Acquiring Business Operations in Argentina



Cristian E. Rosso Alba
Professor da Universidad Austral (Buenos Aires)


I. Introductory Remarks


One of the most important lessons learned from advising US companies doing business in Argentina is that tax planning is efficient if, and only if, it is comprehensive. This means designed so as to address, at the same time, worldwide tax planing goals while minimizing overall exposure to Argentine Federal taxes on one side, and Argentine provincial taxes on the other. Foreign tax savings may be offset by US tax costs if planning is not integrated. In addition, an efficient tax planning should also minimize overall tax exposure to Federal and Provincial taxes in a way consistent at both levels. For example, the issue as to what kind of local tax presence in Argentina constitutes a permanent establishment is not only a Federal Income tax concern. It is also an issue at the provincial level, since the local Gross Turnover Tax is exclusively collected - in most provinces - from foreign companies which do have local tax presence. This is due to the lack of withholding mechanisms at the source. Tax planning for acquisitions is the first and probably the most important stage in such an overall tax design, aimed at optimizing deduction of costs, avoid expiration of favorable tax attributes and produce actual tax savings.


This paper provides an overview of some of the Argentine-tax issues encountered by a multinational or an institutional investor upon the acquisition of an Argentine target. The analysis is done taking into account the tax reform passed on December 1998 (Law 25.063, published in the Official Gazette on December 30, 1998, hereinafter "Tax Reform"), as well as the implementing rules published up to early February, 1999. The Tax Reform provides major changes to the Argentine tax system that not only impact typical acquisition structures used in the past but would also affect existing structures used for previous acquisitions.


Investment in one company may take many forms, ranging from a portfolio investment in stock and bonds of the target, to a full purchase of assets (e.g. an acquisition of a complete on-going concern). This article identifies the critical tax issues to the success of any acquisition that should be addressed at an early stage, as well as the tax consequences involved in an exit scenario. Following this introduction, Part II of this article provides a background analysis of the basic acquisition strategies: stock deals vs. asset deals. Part III describes the key corporate tax issues that should be taken into account to frame any acquisition structure. It includes the analysis of entity-election issues that usually concern US investors doing business in Argentina. Part IV discusses the use of tax-free reorganization structures for planning acquisitions, as well as the news from the Tax Reform in this particular field. Part V evaluates the tax aspects of goodwill and covenants not to compete, namely minimizing disadvantages while planning for purchases. Finally, part VI evaluates planning alternatives in connection with transactional taxes.


Part II: Asset Deals vs. Stock Deals: Dealing with the Parties' Expectations


Most tax-efficient acquisition strategies are usually conditioned upon the result of due diligence. If significant contingencies are found, with the consequent potential for high penalties and interests, then the main concern of purchaser would be to design a structure that would better insulate him from hidden tax liabilities. In these cases, the choice is usually an asset deal. On the other hand, whenever contingencies can be reasonable estimated and addressed contractually, the focus is usually turn to working out tax-efficient acquisition structures aimed at reducing the overall tax burden so as to a lower purchase price. For the sole purpose of reducing tax exposure, stock deals and/or a variety of tax-free reorganizations (be they amalgamating or divisive reorganizations) are usually designed and tailored to the particularities of each transaction.


2.1 Asset Deals


Under Argentine Law, asset deals provide the safest available harbor to protect purchaser from hidden past liabilities of seller. The acquisition would then be structured as a sale of an on-going concern. For such purpose, it is necessary to comply with a set procedure provided by tax laws. Such procedure involves formal notifications to the Federal and local tax authorities aimed at preventing purchasers to be held jointly and severally liable with seller for past hidden (unassessed) tax liabilities. In fact, as far as federal tax liabilities are concerned, usually the purchaser does remain liable in connection with assessed tax liabilities, be they assessed by the Tax Authorities or the same taxpayer. Few exceptions to this statement can be found: for example when the Argentine IRS expressly recognizes the solvency of seller to pay up any pending taxes, penalties or interest. The concept of assessed tax liabilities includes, in addition, tax claims appealed before the Tax Court.


The sale of a going concern does trigger taxes on seller, be it a domestic corporation, a subsidiary (or branch) of a foreign company or a single proprietorship enterprise. As far as Argentine Income Tax is concerned, there is no differential tax rate for capital gains; accordingly, seller will have to include the capital gains in its annual income tax return, thus being subject to the standard rate of 35%. Regarding VAT, both the sales of inventory and fix capital assets would be usually subject to the tax. However, any VAT output tax charged by seller may be later credited by purchaser against its own taxable sales under the Argentine European-style credit-subtractive VAT.


As far as provincial taxes are concerned, asset deals also trigger stamp taxes in most provinces, since it is required by law to paper the deal in a taxable document. The Transfer- of Going Concern Act requires a notary deed to evidence in writing the sale of the going concern. If the assets are located in provincial jurisdiction, stamp tax needs to be paid in connection with this deed. Any advance payment made in connection with any prior document related to the same transaction would be usually creditable. In addition, Gross Turnover Tax would vary by jurisdiction involved. Usually, most provinces would tax the sale of inventory but would exclude sales of fix assets from the taxable event.


2.2 Stock Deals


The stock purchase usually entitles seller - when he is a non-resident alien or an Argentine individual - to an Income tax exemption on the capital gain resulting from the sale of shares. In addition, Federal Value Added Tax and provincial Gross Turnover Tax will not apply either. Transactional taxes, such as the stamp tax, usually apply in most provinces.


But even if seller were to perform a taxable transaction – e.g. a sale of stock by an Argentine business entity or even a sale of assets – there is still room for a number of planning opportunities in order to address sellers expectations:


- To use the capital gain to refresh tax losses, be they restricted or unrestricted. Note that the restriction applicable to losses resulting from sale of stock do not impair the ability to credit NOL´s against capital gains from the sale of stock or other assets.

- To reduce the value of target, for example by reorganizing out of target undesirable assets for purchaser.

- If there were excess VAT input credits a sale of assets may allow to use them up.


