New taxation on capital gains and dividends under Argentine income tax
Gabriel Gotlib, Fernando Vaquero and Martina Caunedo of Marval, O’Farrell & Mairal outline the latest changes to the Argentine Income Tax Law, including new capital gains and dividend taxation provisions.
A recent amendment to the Income Tax Law modified the applicable tax treatment of the income obtained by non-Argentine residents and Argentine resident individuals from the sale of shares issued by Argentine corporations and other securities. The amendment also established a 10% income tax withholding for dividends and profit distributions.
Law N° 26,893 and its regulatory Decree N° 2,334/13 established that the amendment to the Income Tax Law (the Amendment) shall be applied (i) in terms of transfer of shares, quotas and other securities: for transactions whose payments are made as of September 23 2013; and (ii) in terms of dividends or profits: for the withholding on dividends or profits distributions that are available on or after September 23 2013.
Capital gains taxation for non-Argentine residents
Argentine-source income arising from the sale of shares and "other securities" became taxable under the Income Tax Law for non-Argentine residents. Before the Amendment, the income arising from such type of transactions was exempted (under Section 78 of Decree No. 2,284/91) for non-Argentine residents. Law N° 26,893 abrogated this exemption.
The term "other securities" refers to the securities which may be commercialised in the stock exchange or exchange markets. The definition of "other securities" is of the utmost importance, since it determines which securities are subject to tax.
It is subject to discussion whether the sale of American Depositary Receipts (ADRs) generates Argentine-source income for the non-Argentine resident. Under the Income Tax Law, non-Argentine residents are only taxable on their Argentine-source income.
ADRs are negotiable certificates issued by an American bank, which evidence ownership of a specified amount of American Deposit Shares by the holder of these certificates. Such American Deposit Shares evidence an interest in certain underlying shares or securities issued by non-US publicly-held corporations and deposited with a custodian entity located in the non-US issuer's country. It is argued that ADRs are stand-alone instruments issued by a non-Argentine resident and independent from the underlying shares and, therefore, its trading does not generate Argentine-source income. On the other hand, it is argued that income exists since the underlying assets are shares issued by Argentine corporations and Argentine source.
Notwithstanding the above, the scope of the Amendment is not clear enough since a regulation is still pending, and such regulation might establish that gains derived from the transfer of ADRs are subject to tax.
Rates and taxable income
According to the provisions of Law N° 26,893, Argentine-source income arising from such transactions is subject to a 15% tax upon: (i) the "net presumed income" provided by the Income Tax Law for this type of transaction (90%), which determines an effective rate of 13.5% on the sale price; or (ii) the "real net income" of the transaction, which, according to section 93 (second paragraph) of the Income Tax Law, means "the sum resulting from the deduction of the net profit paid, the expenses made in the country, which were necessary for the obtention, maintenance and conservation, as well as all the deductions authorised by law, depending on the profits and their recognition by the tax authority".
If the real net income is used, there are certain issues that are not clear enough and additional clarifications and regulations may be expected. Issues that may require further regulations (among other matters) include:
i) the documentation that should be provided to evidence the result of the transaction according to the real net income alternative. It would probably be relevant to analyse the following documentation: (a) the stock purchase agreement of the shares that are being transferred, if any; (b) capital contributions made by the seller shareholder; (c) bank account statements regarding the payments made for the purchasing of the shares or the capital contributions; and (d) a certificate issued by an accountant who calculates the result of the transaction.
ii) whether the income arising from the transaction should be determined in a foreign currency or in AR$. The regulations only provide that the gain of the transaction should be determined by deduction of the acquisition cost from the price at which the securities are sold, but it has not been clarified whether the acquisition cost should be considered at the exchange rate in force at the time of the acquisition of the shares or upon the sale of the shares.
iii) whether the validation of the "expenses made in the country (Argentina), which were necessary to the obtention, maintenance and conservation" (of the profit), which have to be deducted from the net profit paid by the buyer, has to be done before or after the transaction is performed. In others words, it is not clear whether it is necessary to request for a previous authorisation from the tax authorities to deduct such expenses from the price paid by the buyer, or if the transaction could be performed considering those expenses being the transaction subject to a subsequent audit. Taking into account that the buyer is responsible for the payment of the tax, generally the buyer will prefer the net presumed income alternative, due to the concerns explained regarding the real net income alternative.
