argentina const. 88 298.
(photo credit: Bloomberg)
We continue a series of occasional articles on possible economic opportunities and tax issues for Israelis with overseas interests. In this article, we review Argentina. Our remarks are very general and experienced professional advisors in each country should be consulted in specific cases.
Argentina contains one of the most significant pools of natural and human resources in Latin America. A variety of climates, enormous expanses of land, skilled and educated people and a solid industrial background are some of the country's features.
In the years that have elapsed since the 2001-2002 crisis, economic activity has been recovering with an average annual GDP growth of 9% in the last three years. One of the key factors in the recovery of investment levels was the increase in real estate investment and construction.
How are Israeli investors treated? No prior approval is required for foreign capital investments in Argentina, and investors are allowed to organize their business entities under any form provided in Argentine legislation. Moreover, Argentina and Israel have signed a Treaty for the Promotion and Reciprocal Protection of Investments dated July 23, 1995, in force in Argentina by means of Law 24,771 as from April 10, 1997.
The forms of business organization are covered by the Companies Law (No 19,550). The most common of business organizations used by foreign investors are corporations ("sociedad an nima" or S.A.), the limited liability companies ("sociedad de responsabilidad limitada" or S.R.L.) - both of which limit the responsibility of the shareholders/partners to the capital invested - and branches of foreign companies.
Taxes in Argentina: Argentina has federal, provincial and municipal levels of government and taxes are imposed at each level. The Argentine tax system has some unique characteristics not found in Israel, so you should do some homework in advance. Residents are taxed on their worldwide-source income; non-residents, only on their Argentine-source income.
Resident companies and branches of foreign companies are generally taxed at a flat 35% rate. Resident individuals are subject to a progressive scale - after the deduction of certain expenses and allowances - ranging from 9% to 35%.
Non-residents are subject to tax on their Argentine source income through income tax withholdings to be performed by the Argentine payer.
In the case of resident corporate taxpayers, the tax is generally calculated on the accounting profit (not adjusted for inflation) earned in the tax period, on an accrual basis, after adjustments provided for by the tax law. Exemptions are usually insignificant. Expenses are deductible to the extent incurred in producing taxable income, subject to certain restrictions and limitations. Net operating losses can be carried forward for five years.
Tax is withheld from payments to non residents, applying the corporate income tax rate (35%) to a net presumed income percentage which according to the type of income. As a result, the most important effective withholding rates on gross payments to non-residents are:
* Interest payments: 15.05% on loans granted by foreign banking entities complying with certain requirements, among others; 35% on most other interest payments.
* Royalties and technical assistance rendered from abroad: 21%, 28% or 31.5%, depending on their nature and compliance with certain registration requirements.
* Dividends: are generally not subject to withholding, however, 35% tax is withheld from any amount distributed in excess of accumulated taxable income (with certain adjustments).
* Remuneration of employees working in Argentina for less than six months: 24.5%.
* Lease of real estate: 21%.
* Sale of assets - located in Argentina: 17.5%.
In the last two cases (lease of real estate and sale of assets in Argentina), there is an option to apply a 35% tax rate on the actual net income. Nevertheless, individuals who sell real estate - not habitually - pay "tax on the transfer of real estate" at a rate of 1.5% tax of the transfer price, instead of income tax.
Argentina has signed income tax treaties with 18 countries, but there is no tax treaty with Israel (except for a treaty for the avoidance of double taxation in international transport).
Minimum Presumed Income Tax (MPIT): This tax is supplementary to income tax. It is generally applicable to corporate taxpayers on its assets at a 1% rate. The fiscal year's income tax can be credited against the fiscal year's MPIT. If MPIT is paid in a fiscal year, it may be credited against income tax in the following ten years if certain conditions are met.
"Rural real estate" held by non-residents is generally subject to the 1% tax on an annual basis, while "urban real estate" is subject to the tax if it is connected to the generation of income.
What about VAT? The scope of VAT in Argentina is broad and covers, among other things, the supply of goods and services, including services from abroad to be used in Argentina. The standard rate is 21%. Rates of 27% or 10.5% apply to some goods and services.
Real estate transactions are generally outside the scope of VAT. However, construction activities are subject to the tax, at a rate of 10.5% for dwelling construction and 21% in other cases. The letting of real estate is exempt if intended for rural activities or dwelling purposes. Other lettings are subject to 21% VAT above a certain amount.
"Tax on Personal Assets:" This tax generally applies to individuals on assets owned as of December 31st each year. For resident individuals, the tax applies to worldwide assets at a rate of 0.5% or 0.75%; for non-resident individuals, the tax applies to assets owned in Argentina (at a 0.75% rate). In the case of ownership of shares and other interest in Argentine companies, the latter are responsible for paying over this tax on their equity if the ownership belongs to individuals (Argentine or foreign) and also when they are owned by foreign entities (since they are presumed to be indirectly owned by individuals), at a flat 0.5% rate (the Company is afterwards entitled to a reimbursement from the shareholder). Certain tax treaties may provide an exemption from this tax.
