Argentina is one of the fastest growing economies in Latin America and has a highly diversified economy. The private sector has a very positive reputation worldwide for its high productivity levels. The country's well-developed industrial base showcases key sectors such as agriculture, automotive, pharmaceuticals and biotechnology industries, as well as the chemical and petrochemical industries, and design, manufacturing and software.
Argentine Investment Vehicles
Foreign companies may conduct business in Argentina on a permanent basis, and the alternatives are:
Branch of a Foreign Entity : Any company duly organized and existing in accordance with the laws of its country of origin can set up a branch in Argentina. The branch must keep separate accounting records in Argentina and file annual financial statements with the IGJ. The branch must also comply with a number of obligations related to the external supervision of the IGJ.
Corporation ( Sociedad Anónima "SA" ): Capital and Shareholders - At least two shareholders, which can be either corporate entities or individuals, are required to set up an SA. Capital is divided into shares, which must be in registered form and denominated in Argentine currency. Except for specific cases provided by the law, there are no nationality or residence requirements; foreign individuals (whether residents in Argentina or not) or foreign companies may hold up to 100 percent of the share capital.
Management and representation:The SA is managed by a board of directors elected at a shareholders' meeting. The directors and even the president of the company may be foreigners; however, the majority of the members of the board of directors must be Argentine residents.
Limited Liability Companies ( Sociedad de Responsabilidad Limitada or "SRL") : Capital and partners - A minimum of two and a maximum of 50 partners, who may be individuals or corporate entities, may set up an SRL. Partnership quotas must be of equal par value and entitle the holder to one vote each. Partners in an SRL are entitled to pre-emptive rights with respect to new issues of quotas. Management and representation - The partners may appoint one or more managers to manage the company, who may be partners, employees or third parties. The managers represent the company, either individually or jointly, as provided for in the by-laws.
Partnerships: Partnerships in Argentina generally take the form of a Sociedad Colectiva . All the partners are jointly and severally liable for the obligations of the partnership, once its assets have been exhausted. No minimum capital is required, and liquidation of partnerships requires unanimous consent.
Joint Ventures (UTE): The joint venture vehicle most commonly used in Argentina is the Unión Transitoria de Empresas ("UTE"). The UTE is a specific type of joint venture governed by the Argentine Companies Law. A nonresident corporation may be a member of an Argentine UTE, subject to it complying with the same kind of registration proceedings with the Registro Publico de Comercio ("RPC") as those applicable to a branch of a foreign company.
Trust: Law No. 24,441 of January 1995 introduced the trust concept into Argentine law. It has been instrumental in permitting innovative financial techniques to be introduced into Argentine real estate financing. The trustee of a financial trust may only be a financial entity or a corporation specifically authorized by the Argentine Securities Commission to act as financial trustee.
Capital Market: The Argentine securities market is regulated nationwide by Law No. 17,811, as amended ("Securities Law"). The Comisión Nacional de Valores (the "CNV"), which administers the Securities Law, is a government agency empowered to issue further regulations in the form of mandatory resolutions (CNV Resolutions). The securities market is divided from a regulatory viewpoint into a private market and a public market. This division is based on the concept of "public offer." The term "transaction" is construed by the Securities Law in the broadest sense, including the initial issue and placement of securities (primary offer), as well as the subsequent purchase and/or sale thereof (secondary market), whether by traditional or electronic means. There are approximately 14 stock exchanges in the country, of which the Buenos Aires Stock Exchange is the most important. Securities in Buenos Aires are traded in self-regulated organizations such as the Buenos Aires Stock Exchange and the over-the-counter market (the Mercado Abierto Electrónico , "MAE"). The only persons authorized to effect transactions in securities listed on the Buenos Aires Stock Exchange are the stockholders of the Mercado de Valores S.A. (the "Merval"), which is the company that oversees brokerage activities and transactions on the floor of that stock exchange.
Argentine Tax Implications
The Income Tax Law No. 20,628, as amended ("ITL"), establishes a federal tax on the worldwide income obtained by individuals, legal entities domiciled in Argentina and Argentine branches of foreign entities.
1. Income Tax for Individuals
As regards income earned by Argentine residents from activities performed abroad, any payment of foreign taxes will be allowed as a credit against payment of the applicable Argentine tax. However, the credit may only be applied to the extent the foreign tax does not exceed the Argentine tax. Nonresident individuals or legal entities without a permanent establishment in Argentina are taxed only on income from Argentine sources. Individuals are taxable upon a sliding scale ranging from 9 percent to 35 percent depending on the income subject to the tax. Income tax is payable upon the net income obtained during a given fiscal year. As a general rule, income is allocated to the fiscal year in which it accrues.
Personal Assets: The Personal Assets Tax Law provides that all individuals residing in Argentina are subject to a tax upon their worldwide assets. Individuals not residing in Argentina are only liable for this tax upon their assets located in Argentina. Shares, negotiable obligations and other securities are only deemed to be located in Argentina when issued by an entity domiciled in Argentina. In general, the tax applies when the value of the assets owned by the tax payer as of December 31 of each relevant fiscal year exceeds A$305.000. Depending on the value of the total assets, tax rates vary from 0.5 percent to 1.25 percent. Nonresident individuals are subject to a fixed rate of 1.25 percent.