Transactions between non-Argentine residents
The general rule is that the Argentine payer must withhold income tax when a non-Argentine resident obtains Argentine-source income. If the buyer of the shares issued by an Argentine corporation (or other security) is an Argentine resident and the seller is a non-Argentine resident, the buyer should withhold income tax.
If the buyer and the seller of the shares (or other security) are non-Argentine residents, the buyer is responsible for the tax. Law N° 26,893 provides that "the buyer shall bear the obligation of payment of the tax". However, the regulations do not clarify the mechanism to pay the tax in the case of the transfer of shares and other securities executed between two non-Argentine residents. In other words, the law provides that the buyer shall pay the tax, but it does not regulate a specific mechanism. Even in the absence of a regulation regarding a mechanism for the payment of the tax, in practice, certain brokers withhold income tax on transactions in the Argentine Stock Exchange.
The capital gains exemption applicable to income arising from the sale of certain types of securities has not been amended. The income obtained by non-Argentine residents from the sale, exchange, disposition or transfer of securities issued by financial trusts, negotiable obligations issued by Argentine corporations and public bonds is exempted from income tax (provided certain requirements are met). These exemptions are granted by specific laws.
Capital gains taxation for Argentine resident individuals
Argentine resident individuals are subject to income tax on profits obtained periodically and which imply the permanence of the source which produces such income. Therefore, capital gains are not generally subject to Income Tax. Law N° 26,893 taxed the profits obtained by Argentine resident individuals from the sale of shares, equity interest, bonds and other securities issued by Argentine or foreign entities. Thus, other capital gains remained outside the scope of such tax.
Rates and taxable income
The income arising from the transfer of shares, quotas, equity interest, bonds and other securities shall be determined, as the case may be, according to article 61 of the Income Tax Law (that is, deducting the cost from the sales price). The income is subject to a rate of 15%.
Law N° 26,893 provides that profits from the sale, exchange or disposition of public shares, public securities or public bonds are exempted if they are obtained by individuals or undivided estates resident in Argentina, in the event that the shares and the securities are traded in a stock exchange or publicly traded. Regulations provide that the trading should be done through exchange markets duly authorised by the Argentine Securities and Exchange Commission (CNV).
The income obtained by Argentine resident individuals from the sale, exchange, disposition or transfer of securities issued by financial trusts, negotiable obligations issued by Argentine corporations and public bonds is exempted from income tax (provided certain requirements are met). These exemptions arise from specific laws.
Capital gains taxation for Argentine resident corporations
The Amendment does not modify the tax treatment for the income obtained by Argentine corporations. In this sense, the income obtained by Argentine corporations for the sale of shares or other securities is subject to income tax as ordinary income at a rate of 35%.
Argentine corporations and certain types of trusts are subject to income tax on worldwide income at a rate of 35% on net income.
Trusts set up in Argentina, according to the provisions set forth in Law No 24,441, are considered taxpayers ("corporate trusts") if: (i) the settlor is not the beneficiary; (ii) the settlor is the beneficiary but is a non-Argentine resident; or (iii) it is a financial trust (a trust whose trustee is a financial institution or a company licensed to act as a financial trustee that issued trust securities).
Before the amendment entered into force, the distribution of dividends and profits was not subject to any income tax withholding, except if equalisation tax was applicable.
Equalisation tax is, in general terms, a 35% withholding applicable to dividends and profits that result from profits not taxed at the corporate level. All dividends or profit distributions exceeding the accumulated taxable income determined according to the Income Tax Law (plus certain adjustments) were subject to equalisation tax.
The Amendment imposes a 10% withholding tax on dividends distributions. Also, profit distributions made by corporate trusts are subject to the withholding. The 10% withholding shall be applied on the amount of the dividend distribution less the amount of equalisation tax, if applicable.
The withholding is applicable when the dividends are paid or when they are made available to the shareholders. The redemption of shares, depending on certain circumstances, may be treated as a sale of shares and a dividend distribution.
General Resolution 3674 establishes the procedure to submit the withholding to the tax authority.