On the purchaser’s side, one usual concern relates to the ability to step up the basis of the underlying assets of Target. This is not possible under Argentine tax law: the target tax basis in its assets remains unaffected, disregarding the price paid for the stock. A step up in basis would only take place upon a taxable realization of the assets. In contrast, it is possible in other Latin American countries to obtain such a step-up basis by acquiring the 100% shares of target through one single acquisition company, thus later being required to liquidate Target due to the lack of more than one shareholder. Although in Argentina the dissolution of Target is also required in such case by Section 94(8) of the Argentine Partnership and Corporations Law, the expected tax outcome would not be obtained tax-free. Under Argentine income tax law, in kind redemption of stock implies the realization - at market value - of the underlying assets. Accordingly, Target will be required to pay Income Tax on the capital gain resulting from the difference between said market price and the adjusted basis on the assets, calculated on an asset-by-asset basis.


As previously highlighted, both for stock purchases and asset deals full legal, tax and accounting due diligence is necessary. However, under an asset deal structured according to the above-mentioned set procedure, the scope of such due diligence may be somewhat narrowed (e.g. on the federal tax arena, just auditing assessed tax liabilities). The pros and cons of each alternative should be weighted taking into account the parties’ goals and the timing constraints.


Although Federal Income Tax and Provincial Gross Turnover Tax apply to seller, it is clear that any adverse tax effect in the structure will be most likely pass on to the purchase price. Conceptually, if the result of the legal, tax and accounting due diligence were satisfactory to purchaser the number of tax planning opportunities gets increased. In fact, it then becomes more sensible not only to consider a stock-purchase acquisition but also to use more sophisticated tax planning structures like tax-free reorganizations or multiple tier structures involving more that one jurisdiction to benefit from Double Tax Treaties.


Part III: Framing Acquisition Strategies Within the Argentine Tax System: Key Tax Issues


The Federal-Provincial-Municipal division of powers in Argentina results in three levels of taxation. The most important levies collected by the Federal Government are the Income Tax, Value Added Tax, Personal Asset Tax, Minimum Presumptive Income Tax, Tax on Interest and Financial Cost of Company Indebtedness, Custom Duties, Excise Taxes and Social Security Contributions. The principal taxes collected by the provinces are the Gross Turnover Tax, the Stamp Tax, and the Real Estate Tax. Municipalities, under the provincial jurisdictions, collect a variety of businesses and other licenses and permits.


3.1 Federal Taxes

3.1.1 Income Tax: Taxation of Business Income. Key Principles.


General: Corporate Income Tax ("CIT") applies to both permanent establishments of foreign companies and locally incorporated business organizations, at the standard rate of 35% applicable on net gain. Taxable income is calculated by deducting from gross income all expenses incurred in obtaining and preserving such income. As in the US, business expenses are all ordinary and necessary expenses paid or incurred during the taxable year in carrying on the taxable trade or business.


The Tax Reform has included an equalization tax, so as to ensure that a distribution has borne tax ordinarily or otherwise an equalization payment would be required regarding such distribution. As of such reform, dividends paid and profit distributions made by Argentine businesses (be they corporations, Argentine branches of foreign companies, partnerships, etc.) are subject to a 35% tax to the extent such distributions exceed the adjusted accumulated taxable income of the distributing company (AATI@) by the end of the fiscal year preceding such payment. The new tax on distributions only applies on the part of the monies distributed that exceeds ATI, which should be calculated according to set procedure.


To avoid double taxation, Section 1 of the Income Tax Law ("ITL") provides for a credit method, so that any Argentine taxpayer who obtains foreign-source income is able to credit taxes charged at the source, as long as (i) such taxes have been effectively paid - in the relevant foreign country - due to the activities performed therein; (ii) such taxes are analogous to the Argentine Income Tax; (iii) the amount of taxes credited in Argentina does not exceed the increase of argentine income tax due to the inclusion of such foreign-source taxable income. The Tax Reform has included a specific chapter related to foreign tax credit, but there are still a number of open issues pending implementing rules.


Taxation of Business Income to Non-Argentine Residents: Non-Argentine residents who do not have local tax presence in Argentina, are only taxed on income arising from Argentine sources. Different effective withholding rates apply to income paid to non-residents; this is because a set percentage of the gross amount paid is deemed to be deductible expenses by the law. The percentage vary depending on the type of income and the location of its beneficiary (i.e. if located in a jurisdiction where Double Tax Treaty standards do alter the general income tax treatment). If no Treaty to avoid double taxation applies, the ITL-effective-withholding rates on gross income paid to foreign persons – taking into account the substantial increase produce by the Tax Reform – are as follows:





Type of Payment Withholding

Tax Rate %

Transfer-of-technology agreements:  
     Technical assistance, engineering or any other advisory service which cannot be obtained within Argentina


     Assignments of rights, licenses for the use of patents and, in general, transfer of technology available in Argentina


Copyright royalties


Remuneration of a nonresident artist hired by the Argentine government or by tax-exempt entities for less than two months a year


Remuneration of employees working in Argentina for less than six month



Interest payments on (i) loans used to finance the import of depreciable movable property -other than vehicles-, granted by suppliers; (ii) loans granted to any Argentine financial entity


Interest payments on loans when the lender is a foreign financial entity located in a jurisdiction where the Basle standards apply


Interest from debt securities meeting certain requirements


Interest payments on deposits in Argentine Financial Entities


Interest on other loans obtained abroad


Gains obtained by foreign companies from the sale or realization of assets or rights located, placed, economically used or exploited in Argentina. The foreign beneficiary has the option to pay 35% on net gain, if he can evidence deductible business expenses in a way satisfactory to DGI.


Income from lease of chattel


Income from lease of real estate. The foreign beneficiary has the option to pay 35% on net gain, if he

can evidence deductible business expenses in a way satisfactory to the Argentine IRS


Ship chartering fees


International transportation


International news agency income


Fees for the local use of foreign movies, TV transmissions, videos, and other transmissions of sounds

or images from abroad; and any other foreign diffusion media


Reinsurance and reinsurance premiums


Container transportation


Other income paid to nonresidents (if not taxable at a specified rate)



It is worth pointing out that - in the context of the Tax-Treaty framework entered into by Argentina - reduced withholding rates apply in many cases, as well as other tax benefits. Consequently, Double Tax Treaties provide good tax planning opportunities for US multinationals, which are in a position to benefit from affiliated companies located in a contracting state.


