Argentine Congress passed comprehensive tax reform
In its commitment to modernising the tax system, but also with an eye on monitoring the fiscal deficit, the Argentine Congress passed, on 27 December 2017, the tax reform proposed by the Executive Branch, which became effective starting 1 January 2018 (the 'Argentine Tax Reform'). The reform introduced several amendments to the Argentine tax system, including, among others, the following:
Withholding tax (WHT) on dividend distributions
The Argentine Tax Reform’s principal change is a corporate income tax (CIT) rate reduction in two phases. For fiscal years starting on or after 1 January 2018 until 31 December 2019, the CIT rate would be reduced from the current 35% rate to 30%; going forward, the tax rate would be further reduced to 25%.
This measure will be offset by the introduction of a WHT on dividend distributions and branch profit remittances at rates of 7% (while the CIT is 30%) and 13% going forward. Thus, the combined rate on dividend/profit distributions would remain around the current 35% rate, as Argentina did not levy a WHT on dividends or branch profits since it abolished the 10% rate in 2016. In addition, the Argentine Tax Reform abolished, for profits generated as of the fiscal year starting on or after 1 January 2018, the so-called equalisation tax, a WHT levied at a 35% rate on dividend distributions in excess of tax earnings, which would remain applicable for the stock of non-distributed earnings and profits (E&P) as of 31 December 2017.
The Argentine Tax Reform includes, among others, the following measures:
- Individuals will be taxed on both the sale and yields of (i) sovereign bonds and (ii) corporate bonds issued in an initial public offering (IPO). The tax will be levied at a 5% rate if the bonds are issued in Argentina without indexation clause or 15% if they are issued in foreign currency or in Argentine pesos with an indexation clause. Before this reform was passed, individuals were exempted from tax on this type of income.
- Individuals, including non-residents, continue to be exempted from tax on capital gains arising from the sale of shares in publicly-traded companies if the shares are traded in the local stock exchange. In case of non-residents, capital gains as well as yields deriving from Argentine sovereign and corporate bonds issued in an IPO remain exempt. However, yields and capital gains derived from specific securities issued by the Argentine Central Bank (LEBACs) do not benefit from this exemption.
- Indirect transfers of Argentine assets (including shares) will be taxable, provided that (i) the value of the Argentine assets exceed 30% of the transaction’s overall value and (ii) the equity interest sold (in the foreign entity) exceeds 10%. The tax will also be due if any of these thresholds were met during the 12-month period prior to the sale. The indirect transfer of Argentine assets will only be subject to tax if said assets are acquired after 1 January 2018. Also, transactions involving indirect transfers of Argentine assets within the same economic group would not trigger taxation provided the requirements to be set by regulations are met.
- Change in controlled foreign company (CFC) rules with full attraction of passive income obtained directly and/or indirectly through a chain of controlled companies provided those companies' income is more than 50% passive and are subject to a tax lower than the 75% of the Argentine income tax rate, among other conditions.
- With respect to value-added tax (VAT), the Argentine Tax Reform establishes a new taxable event for ‘digital transactions’ (e.g. digital services, hosting, online technical support, software services, Internet services). Starting 1 January 2018, as a general rule, these services will be subject to Argentine VAT at a 21% rate if they are supplied by a non-resident entity to an Argentine customer and there is an effective use in Argentina.
- The Argentine Tax Reform also provides for a monthly exemption from employers’ social contributions for the first 12,000 Argentine pesos (ARS) per employee. The change will be implemented gradually over a five-year period (from ARS 2,400 in 2018 to ARS 12,000 in 2022 and after).
- Additionally, employers’ social contributions (except social health) will be progressively modified from current combined 17% to 21% to a 19.5% rate over a five-year period.
- Negotiations with the provinces are also envisioned to accomplish the public commitment of reducing provincial taxes, such as the stamp tax (0.75% in 2019 with gradual reductions until 2022) and turnover tax (mostly for industries and transportation activities, maximum rate for resale would be 5%).