How to Invest in Productive Business to be Developed in Argentina
It's an honor for us to be the first Tax Professors of the University of Buenos Aires to publish an article on the prestigious Journal of the Shanghai Business University in China. This article is the first of a series about how Chinese investors should structure their investments in Argentina in order to achieve a substantial reduction in the impact of taxes. We also explain the different alternatives in organizing a business in Argentina from a legal perspective. Please find attached an electronic version of the published article. It was also an honor for me to contact the authorities of the Shanghai Business University with their colleagues at the University of Buenos Aires. Now both Universities are in the process of reaching a cooperation agreement and I hope this will be a great step in the integration between both countries.
At the time of making a direct productive investment in Argentina, the investor must draw up a detailed project plan that will estimate different hypothetical scenarios in order to measure the return on the invested capital adjusted to risk, while taking into account operational, financial, accounting, legal and tax aspects. The choice of the legal form to structure the investment is essential to achieve the best investment profile in terms of cost and income and to avoid tax or legal inefficiencies that might reduce or compromise the estimated margin of profit. We refer to those predictable elements that are necessary to develop an investment and not those related to the business itself or to the target country where the investment will be made. The tax and legal system provides partnerships, trusts and other companies to make a long term productive business. From the tax viewpoint, the principal differences fall on direct taxes (on income tax, tax on assets or distributed profits) .
Among these partnerships we may highlight the joint ventures (temporary partnerships of businesses) that enable the capital of independent companies to come together without establishing a business organization, and which have a limited liability over the portion that he has contributed. The disadvantage of this partnership is its temporary characteristic that forces parties to make as many contracts as projects they decide to develop. Another advantage is that joint ventures are not subject to income tax (income tax whose rate is 35%) nor personal assets (as tax on alternative minimum income tax whose rate is 1% applicable on business assets and on net wealth tax whose rate is 0,5% applicable on net asset value as of December 31st.), although partners are subject to tax. Furthermore, gains withdrawal will not pay tax on dividends (which is equivalent to 10% of the distributed profits) which would be applied when the partner distributes profits to other partners or shareholders.
Among other fiduciary forms, the Argentine law provides financial and non financial trusts. Financial trusts are those that issue securities (debt bonds or participation or capital certificate) which can be issued by the system of public or private offering. Non financial trusts are those which do not issue securities but the beneficiaries hold a personal participation over a portion of the trust as stated in the trust agreement.
Trusts in general are taxed as income and as dividends, except for those financial trusts whose certificates are issued under the public offering system (in local securities markets). In that case, dividends (participation certificates) as well as their interests are tax exempt (debt certificates).
An advantage of this structure is its versatility as it is not subject to the Business Organization Act (Law 19,550), and it is governed by the autonomy of the will as a source of rights and obligations. A considerable disadvantage of this structure is that a mandatory deposit earning no interest has to be made and it will amount to 30% of the invested sum. This deposit cannot be withdrawn for the period of one year. An exception to this are the financial trusts with certificates issued by public offering.
As for other companies, the legal types available for non-resident investors are the Corporation (Sociedad Anónima –SA), the Private Company Limited by Shares (Sociedad de Responsabilidad Limitada -SRL) and the Branch. The tax system of these companies are very similar as taxes are paid on income, on the alternative minimum income tax, on personal assets and on dividends.
From the company viewpoint, the S.A. has flexibility certificates to sell participation (shares), to increase capital, to issue in the stock exchange or markets, to make transactions of M&A or reorganizations.
The SRL and the Branch are simpler in terms of management but stricter to incorporate partners, increase capital, associate or expand their operations.
The legal form must be determined in terms of the business model and should be aligned to the company structure and the corporate strategy to optimize the fiscal and financial aspects within a legal scheme that economies exploit today to increase the return on investment.
Tax planning is key at the time of organizing an investment in Argentina. It is also crucial to analyze the treaties to avoid double taxation in force between both countries or between Argentina and a third country where a holding or conduit company might be located in order to reduce the tax on dividends, interest, royalties or the provision of services.
At present, China does not have an agreement with Argentina but has made 99 agreements with countries that have agreements with Argentina. ¨ The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.¨ (Supreme Court of the United States in the “Gregory v. Helvering” Case, 1935).