Argentina has entered into agreements to avoid double taxation with Austria, Bolivia, Brazil, Canada, Chile, France, Italy, Sweden, Germany, Finland, Spain, Belgium, Denmark, The Netherlands and U.K. (hereinafter the "Treaties"; each one a "Treaty"). However, the treaty with Belgium is not in force yet. There is currently no treaty in effect between Argentina and the US.


NOL's: Net operating losses may be carried forward five years, starting with the year immediately following the one in which the loss was incurred. Unused losses after the five-year carryover period are not deductible. No carryback of losses is allowed. As an exception, the following are the restricted losses pursuant to Argentine Income Tax law:


(i) losses arising from the sale or disposition of shares, participation interests in Argentine Limited Liability Companies (i.e. quotas of an SRL) and other participation interests in other domestic companies including participation in investment funds (i.e. fondos comunes de inversión);

(ii) losses resulting from non-argentine source activities.

(iii) losses from derivative transactions other than hedges.


Such restricted losses may only be offset against gains arising from activities of the same characteristics, over the five-year carryover period.


Timing of Gross Income / Tax Accounting Issues: Income tax must be accounted for on an annual basis (fiscal period). In the case of corporate entities, the fiscal period is the normal accounting period. With few exceptions (e.g. certain deferred payment sales), business entities must report their income and deductible expenses on an accrual basis. There is, however, an alternative procedure for business entities to account income: once it is accrued and payable on demand (i.e. devengado-exigible). Such alternatives apply in connection with certain deferred payment sales and the carrying out of certain works performed during a period of time exceeding one year. Taking into account this mixed-timing principle, adequate tax planning allows Argentine businesses to get a tax-deferral benefit thus improving their cash flows.


Tax Adjustment for Inflation / Current Status: Although ITL inflation - adjustment rules have not been repealed, according to Law 24,073 only wholesale-price indexes up to March 1992 will have to be considered for these purposes. This is important to highlight because it has two main consequences in connection with domestic corporations and local branches (or permanent establishments) of foreign entities, as well as for other entities subject to inflation-adjustment rules:


(i) As of March 1992, no gain or loss resulting from any inflation adjustment has to be accounted for tax purposes;

(ii) such entities are still prevented from getting certain exemptions, which do not apply, to companies subject to inflation adjustment rules. Types of Business Organizations and Their Tax Impact


General: Under the ITL the following business organizations are treated as separate taxable entities:


(i) locally incorporated Sociedades Anónimas ("SA") (stock corporations);

(ii) locally incorporated Sociedades en Comandita por Acciones ("SCA") (corporate silent partnerships). This is a hybrid form of business company, which combines features of a SA with those of a SC (as defined below). General partners (socios comanditados) have subsidiary, unlimited and joint liability for the SCA's debts. Stock-holders (or silent) partners (socios comanditarios) have a liability limited to the amount of their contribution to the capital of the firm, which is in turn represented by share certificates;

(iii) local branches and permanent establishments - located in Argentina - of foreign companies;

(iv) domestic Sociedad de Responsabilidad Limitada ("SRL") (a limited-liability partnership). In the SRL the capital is divided into the so-called "quotas" . The partners are not liable for the SRL debts but are jointly liable for the unpaid balance of the purchase price of their quotas;

(v) domestic Sociedad en Comandita Simple (SCS) (ordinary silent partnership). The SCS has general partners (socios comanditados), which have subsidiary, unlimited and joint liability for the SCS's debts; and silent partners (socios comanditarios), whose liability is limited to the amount of their contribution to the capital of the firm; and

(vi) certain other business organizations which are not relevant for the purposes of this analysis (ITL, Arts. 69 (a) (3) and (4); e.g. mixed-capital corporations - Sociedades de Economía Mixta - but only with respect to its non-exempted income).

(vii) Most Trusts and Investment Funds established in Argentina.

As explained above, such taxable entities are subject to income tax at a 35% tax rate. Distributions are subject to the new 35% equilasation tax, to the extent they exceed ATI.


Permanent Establishments: the Tax Reform has introduced major news on this regard. First it clarifies that Argentine permanent establishments of foreign companies are regarded non-argentine residents, thus not require to pay income tax on a worldwide income basis. Second, it introduces a definition of foreign permanent establishments of Argentine companies that comprises "establishments located abroad to operate, on a steady basis, commercial, industrial or primary activities", including constructions, building sites or an installation project only if it lasts more than six months. Since Double Tax Treaties rank prior to domestic law, it becomes most important to address these issues in lieu of the treaties wording, whenever applicable to specific situations.


Lack of definitions in the purely domestic context, has motivated the development of major case law standards. In fact, the Tax Court has ruled that:


(i) as a general principle, a foreign enterprise is deemed to have a permanent establishment in Argentina if (i') it has a fix place of business; (ii') it develops its activities in such place;

(ii) facts and circumstances are of the essence to determine, on case-by-case basis, if there is a permanent establishment located in Argentina. Accordingly, to evidence such fact the IRS needs to prove the activities performed in Argentina, the existence of a place of management or the existence of powers exercised by the agent of the company (located in Argentina) on behalf of the foreign entity;

(iii) to finally conclude the existence of a permanent establishment, the Tax Court took into account - among other items - that (i') the by-laws of the foreign company had been filed in Argentina; (ii') the company had paid salaries, fees and freights in Argentina; had made exports; had opened banking accounts; and had been registered as Gross-Turnover-Tax taxpayer.


"Pass-through" Entities: Generally, all other Argentine business organizations (i.e. other than the above mentioned Taxable Entities) are "pass-through" entities. This means that the partners must report, in their respective individual tax returns, their attributable share of the taxable gain or loss of the entity (except for certain losses from the sale of stock or quotas). Passthrough entities include the following business organizations:

(i) Sociedad Colectiva ("SC") (a general trading partnership). This is a form of general partnership in which all the partners contribute to the capital of the firm and have subsidiary, unlimited and joint liability for the obligations of the company. Partners may not undertake activities, which may compete with those of the SC unless otherwise expressly and unanimously agreed;

(ii) Sociedad de Hecho ("SH") and/or Sociedad Irregular o Atípica ("SI"). The SH is a de facto partnership, resulting from no formal constitutive documents. The SI is a defectively organized business company (e.g. SC, SCA, SA or SRL) for failure to file or publish - when required - the organizational agreements or to comply with an essential requirement of the relevant type.