Real estate owned by foreign entities that is already subject to MPIT is not subject to this tax. In some cases, when the ownership of real estate corresponds to foreign companies, the law presumes that the ownership corresponds to foreign individuals, resulting in a "special" 1.5% rate of Tax on Personal Assets.
Tax on bank account credits and debits: In Israel, bank charges on line items on bank statements have caused a stir. In Argentina, there is even a tax on credits and debits in bank accounts, at rates of 0% to 1.2%, but usually at 0.6%. The tax is collected by the financial institutions. A portion of the tax paid (average 17%) can be credited against income tax or MPIT liabilities. Certain operations are exempt from the tax and also some reduced rates apply.
Provincial turnover tax: This tax is generally levied on gross revenues. The rate varies depending on the type of activity and the province(s) where business is conducted. Primary activities are taxed at approximately 1%; industrial activities at 1.5%; trade at 3% and services in general at 3.5%.
Most of the provinces grant exemptions for primary activities, manufacturing industry (except for sales to end consumers) and construction.
Provincial stamp tax: Each province levies its own Stamp Tax. In the City of Buenos Aires (Federal District), the tax is only levied on the sale of real estate and other specific goods, and on the lease of commercial buildings. In the rest of the country, the most common rate is 1%, applied to the economic value of all documents formalizing commercial contracts.
Other rates apply to specific contracts or operations. For instance, notarized documents related to real estate transactions are subject to a 2.5% tax in the City of Buenos Aires or 4% in the Province of Buenos Aires.
How will Argentine taxes interact with Israeli taxes for Israeli investors? This will depend mainly on individual circumstances - see, for example, our article "Tax issues to consider when investing abroad" (The Jerusalem Post October 18, 2006). Key issues typically may include: The entity structure; the business model; intellectual property and research and development; finance aspects; income repatriation; exit strategy; management and employees; double tax relief; tax planning and anti-avoidance rules.
Subject to this, if an Israeli company with no branch in Argentina simply trades from Israel with an unrelated Argentine company, it should only pay tax in Israel.
If an Israeli company has a branch in Argentina it will report the resulting profit or loss to the Israeli Tax Authority as well as the Argentine authorities. Israel generally will tax the Israeli company on its worldwide profits, including Argentine source profits, at the regular rate - 29% in 2007. However, there may be no Israeli company tax balance to pay after crediting the Argentine tax of 35%.
Any excess foreign tax credit (35% Argentine taxes minus 29% Israeli tax equals 6% excess in this example) may be used in the following five tax years against other income of the same type from the same country (Argentina).
If an Israeli resident company or individual invests in the shares of an active Argentine business company, it may be able to defer Israeli tax until it receives a dividend from the Argentine company.
Thereafter, the Israeli tax on such dividends would be:
20% for an Israeli resident individual investor holding under 10% of the Argentine company, resulting in a combined tax burden of 48% in principle (= 35% Argentine corporate income tax plus 20% Israeli tax on 65)
25% for an Israeli resident individual holding 10% of the Argentine company, or for an Israeli corporate investor, resulting in a combined tax burden of 51.25% in principle (= 35% Argentine corporate income tax plus 25% Israeli tax on 65)
Alternatively, if an Israeli company (not individual) holds at least 25% in an Argentine company, the Israeli company may choose to pay the regular rate of Israeli company tax (29% in 2007) on its share of the pre-tax profit of the Argentine company and claim a credit for the 35% corporate income tax paid in Argentina - this should eliminate altogether the Israeli company tax, leaving a 35% combined tax burden.
Capital gains from share sales, loan interest, consulting fees and so forth will be taxable at various rates under the laws of both countries - specific advice should be obtained.
Israeli investors must also report the existence of their shareholdings in an Argentine company in their annual tax return.
The Personal Tax On Assets in Argentina will not be creditable against income tax in Israel. Since the MPIT is also calculated on assets, it seems that Israeli resident investors may face difficulty crediting MPIT paid against Israeli income tax - unless, perhaps, it can be shown the tax was effectively a prepayment of Argentine income tax (a little tax planning may go a long way...). Other taxes in Argentina will also not be creditable in Israel, such as VAT, the tax on bank account credits and debits, provincial turnover taxes, provincial stamp taxes.
To sum up, Argentina is a big country that is bouncing back from economic crisis thanks, among other factors, to real estate investment and construction - check it out.
Leon Harris is an international tax specialist at Ernst & Young Israel
Ariel Becher is an international tax specialist at Ernst & Young Argentina