Withholding Tax on Nonresidents : In principle, any income or gain, other than dividends, deemed by the ITL to be from an Argentine source, obtained by a nonresident individual or a foreign legal entity without a permanent establishment in Argentina, is subject to withholding tax. There are different effective rates of withholding tax upon payments to nonresidents. Argentina, along with a number of other countries, is a party to tax treaties which impose ceilings on withholdings of certain taxable income, which may reduce the rates of the withholding tax.
2. Income Tax for Corporations
The tax rate applicable in Argentina upon the net income of corporate entities domiciled in Argentina, such as SAs or SRLs, is 35 percent. Transfer pricing practices are considered to take place when an Argentine company enters into business transactions with: (a) a related company located abroad , or (b) a non-related company located in a low tax jurisdiction , and the prices agreed upon in such transactions do not reflect normal market practices (i.e. are not at arm's length).
Tax Exemptions for Foreign Entities: Nonresident corporations are entitled to all of the tax exemptions provided in the ITL, provided they file a certificate with the Argentine tax authorities evidencing that the exemption will not result in liability to taxation in a foreign jurisdiction. This certificate must be issued by the competent foreign tax authorities or by a certified public accountant. One of the most important tax exemptions established by the ITL is that any interest accruing upon accounts and deposits made by Argentine and foreign entities in Argentine financial institutions is tax-exempt, provided the foreign beneficiary of the interest files the required certificate.
Value Added Tax (VAT): This tax is regulated by Law No. 20,631 and applies to the sale of goods, the provision of services and the importation of goods. VAT is paid at each stage of the production or distribution of goods or services upon the value added during each of the stages. Thus, this tax does not have a cumulative effect.
Capital Gains Tax: There is no separate tax levied on capital gains for companies organized in the country or for branches as they fall under the scope of income tax. For foreign corporations, capital gains are also included under withholding at source income tax regime at the time payment is made. For foreign resident companies that own shares issued by an Argentine company, gains derived from the alienation of those shares are not levied on income tax, provided that the owner's shares (issued by the foreign resident company) are registered (not issued to the bearer). The same exception is applicable on the alienation of shares and bonds that are quoted on the stock exchange. On the other hand, for foreign companies residing in tax havens (offshore companies) that are shareholders of an Argentine company, gains derived from the alienation of those Argentine shares are levied with income tax. The applicable withholding tax rate is 17.50 percent.
Tax Treaties: Argentina has tax treaties presently in force with the following countries: Australia, Belgium, Bolivia, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Italy, Norway, Spain, Sweden, Switzerland, The Netherlands, The Russian Federation and the United Kingdom. These treaties are based, other than those with South American countries, upon the OECD model and particularly seek to avoid double taxation. Presently, there is no tax treaty between Argentina and the United States.
U.S. Taxation of Worldwide Income
Worldwide Taxation: The U.S. utilizes a system of taxation that subjects U.S. persons to taxation on their worldwide income. Sections 1 and 11 of the Internal Revenue Code of 1986, as amended, (the "Code") impose tax on the taxable income of all persons, including corporations, irrespective of their residence, citizenship, and country of incorporation or organization. Taxable income, in turn, is determined in reference to gross income, which is defined to include income from whatever source derived, i.e., worldwide income.
Limitation on General Rule: The scope of this worldwide system of taxation is restricted by other provisions of the Code that exclude certain types of income or provide credits for foreign taxes paid on the same income that is subject to U.S. taxation. Income tax treaties may also override otherwise applicable rules such that one jurisdiction that is a party to the agreement is given priority to tax a particular type of income sourced from within it. The goal is to eliminate double taxation of the same income. 1. U.S. Taxation of Foreign Persons
The extent to which foreign persons are subject to U.S. taxation is set forth in sections 871, 881, and 882 of the Code (as well as the regulations issued thereunder), which generally tax such persons' U.S.-source income. The taxing of foreign persons may take one of two forms: fixed-rate taxation or the graduated rates of sections 1, 11, and 55.
2. U.S. Taxation of Foreign Corporations
Section 881(a) generally imposes "for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation." In contrast, section 882 provides that a "foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11, 55, 59A, or 1201(a) on its taxable income which is effectively connected with the conduct of a trade or business within the United States." Generally, nonresident aliens and foreign entities are subject to U.S. tax on their U.S. source income but not on their foreign source income.
Income Sourcing and Tax Credits: While a U.S. person's worldwide income is generally subject to U.S. taxation, the Code creates a distinction between income generated from U.S. sources and income generated from foreign sources.
Income Sourcing Under Treaties: Sourcing conflicts may arise if an income tax treaty provides for a rule different than would otherwise apply under the Code. Because application of a treaty is generally made at the election of the taxpayer, it is possible for a taxpayer to assert the more favorable position, whether under the Code or a treaty.
Conclusion
There are significant tax planning opportunities for foreign nationals moving to, or already residing in, the U.S. An international tax consultant can help a company develop an overall global tax strategy that makes good business sense and is practicable. International tax planning for specific situations can then be approached in a coherent manner, taking into account the company's broader global tax and operating strategies.
Published October 4, 2010.