Although such entities are not recognized as independent taxpayers, they do qualify as "income-reporting units" meaning that they are required to file annual tax returns and to self-assess the taxable gain or loss resulting from the business undertaken. However, their partners are subject to income tax on their respective allocable shares of taxable income. Argentine-residents partners have to include in their own tax returns said participations, disregarding whether actual distribution is made or not. Non-resident partners are subject to a 35% withholding at the source, at the earlier of the payment of such participation or on the deadline for filing the companies' tax return (i.e. since by that time the business income is deemed to be distributed).


Non-corporation Joint Ventures / Non "income-reporting units": These joint venture agreements do not constitute legal entities different from their members, and therefore are considered neither taxpayers nor income reporting units for Argentine income tax purposes. The parties to the agreement report - in their respective individual tax returns - their contribution to the expenses and their share in gross profits derived from the activities performed through the joint venture organization. It is important, however, to highlight that UTEs and ACs (as defined below) do qualify as taxpayers for other taxes, such as the Value Added Tax and the provincial Gross Turnover Tax in most jurisdictions.


The two joint venture agreements are:


(i) Unión Transitoria de Empresas ("UTE") (to carry out a particular and concrete enterprise or venture); and

(ii) Agrupaciones de Colaboración ("AC") (to carry out activities for the sole and exclusive benefit of the parties to the agreement).


Entity Election Issue and Exit Strategy for Acquisitions: The entity election issue also affects the exit strategy. As an example, while both the Argentine SRL and the SCA may qualify as hybrids for US tax purposes, only the latter would allow a tax-free exit scenario. The capital gain exemption applicable to the capital gains obtained by non-resident aliens upon the sale of stock requires the existence of share certificates. This is a characteristic applicable to the share capital of an SCA, but inapplicable to the quotas of an SRL.


Tax Treatment of Affiliated Companies:


(i) The Arm's Length Standard: Intercompany dealings between a foreign-controlled domestic company and the foreign persons which directly or indirectly control it are treated as if parties were unrelated, provided that the terms and conditions of such dealings are similar to those that independent parties could have agreed upon.

(ii) Separate Accounting: Annual net income of a local branch is determined on a separate accounting basis. However, if the local branch's accounting records are inadequate or do not accurately reflect net income from Argentine sources, the tax authorities may treat the local branch and the foreign head office (including its other branches or subsidiaries, if any), as a single economic unit and arbitrarily determine the portion of taxable income of the local branch. There is no "force of attraction" rule under Argentine tax law. Therefore, except where local office records are inadequate or inaccurate, income of a local branch does not include any income attributable to the foreign head office for works, services or other activities carried out in Argentina directly by the foreign office without intervention of the local branch. Such income is subject to withholding at the source, and need not be reported by the local branch.

(iii) Transfer Pricing News: The Tax Reform introduce amendments to transfer pricing rules applicable on import and exports of goods, aimed at allowing the Argentine IRS to apply Aprevalent wholesale price procedure. If such adjustments are rendered unreliable, then the new transfer pricing methods will apply. The use of Aprevalent wholesale price procedure is the major item in which the new transfer pricing rules do not observe OECD standards. Furthermore, these rules may be applied even for transactions between unrelated parties, what constitutes a major change in our tax system.


In addition, the Tax Reform provides for new transfer pricing rules applicable to related-party transactions, based on the arm´s length standard. The specified methods, in line with the OECD guidelines, are as follows: comparable uncontrolled price, cost plus, resale price, profit split (formulary and residual application) and transactional net margin. The best method rule will apply. Transactions with related companies resident or located in low tax jurisdictions (e.g. tax havens) are deemed not to be arm´s length unless evidenced to the contrary. No definition as to what a "low tax jurisdiction" means is included.


Argentine tax authorities will require Argentine businesses to submit Aspecial tax reports containing detailed information including data and supporting evidence about related party transactions. Future regulations will have to implement the content of this documentation requirement, as well as the other transfer-pricing framework rules provided by the Tax Reform.


Income Tax Differences between Branches and Subsidiaries: as explained above, the basic tax burden on branches and subsidiaries is similar; however the former are taxed exclusively on Argentine source income, while subsidiaries are taxed on worldwide income. However, there are important differences under an exit scenario: the transfer of a going concern by the branch is subject to income tax, while the sale of the Argentine-subsidiary stock by a foreign shareholder is currently exempted. In addition, tax-planning alternatives and issues are different when trying to minimize the impact of the new equalization tax.


Furthermore, start-up losses of an Argentine subsidiary may be offset against its subsequent profits over a five-year period. However, generally such losses may not be offset against the foreign parent company’s income from other activities. Conversely, start-up losses of a local branch may be also offset against the head office's other profits if so allowed by the law applicable in such jurisdiction. Moreover, even if the head office corporation has no profits of its own, often the losses can be included in the results of an affiliated group in the foreign home country, thus enabling such losses, including the Argentine branch's losses, to be offset against the profits of other members of the group.


Taxable income of a branch or subsidiary is determined by deducting all allowable expenses from the entity's gross income. Expenses incurred abroad may also be deducted provided that the taxpayer demonstrates that they were incurred for purposes of generating taxable income in Argentina. Although this is a general principle applicable to domestic corporations and branches as well, in the case of a branch foreign expenses are subject to a stricter control by the tax authorities. Thus, the tax authorities may object the deductibility of various head office expenses such as research and development, administrative support, and similar items, in the proportion attributable to the local branch, unless it is properly evidenced that such expenses have been incurred on behalf of the local branch. On this regard, based on tax scholars opinions, case law and administrative practices, expenses incurred abroad on behalf of the branch may be deducted in Argentina if:


(i) the branch has adequate evidence: it is required to prove the benefit obtained by the Argentine branch because of such expense; or that the expense was incurred abroad on behalf of the Argentine branch. According to administrative practices, a mathematic pro-rata of the head office expenses would not suffice;

(ii) the expense should be reasonable, ordinary and necessary for the income-producing source: an expense must be of a type encountered by other businesses in the community, appropriate or helpful to the business, and consideration paid must be equivalent to what other similar businesses would pay for like services;

(iii) the branch should keep separate accounting from the head office, as explained above. The accounting of the Argentine branch needs to clearly exhibit the expense to be deducted.


