Amendments to the Knowledge-Economy Promotional Regime

The Argentine Congress recently enacted Law No. 27,570, published in the Official Gazette on October 26, 2020, which modifies the “Knowledge-Economy Promotional Regime” (the Regime), as stipulated in Law No. 27,506. The original draft had been approved by the Lower House in June this year. It was later modified by the Senate and thus returned to the Lower House for final approval on October 7, 2020. The main purpose of the Regime is to promote economic activities that apply knowledge and data digitalization (relying on scientific and technical advancements) to achieve both the provision of goods and services as well as process optimizations.

The Regime was effective as of January 1, 2020 for all enterprises who had adhered to the software promotion regime; and became effective for other new enterprises when the new law was published on October 26, 2020. It will remain in effect until December 31, 2029. The Regime will be enforced by the Ministry of Productive Development, which may issue complementary regulations on an as-needed basis for the Regime’s implementation.

The Regime promotes many activities, including software, computer and digital services; audiovisual production and post-production; biotechnology, neurotechnology and genetic engineering; geological and prospecting services as well as other electronic and communications-related services; professional services as long as they are exported; nanotechnology and nanoscience; aerospace and satellite industry; nuclear industrial engineering; and artificial intelligence, robotic and industrial internet, the internet of things, augmented and virtual reality. The legislation creates a National Registry of Beneficiaries in which those who want to have access to the Regime are required to register.

Entities who want to adhere to the Regime must meet certain criteria in addition to carrying out any of the promoted activities in Argentina, on their own behalf, and as their principal activity; and those criteria include being in compliance with their fiscal, labor, union, and social security obligations, which they must demonstrate with a debt-free certificate.

The Regime requires that beneficiaries prove: (i) that  at least 70% of their last annual revenue derived from one or more of the promoted activities; or (ii) if they have not yet issued any invoices, that they carry out one or more of the promoted activities intensively to incorporate knowledge derived from scientific and technological advancements to their products, services or productive processes, with the purpose of adding value and innovation.

In addition, beneficiaries must prove that they comply with at least two of the three following requirements:

1.  continuous improvements in the quality of their services, products and/or processes or adherence to a quality norm suitable to those services, products and/or processes; and/or

 

2. investments in:

• employee training representing at least the following minimum percentages compared to the previous year’s payroll: (i) 1% for micro enterprises, (ii) 2% for small and medium-sized enterprises, and (iii) 5% for large enterprises. In addition, another novelty is that investments in training earmarked for the unemployed population under the age of 25 and over the age of 45, women who are formally employed for the first time, and/or other vulnerable groups to be determined, may be set off for twice their value;

 

• research and development activities for at least the following minimum percentages compared to their previous total annual revenue: (i) 1% for micro enterprises, (ii) 2% for small and medium-sized enterprises, and (iii) 3% for large enterprises; and/or

 

3. exports of goods and/or services derived from the performance of any of the promoted activities for at least the following minimum percentages compared to their previous total annual revenue: (i) 4% for micro enterprises, (ii) 10% for small and medium-sized enterprises and (iii) 13% for large enterprises.

In terms of tax benefits, substantial amendments were made, which can be outlined as follows:

 

Stability in the enjoyment of Regime benefits. The notion of “fiscal stability” is replaced with that of “stability in the enjoyment of benefits” established by the Regime, as long as its requirements are met. In fact, the original fiscal stability benefit was eliminated entirely, since granting stability in the enjoyment of benefits of a promotional regime (as long as the beneficiary is registered and in good standing) merely means complying with its basic mandates and in no way implies the granting of a special benefit.

 

Social security contributions. Tax credit bond. Beneficiaries can obtain a non-transferable tax credit bond (which was previously a one-time transferrable bond) of up to 70% of the paid social security contributions of every employee associated with the promoted activities. Such bonds can be used within 24 months (which can be extended for an additional 12 months with justified cause) from its issuance date to pay national taxes: VAT in particular and other federal taxes and their advance payments. As a novelty, the Regime specifically bans the application of the bond to cover income tax obligations.

However, the new law provides that beneficiaries who can prove that they carry out exports derived from their promoted activities can choose to use the bond to pay their income tax obligations, up to the percentage of exports reported upon registration.

Regarding the bond itself, the law establishes a cap equivalent to 7 times the number of employees allowed under ‘section 1’ of medium enterprises in the sector of the service at hand (i.e. 3,745 employees). Once the personnel cap is reached, the benefit may be additionally set off for newly-onboarded, duly-registered employees, provided that (i) doing so implies an increase in the total reported payroll at the time of registration; and (ii) they are earmarked for the promoted activities.

Finally, the maximum budget established for the Regime also applies when granting tax credit bonds.

 

Additional benefit. The bond is increased to 80% of the paid social security contributions when the newly-onboarded employees are: (a) women, (b) transsexual and transgender persons, (c) professionals with graduate studies in engineering, exact or natural sciences, (d) individuals with disabilities, (e) individuals who reside in unfavorable areas and/or provinces with lower relative development, (f) individuals who, before being employed, were beneficiaries of welfare programs, among other groups of interest to be added by the enforcement authority.

 

Income tax. The old law established a reduced 15% corporate income tax rate, as long as the beneficiaries maintained their payroll in the conditions established by its complementary regulations.

That is precisely where we see a significant change as the new law provides that beneficiaries will enjoy a percentual discount on their total corporate income tax only in relation to the promoted activities and to be determined each tax year as follows: (i) 60% for micro and small enterprises, (ii) 40% for medium-sized enterprises, and (iii) 20% for large enterprises.

These benefits apply to both Argentine and foreign sources of income.

In addition, they are applicable for the fiscal years starting after the date of registration before the Registry.

 

VAT withholding and collection regimes. Beneficiaries who carry out exports within the promoted activities are not subject to VAT withholdings or collections (whereas the old law did not provide for such distinction and granted the benefit to all Regime beneficiaries alike).

 

Foreign taxes. This benefit was also modified. It used to allow beneficiaries to deduct a tax credit derived from any payment or withholding of foreign taxes, even if the taxed income qualified as an Argentine source of income.

Now the law establishes that beneficiaries may record, as an income tax deductible expense, any payment or withholding of foreign taxes, concerning the income obtained in exchange for the promoted activities, provided the taxed income constitutes an Argentine source of income.