Decree 814/2001 (which currently is ARS 17,509.20), as the progressive scale provided by article 173 of Law No. 27,430 is not applicable. In other words, beneficiaries will be able to fully detract such amount as of the moment of registration, while the general regime established in article 173 of Law No. 27,430 allows this possibility as of year 2022.
• Additional benefit: Beneficiaries will be able to obtain a onetime transferrable tax credit bond, which can be used for paying advances and/ or balances of income tax and/or VAT. The bond is equal to 1.6 times the amount of the employer’s social security contributions that the beneficiary did not pay due to the benefit mentioned in the above paragraph.

Each beneficiary must annually pay an amount of up to 1.5% of the total amount of the tax benefits granted under the Regime to the Fondo Fiduciario para el Desarrollo de Capital Emprendedor (FONDCE), established by article 14 of Law No. 27,349.

The enforcement authority of the Regime is the Ministry of Production and Labor and any other authority such ministry appoints.