Other Tax Reform News:


(i) Thin Capitalization Rules: The Tax Reform imposes new thin-capitalization rules in connection with interest expenses other than (x) interests on loans granted by Argentine resident individuals; (y) interest included in Section 93(c)(2) (i.e. interest subject to the 35% withholding at source), and (z) 40% interest on all other debt. Interest expenses resulting from other debt will not be deductible for Argentine businesses - other than financial institutions - in the proportion corresponding to the higher of the following overstepped limits provided both limits are overstepped at the same time:


the total amount of debt that generates interest - except for loans granted by Argentine resident individuals or undivided estates and loans granted by non-residents included in Section 93(a)(2) - at the closing of the fiscal year should not exceed 2.5 times the net worth of the taxpayer at the same date.


the total amount of deductible interest - except for loans granted by Argentine resident individuals or undivided estates and loans granted by non-residents included in Section 93(a)(2) - should not exceed 50% of the net taxable income calculated before deducting such interest.


Any interest expense not deducted due to previous rules may be carried forward to future fiscal years, always taking into account the afore-mentioned limitations.


(ii) Deductions: the Act provides for (a) caps on the deduction of royalties for trademarks and patents, to be determined in future regulations (b) the repeal of the dismissal indemnity reserve deduction.


(iii) Implementing rules for worldwide-income taxation: a new set of rules regarding the worldwide system of taxation, unregulated since 1992, is included. Residence principles are regulated, including new rules regarding expatriates. For example, expatriates working in Argentine for less than a five-year term will be subject to tax only on Argentine source income. Among the new rules, it is worth highlighting that dividends obtained from non-Argentine corporations will be subject to tax as of the Tax Reform. The President has exercised his veto powers to prevent the retroactive application of this rule.


3.1.2 The Argentine Personal Asset Tax.


The Argentine Personal Assets Tax ("APAT") was created in Argentina for the first time in August of 1991 (Law No. 23,966). It imposed a tax rate of 1% per annum on assets belonging to physical individuals and undivided estates domiciled in Argentina, whether located in Argentina or abroad. Physical individuals and undivided estates domiciled or based outside Argentina were taxed at a rate of 1% per annum on assets held within the Republic only. Corporations incorporated and other legal entities based outside Argentina were excluded from the scope of APAT.


In March of 1995 the Argentine Congress introduced amendments to APAT (Law no. 24,468) which, on the one hand, reduced the tax rate to 0.5% per annum and, on the other, introduced an irrebuttable presumption to the effect that certain Foreign Taxable Entities (as defined below) incorporated outside Argentina and holding certain Taxable Assets (as defined below) are subject to APAT, since such assets are deemed to be held by Argentine taxpayers. This presumption was aimed at preventing certain tax evasion schemes, so that no Argentine individual subject to the tax would be able to hide himself behind certain off-shore companies located in tax heavens, which may have issued its own stock in bearer form thus preventing any successful audit by Argentine tax authorities.


The term "Taxable Assets" comprises the following items:

(i) Securities issued by the Federal, Provincial or Municipal government;

(ii) Negotiable Obligations (i.e. certain specific debt securities) issued pursuant to Law 23,576;

(iii) Stock, shares and participations in the capital of a domestic corporation or company, including sole proprietorship businesses; and

(iv) shares in a private investment fund (fondo común de inversión) and cooperativas.


Later, according to Decree 812/96, the following securities were excluded from the concept of Taxable Assets: (x) public bonds issued according to foreign legal standards (emitidos con sujeción a regímenes legales de países extranjeros), and (y) private debt securities of Argentine issuers which have been authorized for public offering by the Argentine Securities and Exchange Commission (Comisión Nacional de Valores) and are traded in Argentine or foreign exchanges or securities markets.


The term "Foreign Taxable Entity" - pursuant to the APAT law and its implementing regulation - means an entity which

(a) is located in a country that does not require securities to be held in registered form (Section 26, fourth paragraph, APAT law); and

(b) as a result of the legal nature of such entity or provisions of its constitutive documents, has as its principal business to make investments outside its country of incorporation and/or is prohibited therein to carry out certain transactions and/or investments which are expressly determined in the legal or corporate framework which regulates them; excluding Exempted Persons.


The latter feature (b) is a frequent occurrence in tax heavens such as the Cayman Islands and the British Virgin Islands. The term "Exempted Persons" comprises insurance companies, pension funds, open-ended investment funds or banking or other financial entities whose head offices are domiciled in a jurisdiction in which the international banking supervisory standards approved by the Basle Committee on Banking Regulations and Supervisory Practices are applied, who are direct owners of taxable securities.


According to Law 24,631, the APAT tax rate applicable to Foreign Taxable Entities has been increased to 1%, effectively as of its publication in the Official Gazette.


The Tax Reform, as passed by the Congress, repealed this 1% presumptive tax in connection with shares and stock securities, by deleting this item from the list of Taxable Assets. Notwithstanding this fact, the President has exercised his veto powers in connection with this amendment, so this presumptive tax would still apply to the holding of shares in Argentine companies by non-resident aliens, unless it were evidenced the non-applicability of the presumption in each specific case. This issue usually requires adequate planning, particularly when stockholders are located in tax havens jurisdictions.


3.1.3 Value Added Tax


Argentine VAT is an all-stage turnover tax imposed on the sale of most tangible personal property and the rendering of services within Argentina, as well as the imports of goods. In addition, the Tax Reform amended the taxable event so as to include the import of services. This amendment provides some additional neutrality to the tax system, as previously highlighted from the tax-policy viewpoint (1).


The basic characteristics of the Argentine VAT are as follows:


(i) Invoice credit method: under this European-inspired credit-subtractive method, a domestic seller of taxable goods (or suppliers of taxable services) charge VAT on the selling price of its products or services (output taxes), and takes credits against that "output tax" liability for the VAT paid on imports and its purchases from other companies (input tax);

(ii) Destination basis: Argentine VAT is a consumption-type tax, thus only goods or services consumed within Argentina trigger the taxable event. In contrast, goods exported for its consumption abroad are zero rated, meaning that all VAT paid on inputs, be they services or materials, will be refunded to the extent they are attributable to exports. The Tax Reform now excludes export of services from the taxable event. Accordingly, related VAT input credits may not be claimed any longer.


