Argentina and UAE sign double tax treaty
The tax treatment of transactions between Argentina and the UAE will change after the two nations signed a new agreement for the avoidance of double taxation (DTA).
The DTA was signed on November 3 2016 in Dubai. It will require ratification by both countries before entering into force. The exchange of instruments of ratification, which is expected to occur soon, will make the DTA effective from the date when the last notification takes place.
The tax treatment of Argentinian transactions under the newly signed tax treaty with regards to interest, royalties, dividends and capital gains will be as follows once the agreement is effective.
Domestic Argentinian tax law generally subjects interest payments on related-party loans to a foreign beneficial owner to a 35% withholding tax rate. However, under the tax treaty, interest payments on such loans paid to UAE beneficiaries will be subject to a maximum withholding tax rate of 12%.
Although the DTA contains non-discriminatory provisions they are not wide enough and do not override domestic thin capitalisation rules in Argentina that establish a 2:1 debt-to-equity ratio.
Under the tax treaty, royalties and technical assistance payments made to a UAE beneficial owner should be subject to Argentinian withholding income tax at a rate of 10%. It should be noted that under domestic Argentine tax law, royalties may be subject to withholding tax rates as high as 31.5%.
The DTA generally follows the OECD model, but there are some deviations. For example, technical assistance services are listed under Article 12 (royalties). Moreover, according to the Argentinian tax authorities' controversial approach, this concept includes the rendering of independent services consisting of the provision of non-registrable knowledge through any mean.
Under Argentinian domestic law, dividend payments are subject to a 35% withholding tax to the extent the payment exceeds the amount of accumulated tax earnings. Although it envisions reduced withholding rates in practice the treaty does not provide any relief in this regard.
Under the DTA, the taxation on capital gains derived from the sale of shares will be limited to a 10% tax on the gain to the extent it relates to a stake larger than 25%. If the stake is lower than 25%, then the tax will be limited to a 15% tax. This may imply a relief from an Argentinian perspective since under domestic law foreign beneficiaries are subject to a 13.5% effective tax on gross proceeds or, alternatively, 15% tax on the actual capital gain duly supported.
However, the above potential relief will not apply if more than 50% of the value of the relevant shares is derived from real estate property (to this end cattle and equipment used in farming, forestry, as well as in the exploitation of natural resources would be considered as such).
Other particular features
Some other particular features that the treaty provides are as follows:
Similar to the DTAs that Argentina recently agreed with Chile and Mexico, the Argentinian DTA with the UAE includes a limitation of benefits (LOB) clause. Although these LOBs may be relaxed and some relief may be provided by the relevant contracting state under certain specific facts and circumstances, they are clearly aligned with current global trends (e.g. BEPS), mainly aimed at avoiding treaty-abuse practices and double non-taxation scenarios;
The reduced withholding rate for royalties applies to copyrights only to the extent that the beneficial owner is the moral holder of the rights (individual) or their heirs. This was clarified and accepted by the Supreme Court of Justice in Argentina after a long-standing controversy, but the fact that this DTA has only one reduced rate for royalties, as opposed to the other treaties Argentina has signed, exposes copyrights licensed by companies to domestic legislation; and
It is stated that a permanent establishment is deemed to exist in cases of fishing activities for a period longer than three months even without a fixed place of business.
The new tax treaty will enter into force after instruments of ratification have been exchanged.
This development gives hope that the Argentinian authorities are willing to continue expanding the tax treaty network, after concluding new treaties with Spain, Switzerland, Chile (already in force) and Mexico during the past three years, ratifying certain BEPS-related features.
Andrés Edelstein (email@example.com) and Ignacio Rodríguez (firstname.lastname@example.org)
Tel: +54 11 4850 4651