Argentina: Government moves to strengthen bilateral treaties
Ignacio Rodríguez and Juan Manuel Magadan of PwC Argentina discuss how the Argentine government has actively pursued to expand its treaty network.
On December 6 2019, Argentina signed a new double tax treaty with Austria and an amending protocol to the treaty with France.
The new treaty and the amended protocol would enter into force once the relevant internal approvals and notifications between the countries are completed.
The developments show how Argentina has been actively negotiating double tax treaties in recent years to expand its existing treaty network.
New treaty developments should be monitored by multinational groups as well as how the multilateral instrument (MLI) is finally implemented to affect existing bilateral treaties.
Tax treaty with Austria
Representatives of the governments of Argentina and Austria signed a new double tax treaty (DTT) between the two countries. This treaty replaces the old treaty signed in 1979, which had been terminated by Argentina in 2008. It was alleged that its provisions led to abusive practices by Argentine residents, particularly due to a broad exemption on income and capital from holding Austrian government bonds.
Like other OECD model-based treaties, this one introduces relief on domestic withholding on cross border payments of (i) interest (12%), (ii) royalties and technical assistance services (3%, 5%, 10% and 15%), and (iii) dividends (10% provided the interest held is greater than 25% and it has been held for the 365-day period before the dividend payment).
Taxation of capital gains derived from the transfer of shares is also capped at 10% or 15%, depending on the participation held. Furthermore, capital gains derived from the indirect transfer of Argentine shares should be taxable only in Austria if the entity is not land-rich.
With respect to the permanent establishment definition, in line with the election made by Argentina for purposes of the MLI, the exceptions included in Article 5 are subject to the “preparatory or auxiliary” condition. Additionally, the permanent establishment definition includes the provision of services for more than six months in any twelve-month period.
The protocol to the treaty also includes a definition for “technical services”, which are defined as those of a customised nature that involve the application of a non-patentable special knowledge, ability or experience. Standardised services are specifically excluded from the technical services definition.
Finally, the treaty includes the “principal purpose test” as a general anti-abuse provision. The treaty would have effect from January 1 of the year following in which the treaty enters into force, for which internal approvals and the subsequent exchange of ratification documents must be completed.
Protocol to the treaty with France
Argentina signed an amending protocol to the DTT signed with France with the intention of updating most of the provisions from the original treaty that was signed in 1979.
For instance, the protocol amends the permanent establishment definition to include the provision of services and the exception for activities of a preparatory and auxiliary character.
Regarding the interest article, the protocol reduces the limitation on the taxation at source from 20% to 12% (in line with most DTTs signed by Argentina). Similarly, the cap on royalty withholding is reduced from 18% to 3%, 5%, 10% or 15%, depending on the type of royalty income paid.
The capital gains article is also updated by the protocol to include special provisions in case of transfer of shares. In this sense, it is established that the transfer of shares could be taxed in both states, but in case of non land-rich companies the taxation at source cannot exceed 10% (when a seller owns at least 25% of the capital) or 15% (for all other cases).
Notably, the protocol does not provide for the inclusion of a general anti-abuse provision, though it has been the case of recent DTTs signed by Argentina.
Congress approval and the subsequent exchange of ratification documents would be needed before the treaty becomes applicable.
Juan Manuel Magadan