In connection with the possibility to credit input taxes, it is worth mentioning that only those incurred in taxable activities can be deducted. Conversely, those incurred in making exempted or tax-excluded supplies or sales are not recoverable. Registered taxpayers are required to allocate input tax credits accordingly, in a three-step process as follows:


(i) identifying sources of taxable and exempt outputs;

(ii) quantifying any input tax wholly used in making taxable supplies or sales (included zero-rated supplies), which is fully recoverable; and

(iii) quantifying any input tax wholly used in activities which do not result in the making of taxable supplies that cannot be recovered.

Whenever direct attribution is not possible, input tax credits must be apportioned between taxable and non-taxable supplies, a process that usually involves cumbersome allocations.


The number of exemptions is very limited. For example, Argentine VAT taxes financial services, exempted in most VAT legislations throughout the world.


VAT standard rate is currently 21%, although there are certain different tax rates applicable to a reduced number of taxable activities. The Tax Reform provides for a special rate (10.5%) in connection with certain activities such as cable television, certain services provided to households, the trading of certain agricultural products, etc. In addition, the reduced rate of 10.5% also applies on interests and commissions charged on loans granted to registered VAT taxpayers. For this reduced rate to apply, the lender should be either a domestic financial institution or a foreign financial institution established in a country whose central bank or equivalent body has adopted the international banking supervision standards established by the Basle Committee of Banks.


3.1.4 Minimum Presumptive Income Tax (Corporate Asset Tax)


General: A new 1% Corporate Asset Tax is levied annually on the worldwide assets of Argentine businesses owned at the end of the fiscal year, calculated according to a specific valuation criteria. The following taxpayers are subject to this tax: (i) Companies domiciled in Argentina (e.g. corporations, partnerships, etc); (ii) Foundations and non-profit Associations; (iii) Sole proprietorship businesses belonging to Argentine residents; (iv) Resident individuals in connection with their farm or rural exploitations; (iv) Trust governed by Law 24,441 other than financial trusts; (v) Closed-End Mutual Funds; (vi) Argentine permanent establishments of non-resident aliens, such as a branch, a factory, a construction, an office, a workshop, etc.


Those individuals or legal entities domiciled in Argentina who have the possession, use, deposit, administration or otherwise held or take care of the taxable assets belonging to the non-resident aliens, are regarded substitute obligors for the purpose of collecting the MPIT.


Exemptions: There are several exemptions such as the followings:


shares and any participation in the capital of other entities subject to MPIT

irrevocable contributions for future capital increases, as long as they do not carry a financial charge such as the one that would be charged by independent parties in an arm´s length financing.

financial trusts, participation certificates and debt securities, in the proportion allocable to the value of the shares or other interests in the capital of institutions subject to the tax, which form part of the trust fund, etc.

The law provides for a specific threshold amount. Assets located within the country, with a total value under or equal to $ 200,000 are exempted from the MPIT. Should there be assets located abroad, then this threshold amount may be increased according to set calculation provided by the law.


A Non computable Assets: In addition, there are non-included assets such as:


new depreciable movable assets, in the fiscal year in which they have been acquired and the subsequent year;

construction of new buildings or improvements, in the financial year in which they have been acquired and the next one;

Dividends and profit distributions from other MPIT taxpayers, corresponding to the fiscal period in which the holding company assess the MPIT.


Tax Offsetting: The fiscal year Income Tax paid is creditable as a payment on account of this business asset tax. However, a taxpayer will never pay less than the MPIT, which functions as a tax on a hypothetical-minimum profit.


Should there be any excess income tax - not offset against MPIT -, it shall not generate a credit in favor of the taxpayer, neither shall he be entitled to file a petition for reimbursement or set off.


If the Income Tax paid on account of MPIT is insufficient to fully offset the MPIT liability in a certain fiscal year, then any MPIT so paid would be creditable against the Income Tax, provided that (i) during any of the four subsequently-following fiscal periods an Income Tax surplus is generated, as a consequence of an excess of Income Tax over MPIT in such period (i.e. a non-offset amount of income tax), and (ii) MPIT may be credited only up to the amount of such Income Tax surplus. No refund is allowed.


Tax Credit. There is a tax-credit mechanism for similar taxes paid abroad on assets subject to the tax.


Enforcement. According to the provisions of the Tax Reform, this tax shall be effective for fiscal years ending after the day that follows its publication in the Official Gazette. The day that follows publication is December 31, so according to the law the tax could be only reasonably applied as of January the first (i.e. after December 31). However, the Government has required the payment of this tax for fiscal years ending December 31, 1998. This decision was implemented by means of IRS resolution 328/98 and Decree 1533/98. Taxpayers are considering a challenge of these rules on constitutional grounds. Similar debate has taken place in connection with the Corporate-Income-tax rate increase, from 33% to 35%.


3.1.5 Tax on Interest Paid and the Financial Cost of Business Indebtedness


General: This new tax is levied on interest (and financial costs) which are allowed to be deducted for Income Tax purposes, derived from: (i) loans obtained from local financial institutions governed by Law 21,526 (Financial Institutions Law); (ii) negotiable bonds held by Argentine taxpayers other than companies (basically individuals) and by non-residents aliens; (iii) loans granted by Argentine resident individuals or undivided estates located within the country. The tax applicable in connection with negotiable bonds apply disregarding whether the issuance has taken place prior to the effective date of the tax.


Taxpayers: The taxpayers are the local companies - other than financial institutions - who get financing or issue negotiable bonds. The tax burden has been placed on the issuer of this debt securities in order not to affect the Eurobonds and foreign markets of Argentine- Company negotiable obligations.


Tax point: The taxable event is triggered when interest is paid. Payment is deemed to take place as provided by Section 18 of the Income Tax Law (when it is paid in cash or in kind; or when it is available, is credited to the payees account or reinvested, accumulated, capitalized, or allocated to an amortization fund or pension fund).


Tax basis: The tax basis is the amount of interest and financial costs of indebtedness paid, disregarding the fiscal period of accrual or whether it is a partial or total payment. It is important to point out that this tax is deductible for Income Tax purposes.


Tax rates: The applicable tax rates are as follows, depending on the different types of loans. A 15 % rate apply to both (i) loans obtained from local financial institutions (Law 21,526); and (ii) negotiable bonds held by Argentine individuals and non-resident aliens. In these two cases, there is a cap, which is 1.5% of the debt that generates the interest. However, it should be noted that the President has exercised his veto powers in connection with this cap. Accordingly, it will not be effective unless the Congress were to take any specific action against this veto. In addition, a 35% rate apply to loans granted by Argentine-resident individuals and undivided estates established in Argentina.


