New Decree on Income Tax Law on Financial Transactions

a, Null or Low Tax Jurisdictions-Tax Haven

According to the third unnumbered article after article 15 of the Income Tax Law (“LIG” after its Spanish acronym), all those jurisdictions or special tax regimes whose total corporate tax rate is lower than 15% are considered to be low or null tax jurisdictions  

To such extent, the current reglamentary Decree establishes in its article 21 that total tax rate would be considered total corporate tax burden independent of level that the government set.

“Special tax regime” means all such regulation or specific scheme different from the general corporate tax regime in force in such country, which results in an effective tax rate lower than the one established in the general corporate tax regime.

b. Financial Transactions

1. Individuals and undivided estates which are considered residents in Argentina. In the event of sale of quotas of investment funds, such income would be considered exempted from tax as long as the investment fund is comprised of a main underlying asset also considered as exempted (listed shares or listed participation certificates in Argentina). Otherwise, the mentioned sale would be taxed at 5% or 15% depending on the currency of the fund.

2. The investment fund would be considered as comprised of a main underlying asset when a single class of asset represents at least 75% of the total investments of such fund. To such extent, “class of asset” will mean shares, deposits, public bonds, negotiable obligations, investment fund quotas, debt certificates of financial trusts, bonds and other securities on a separate basis depending on whether they are issued in Argentine pesos or dollars or with an adjustment clause issue in dollars. 
   Such percentage would not be deemed fulfilled in the case of a modification in the composition of the assets which results in a reduction of said percentage in a continuous or discontinuous period of at least 30 days in a calendar year.
3. In the event of a sale of assets executed by a foreign resident, the corresponding tax should be paid (i) directly by the foreign resident by means of the proceeding to be established by the Argentine Tax Authority (the “AFIP” after its acronym in Spanish); (ii) through a resident in Argentina with sufficient powers or (iii) through its legal representative duly domiciled in Argentina, who will not be considered as jointly liable.

c. Fiscal Transparency-CFC Rules

1. Control. Income arising from trusts, foundations of private interest and other kind of structures incorporated, domiciled or located abroad should be included in the corresponding tax return on an accurate annual basis in case of existence of control by Argentine residents. Such allocation should also be made in case of a proportional period in which evidence of control was found.

There will be “control” in the terms of law in case the financial or non-financial assets remain in control and/or administered by an Argentine resident, including but not limited, the following cases; (i) revocable trusts or foundations (ii) settlor/founder/creator is also beneficiary and (iii) when the Argentine resident has power of decision, either directly or indirectly to invest or uninvest the assets, etc.

2. Tax Entity. Income arising from participation in companies without tax entity will be allocated by their shareholders, controllers, beneficiaries, etc. to the fiscal year corresponding to the closing date of the fiscal year of such companies in the proportion of its participation as long as such income is not included in another topic. It will be understood that a company lacks tax entity when it is not considered a taxpayer under the income tax law of the jurisdiction in which those companies are incorporated.

3. Substance. It will be understood that a foreign entity has the material resources necessary for the performance of its activities when the shareholder or Argentine resident participant evidences one of the following situations:

• Such organization is consistent with valid and economic goals and is also prepared to carry out the business with qualified personnel with sufficient skills for the appropriate duties;

• If the foreign entity is lacking its own material resources, it will be considered to have substance if it can demonstrate that the activity is carried out by a third related party or that the provider entity is located in the same jurisdiction as the foreign entity subject to analysis as long as it is not a low or null tax jurisdiction. 
   

d. ADR – Conversión

In the event of a conversion of representative securities (ADR) whose underlying asset is an exempted Argentine listed share into an exempted Argentine listed share, such conversion will be deemed considered as a taxable event at a 15% rate. Same tax treatment will be granted to the conversion of non-exempted shares into representative securities considered exempted by the Law (CEDEARs).

e. Possibility of Computing Interests against Acquisition Cost of Bonds or Negotiable Obligations

In the event of public bonds or negotiable obligations, the taxpayer may choose to attribute the income arising from fiscal period 2018 – up to now it is only a temporary option for transactions occurred during 2018- to the acquisition cost of the security that generated such income. For example, if I purchase a bond for 100 Argentine pesos which market value is 80 and, at the same time, I obtain an income arising from such bond of 10 Argentine pesos, normally a tax over those 10 Argentine pesos should be paid. With this proceeding, the taxpayer may opt not to pay such tax and allocate such amount to the acquisition cost of the bond so that, at the end of the day, a total acquisition cost would be reduced from 100 to 90. In the event of a potential sale –even though it is not a requirement for the exercise of the option- the loss would not be 20 but 10.   

f. Allocation of losses

In addition, losses considered as “specific” can only be compensated with the net income of the same source (Argentine or foreign source) of the same kind of transactions in the year in which such losses were generated or within the following 5 fiscal years.