Regulation of the Knowledge-Economy Promotional Regime

The Argentine Executive issued Decree No. 708/2019, which regulates the “Knowledge-Economy Regime” (the “Regime”), created by Law No. 27.506 (the “Law”) (https://www.marval.com/publicacion/regimen-de-promocion-de-la-economia-del-conocimiento-13355&lang=en). In addition, by means of Resolution No. 1084/2019, the Ministry of Production and Labor appointed the Secretariat of Entrepreneurs and Small and Medium-Sized Enterprises (the “Secretariat”) as enforcement authority of the Regime and authorized the Secretariat to issue complementary regulations. Consequently, the Secretariat issued Resolution No. 449/2019. Even though there are still some matters pending regulation, the scope of the Regime was established through these resolutions.

 

Regarding the extensive enumeration of promoted activities mentioned by article 2 of the Law, Resolution 449 details in its Annex I the scope of the activities included in the Regime. Moreover, for the purpose of determining the main activity, the invoicing of the activities included in Annex I should match with the codes provided in the “Nomenclature of Economic Activities” issued by the Argentine Tax Authority (the “AFIP” after its acronym in Spanish), according to the detail provided in Annex II of Resolution 449.

 

In relation to the procedure to be followed and the conditions to be met to enjoy the benefits of the Regime, the regulation establishes that:

 

- All applications submitted to access to the Regime must be done through the official platform for governmental filings (the “TAD” after its acronym in Spanish), which must be deemed as a sworn statement.

 

- Main activity: to comply with this requirement at least the 70% of the annual revenue of the legal entity must derive from one, two or more of the promoted activities. If the promoted activity is “professional services”, the 70% threshold must derive from the export of such professional services (or 45% of the total in case of small or medium-sized enterprises). The Regime considers those services rendered in Argentina whose effective use or exploitation takes place abroad to be “export of services”, and this is deemed to be the immediate use or the first act of disposal by the recipient. This definition of “exportation of services” follows the one provided by the VAT Law and the Customs Code, which is useful to avoid uncertainty about the scope of such services.

 

If the applicant has not yet issued any invoice, it must file an affidavit in accordance with Annex IX of Resolution 449. In addition, applicant must file: (i) a chart with the information of its payroll; (ii) its business model; and (iii) a sworn statement declaring that it has not carried out any sale of goods or services. Once the applicant issues its first invoice, it must inform such event to the enforcement authority within a 10-day term. Finally, within the first year since the first invoice was issued, the enforcement authority will verify that all the requirements to access to the Regime are fulfilled.

 

- Registration: for the purpose of enjoying the benefits under the Regime, applicants must file a registration with the relevant registry (the “KE Registry”) and provide all the necessary documentation to prove compliance with –at least- two out of the three necessary requirements provided in article 4 of the Law (e.g., performance of continuous improvements in the quality of the services, products and/or processes, or through a quality norm suitable to their products; expenditures in research and development and/or training of employees assigned to the performance of the promoted activities; and/or export of goods and/or services for at least a certain percentage) during the 6 previous months before the application date. Applicants must also be in compliance with all its tax and social security obligations.

 

Registration should be rejected for those who intend to violate a disqualification applied in the terms of the Law. Such disqualification will be presumed, unless there is proof to the contrary, when the applicant: (i) is a continuing entity of a disqualified entity; (ii) is controlled by a disqualified entity; (iii) has substantially the same shareholders and corporate purpose as the disqualified entity; or (iv) receives revenue and/or employees from the disqualifies entity.

 

An Argentine Agency, dependent on the Secretariat, will be in charge of analyzing the information submitted and verifying compliance with all the relevant requirements. In case of any observation, the applicant will have a 10-day term (which can be extended by request or ex officio) to remedy such observations and/or file complementary information. Lack of remediation entails the termination of the registration procedure; however, it will not prevent the applicant to file for a new registration.

 

If all requirements are met, the Argentine Agency will issue a report with its recommendation regarding the approval or rejection of the application, which would be passed to the Secretariat, who will approve or reject the application by issuing the relevant administrative act. The administrative act that orders the registration will state the inclusion of the applicant in the KE Register, addressing the promoted activities that qualify as main activity.

 

- Maintenance of requirements. The enforcement authority will verify the compliance with all requirements provided by the Law and its complementary regulations on an annual basis. In the event of of modification of any of the requirements timely informed at registration, and as long as the beneficiary meets two out of the three requirements established in article 4 of the Law, it must inform such modification to the enforcement authority within a 30-day term.

 

Transfer of tax benefits to another entity is only allowed in case of a tax-free reorganization, carried out in accordance with the Income Tax Law.

 

In relation to the tax benefits, we remark the following:

 

-Fiscal stability: no regulation was issued in this regard.

 

-Income Tax: the Law establishes a reduced tax rate of 15%, as long as the payroll is kept under the conditions set by the regulations. The Decree clarifies that a reduction on the employment level is deemed to exist when there is a difference higher than a 10% of the payroll’s average informed when submitting for registration. Likewise, it will not be considered reduced when the termination of the labor relationship derives from certain situations (e.g., mutual agreement, resignation, dismissal with fair cause, etc.) and the employer proves the hiring of new personnel to maintain the declared payroll level within 180 running days since the personnel reduction took place.

 

No regulation has been issued regarding the tax credit derived from any payment or withholding of foreign taxes, if the taxed income constitutes an Argentine source of income.

 

-Withholdings and collections: The Law provides that beneficiaries will not be subject to any withholding and/or collection VAT regimes. To such extent, as of the registration in the KE Registry, the AFIP must issue the non-withholding certificate.

 

-Employer social security contributions and additional tax incentives (tax credit bond): The regulation establishes that both benefits are applicable regarding all employees as from the tax period when the registration on the KE Registry took place.

 

Tax credit bonds cannot be used to cancel debts that were previous to the effective inclusion in the Regime and under no circumstance any favorable balance will entitle the beneficiary to seek its reimbursement.

 

The tax credit bond will be available on the AFIP’s tax incentive system. In addition, the AFIP is authorized to issue complementary regulations for the registration and use of this benefit.

 

Regarding the additional benefit for employees who hold a PhD, beneficiaries must submit proof of said degrees and may enjoy this benefit for a maximum term of 24 months since such employees were hired.