Collection: In the case of loans granted by financial institutions, such entities will be required to collect the tax due by taxable customers. In all other cases, monthly tax returns should be filed by the taxpayers. This tax should become effective as from January 1, 1999 for ten subsequent years.


3.1.6 Other Federal Taxes and Contributions


Custom Duties: duties vary according to the type of goods under trade. The Tax Reform amended the Custom Code so as to include "services" in the definition of items that may be exported or imported. Consequently, services performed outside Argentina but actually used or exploited in said territory (other than services not rendered on a market competition basis), copyrights and intellectual rights shall be treated as goods for Custom law purposes, thus potentially subject to importation and exportation duties. The domestic supplier of the services and/or the copyright or intellectual right is regarded as exporter, and the domestic payer/beneficiary of the service as importer. Custom duties shall become enforceable on the due date for the payment therefor. The effective levy of import or export duties will depend on future regulations implementing these amendments to Customs Law.


Excise Taxes: there are a number of excise taxes that apply to selective items such as tobacco, beer (4% rate), most type of sodas (4% tax rate), automobiles, etc.


Social Security Contributions: Argentine employers are required to make both deductions on employee’s wages and contributions to the social security system. Main payments and contributions are applicable on a monthly gross remuneration up to a monthly cap salary of $ 4,800 and are as follows:


  Employer % Employee %
Without reduction With reduction  
Pension Fund 18 11.55 11 + 3
Family benefits 9 5.25 -
Medical care 6 5 3
Total 33 21.8 17


The reductions referred to in the second column applies in the Federal District as long as the employer meets certain legal requirements (e.g. updated payments of VAT and social security contributions). However, different reductions apply throughout the country.


The Tax Reform states that during 1999 social security contributions paid by employers will be effectively reduced. The government has already implemented the scheduled reductions for 1999, that will vary depending on the activity and jurisdiction involved. Some of those reduction would be effective as of February 1999.


3.2 Provincial Taxes



Gross Turnover Tax: Different from the previous taxes levied by the Federal Government, Gross Turnover Tax ("GTT") is a local tax applicable in each province and the City of Buenos Aires according to their own legislations. It is a tax imposed on gross receipts from most business activities. If activities are carried out in more than one jurisdiction, the gross receipts should be allocated among the jurisdictions involved pursuant to the rules of the Convenio Multilateral, generally taking into account the proportion of income and expenses incurred in each jurisdiction. The tax rates and exemptions vary in each province, being 3% the most standard rate in the City of Buenos Aires. Higher or lower rates apply to different activities.


The provinces have entered into an agreement with the Federal Government (i.e "Pacto Federal para el empleo, la producción y el crecimiento"), in which they have become obliged - among other items - to exempt primary activities from gross turnover tax. Although the level of implementation of this agreement vary by province, most provinces have already implemented the exemption on primary activities.


Stamp Tax: The Stamp Tax ("ST") is a local tax levied by all the provinces. ST applies on written contracts, either executed or "having effects" within provincial territory. The term "effects" that trigger the taxable event is referred to the performance of any contractual obligation within the relevant provincial territory. As a consequence, trademark, know-how, technical assistance, services contracts - among many others - are subject to ST in the jurisdiction where such services are rendered. Although the rates, taxable events and exemptions vary by jurisdiction, the most standard rate is one per cent, applicable on the contractual price for all the term of the agreement. Higher rates apply to real estate transactions. As relevant to acquisition structures, the issues will be analyzed in Chapter VI below.


Real Property Tax: it is a tax imposed by most provinces on the holding of real estate, usually at flat rates that vary depending rate on the value of the property, which is officially assessed by local Tax Authorities.


Part IV: Tax-free Reorganizations


Structuring acquisitions using the tax free reorganization rules provided by Argentine Income Tax law requires, as an starting point, an exhaustive due diligence. Similar to those conducted for a standard stock purchase. Significant contingencies are common, with the consequent risks of penalties and interest at the rate of 3% per month. The reason for such a due diligence is that the use of tax-free reorganization structures implies that purchaser ends up stepping into the tax history of target. As mentioned above, when the potential for tax liabilities is significant, purchaser would be better off by structuring a taxable sale of asset, following the set procedure of the Tax Procedure Act. If contingencies are reduced or, at least, reasonably guaranteed by seller in a way acceptable to purchaser, then the parties would normally agree to figure out alternatives to structure acquisitions using tax free reorganization rules.


There is no one single tax planing alternative: a number of combinations and alternatives can be designed in each case, tailored to the particular needs of each transaction. As a starting point, Argentine Income Tax Law provides for three statutory types of tax-free reorganizations: (a) amalgamating reorganizations such as mergers; (b) divisive reorganizations, like a split up or spin off, and (c) a sale or transfer of assets between enterprises which are members of the same economically controlled group. Each of them, being an A, B or C type or reorganization. By qualifying for any of the three types, fiscal rights and obligations of the absorbed entity should then be transferred to the surviving one, and no gain or loss should be recognized upon the reorganization.


Different legal requirements are provided for each of the three types. However, the two unifying aspects of the statutory reorganization are those of continuity of interest and activities, that should be observed for two years counted as of the reorganization date. The various definitions in Argentine Income Tax law seek to provide tax-free treatment to corporate rearrangements in which the shareholders continue their investments in modified form. The continuity of interest is, however, differently defined for each of the three types of reorganization and does not prevent increases of capital or dilution of existing shareholders for tax planning purposes. In all cases, facts and circumstances should be carefully observed to prevent any challenge under the substance over form principle which - in Argentina - governs the tax arena. Other requirements generally applicable to the three reorganizations are the following:


(i) Continuation of activities: the reorganized companies should continue the activities of the predecessor or associated activities, for a minimum 2 year period as of the date of reorganization

(ii) The reorganization should be notified to the Argentine IRS (Dirección General Impositiva, hereinafter "DGI") within 180 days counted as of the date of the reorganization. Such date takes place when the reorganized companies start with the activities of the predecessor entities.

(iii) Whenever the reorganization does not comprise the transference of the whole-reorganized companies, the assignment of the fiscal attributes is subject to prior authorization of the Argentine IRS.

