Multinationals in Argentina may want to rethink the way they operate in the country to take advantage of tax benefits available from 2020 under the new tax promotional regime for the so-called knowledge-based economy.
On May 22 2019, the Argentine Congress passed a bill, approving a new tax promotional regime for the so-called knowledge-based economy (the regime). The regime replaces the former software promotional regime (established by Law 25,922, as amended), but also broadens its scope to include and promote other economic activities that are knowledge-based.
The regime will be in force from January 1 2020 until December 31 2029.
The objective of the regime is to encourage the creation, design, production and implementation – or adaptation – of products and services, as well as the associated technical documentation, relating to the following activities (the promoted activities):
Software, computing and digital services, including, among others, the development of software products and software-based services (SAAS), embedded software, videogames and cloud services;
Audio-visual production and post-production activities, including digital;
Biotechnology, bio-economy, biology, biochemistry, microbiology; bio-computing, molecular biology; neuro-genetics, genetic engineering, geo-engineering;
Geological and prospecting services, and services relating to electronics and communications;
Professional services, to the extent exported;
Nanotechnology and nanoscience;
Aerospace and the satellite industry;
Engineering for the nuclear industry; and
Manufacturing of products and the provision of services regarding the automation of the industrial sector, using industry 4.0 technologies.
The requirements
Companies, branches of foreign entities, trusts and mutual funds organised in Argentina are, in principle, entitled to apply for this regime to the extent they carry out, as a main activity, one or more of the promoted activities listed above. For this purpose, more than 70% of the applicant's total gross revenues must derive from the promoted activities.
Further, such companies must register with the National Registry of Beneficiaries of the Knowledge-based Economy Promotional Regime (the registry) and comply with at least two of the following requirements, on an annual basis:
Demonstrate continuous improvements in the quality of their services, products and/or processes, through a recognised standard of quality;
Demonstrate research and development (R&D) expenditures in connection with promoted activities of at least 3% of the applicant's total gross revenues and/or demonstrate training expenditures for the benefit of employees related to the promoted activities of at least 8% of the total payroll; or
Perform exports of goods/services originated in promoted activities of at least 13% of the total gross revenues derived from those promoted activities. In case of professional services, the amount of exports originated in promoted activities should be of at least 70% of the applicant's total gross revenues (45% if the company is a small or medium size entity).
The benefits
Promoted companies would be awarded with the following tax benefits:
Fiscal stability for federal tax purposes, concerning the promoted activities, from the date of its registration with the registry and until the regime is in force. The fiscal stability will be extended to provincial and municipal taxes provided the relevant jurisdiction formally adheres to this national regime;
Acceleration of the full amount of computation for the special deduction from the taxable basis used to calculate the employer's social security contribution which is gradually increased until 2022 for all taxpayers (full deduction amount currently set to approximately $390);
Tax credit certificate equal to 1.6 times the social security contributions that the applicant should have paid on the amount of the special deduction described above. The amount of the tax credit may be doubled in certain specific cases. This tax certificate would be creditable against corporate income tax and value-added tax (VAT) obligations and is transferable only once;
A reduced corporate income tax rate of 15% (not extended to withholding tax on dividends which would remain at the 13% rate for profits generated in fiscal years starting on or after January 1 2020);
An exemption from being subject to VAT withholdings and collections; and
A foreign tax credit for income taxes paid/withheld abroad on income received by the beneficiary from carrying out the promoted activities would always be available regardless of whether the relevant income is characterised as Argentine or foreign-sourced (although always limited to the rise of the income tax liability due to that relevant income).
Other relevant features
Beneficiaries of the promotional regime would be required to afford the expenses necessary for the control and supervision of the regime through the payment of a special fee that shall not exceed 4% of the tax benefits granted.
Additionally, each beneficiary would be required to pay, on an annual basis, an amount equal to 1.5% of the benefits granted under this regime to contribute to the funding of the Trust Fund for the Development of the Entrepreneurial Capital.
Regulations, which will be released soon, are expected to provide additional guidance on the scope of activities, the registration process and methodology to request the benefits, as well as the practical matters related to making effective contributions to finance the regime, as described above.
The regime appears to be a great opportunity for multinationals to rethink the way they operate in Argentina in order to take advantage of the promotional benefits.
The attractiveness of the regime is further increased by the wide scope of activities covered. In this sense, planning opportunities could also arise for MNEs that, although not having one of the promoted activities as their main activity, may evaluate to restructure their business to still apply for the benefits (e.g. carve-out of internal processes, mergers, etc.).
The regime would also work as a tool to foster the localisation of regional service centres in Argentina that export a wide range of services to other subsidiaries within the same multinational group.