(iv) Corporate law requirements, as applicable, should be also observed, as well as the specific requirements provided for each type.


The basic planning alternatives imply combinations of tax-exempted purchase of shares of Target and/or capital increases, followed by an A, B or C type of reorganization. As a consequence, selected assets of target and its fiscal attributes -such as pending depreciation allowances, NOL carryover- are then acquired tax-free by purchaser.


The tax reform provides for the following new requirements:


(i) Maintenance of an 80% interest for two-years prior to the reorganization: the transfer of net operating losses and tax incentives between the reorganized companies is only allowed when the equity interests in the predecessor-company have been maintained for two years prior to the reorganization date (or the lesser period of existence, as the case may be). Accordingly, it should be noted that lack of compliance with this requirement does not impair the tax-free status of the reorganization. In all cases, the new requirement does not apply when the reorganized companies have listed their own stock.

(ii) Companies in a situation similar to a US Chapter 11 restructuring may request Argentine IRS authorization for a tax-free reorganization aimed at ensuring continuity of the business, even when the legal requirements are not met. The President has exercised his veto powers in connection with this provision, so it will not be effective unless the Congress were to take specific action against this veto.


PART V: Covenants not to Compete. Goodwill


Argentine Income Tax Law does not allow the amortization or deduction of goodwill as a general rule. Only intangibles with a limited useful life may be amortized over such term. Tax planning alternatives must be then analyzed on a case-by-case basis. Sometimes it is possible to allocate price to covenants not to compete, an obligation, which usually has a limited term. Argentine Commercial law scholars provide substance to such planning: even if such covenants were not spelled in the purchase documents, they understand that non competition is an implicit legal restrain imposed on any bona fide transferor of a going concern. In all cases, to prevent recharacterizations by the tax authorities, the substance of the transaction should support any pricing allocation.


Decree 692/98 provided for new tax rules related to the tax treatment of covenants not to compete under Value Added Tax. They basically summarize and update conclusions of previous Argentine IRS rulings, although written quite confusedly. The lack of clarity of said rules raised a number of issues. For example, whether the isolated sale of an intangible together with a covenant not to compete would be taxable or not; or whether a covenant not to compete may be taxed on an isolated basis. A reasonable construction of the law prevents these transaction from being taxed.


The law only provides for the taxation of an assignment of trademarks and industry intangibles as an exception, only when they are assigned as an ancillary element to a taxable lease or service. The purpose of the law is basically to prevent tax basis erosion: if a taxable service is rendered and, as a consequence, a sale of industry intangibles results ancillary to such service, the ancillary component needs to be taxed to prevent erosion of the taxable-service basis. These rule nothing provides as to the taxation of covenants not to compete whenever they are ancillary to a taxable sale of industry intangibles. In addition, Decree 692/98 further provides that VAT would only apply to a covenant not to compete when it is tied to an assignment that imply a taxable financial service or an exploitation concession. Any of these two taxable services need to be present for covenant not to compete to be taxed. Scholars sustain this criteria, further arguing that no VAT applies to an isolated sale of an industry intangible or an isolated covenant not to compete(2).


Decree 692/98 made clear that covenants not to compete cannot be taxed isolatedly, as the IRS had intended to argue in a nineteen ninety four letter ruling, which was later overruled. As mentioned before, covenants not to compete would be taxed whenever tied to a taxable financial service or an exploitation concession. Only in these cases, the consideration received for the covenant not to compete may be viewed as further "value added" resulting from the performance of the two preceding taxable items. However, the lack of consistency between these implementing rules and the VAT law itself may justify a future challenge before Courts on constitutional grounds.


Part VI: Transactional Taxes


As mentioned above, Stamp Tax is a local tax levied by the provinces. Accordingly, tax rates, exemptions and taxable amount vary according to the jurisdiction involved. Stamp Tax applies on written contracts, either executed or "having effects" within provincial territory. In general, the term "effects" that trigger the taxable event is referred to the performance of any contractual obligation within the relevant provincial territory, such as the trading of assets located in a province. Contracts and documents evidencing tax-free reorganizations are usually exempted in most jurisdictions. In contrast, a reduced number of provinces exempt stock purchase agreements. Furthermore, most provincial tax authorities have the criteria that these contracts –even if executed out of the province- do trigger the taxable event whenever the corporate domicile is located in the province, since they always involve the trading of assets deemed located in provincial jurisdiction. A change of corporate domicile to selected jurisdictions prior to the sale of stock would solve such problem. There are other options available to reduce stamp tax costs:


1. Most provincial tax codes provide for reduced rates applicable to certain contracts registered in stock exchanges. The filing procedure is usually simple. For example, in the province of Buenos Aires the standard tax rate is 1%, being possible to get a reduced 0.25% tax rate when the stock purchase agreement is registered with certain provincial entities.

2. The traditional alternatives to use exchange of letter agreements and written offers accepted by non-written means, have been recently challenged by local tax authorities. The case-law trend has been quite adverse to taxpayers such as in the SOLBA UTE case. However, it is still possible to design tax planning alternatives excluded from the principles of these adverse cases, assuming the overall risk of a trend that really concerns the market.


Alternative tax planning options may be found in the recent changes to most provincial Tax Codes. A number of jurisdictions, to foster investments and location of industries within their jurisdictions do exempt documents of incorporation of new entities and capital increases. This exemption provide for tax planning opportunities that involve a mix of newly incorporated business entities -in selected jurisdictions- and subsequent sales of stock. This alternative is exclusively applicable for stamp tax purposes, a formal tax that prevents per se any reasonable challenge under the substance over form principle. In fact, there are written interpretation rulings in certain provinces that provide the necessary comfort for such a planning alternative.


1. For an extensive analysis of the Argentine VAT in general, a comparative analysis, and particularly its application to financial transactions, see Cristian E. Rosso Alba, "Taxation of Financial Services Under the Value Added Tax: A Survey of Alternatives and an Analysis of the Argentine Approach", International VAT Monitor, Volume 6, Number 6, 1995, page 335; published by the International Bureau of Fiscal Documentation.

2. See Yemma, J.C. and Ribet, M., "Las tranferencias de fondos de comercio frente al IVA según el nuevo decreto reglamentario"; Errepar DT, Sept. 1998, page 411