Tax reform - Tax transparency regime
Law N°27.430 substantially changed the text of the Income Tax Law, establishing numerous and significant changes with effect for fiscal years starting from 1 January 2018. Amongst the changes, the tax transparency regime was restored, to prevent taxpayers from using tax benefits from other jurisdictions for the purpose of avoiding paying taxes in the place where the tax would correspond. This is in line with the recommendation of the OECD in the “OECD and the G20 Project on Base Erosion and Profit Shifting (BEPS), Final Report 2015”, in an international context in which local subjects intend to defer tax payments by interposing companies, in many cases, situated between the subject that obtains the profit and the final beneficiary. Several States have implemented different measures included in the BEPS plan, to avoid hollowing out the tax base and the above-mentioned transfer of tax benefits among jurisdictions.
The previous transparency regime that was in force in Argentina applied to companies that did not distribute their capital in shares (partnerships) or by companies established in non-cooperating countries. That regime considered that Argentine residents had to recognise revenue arising from investments in any of the entities mentioned above, at the time of accrual, regardless of whether the profits were distributed or not.
In the same way, if the investment abroad was channeled through a joint-stock company – provided it was a cooperating country - the profits were attributed to the Argentine resident, at the time of the profit distribution. Furthermore, the previous situation consisted in analysing only direct interests in foreign entities, not performing an analysis beyond the structure, on indirect interests.
In contrast, the current tax transparency regulation defines certain requirements that, if not completed, oblige the Argentine resident (individual or company) to ignore their foreign companies as independent entities located in any cooperating or non-cooperating countries, and include in their tax return the profits obtained by the foreign entity as if he/she would have paid the tax in a direct manner.
One of the most frequent cases to consider is the investment in companies with a tax status abroad. Indeed, according to the Legislation and regulations, entities will be considered transparent when the following conditions are concurrently met:
- Control requirement: Self-control or control on behalf of related entities or taxpayers with third degree kinship equivalent to 50% of the equity, of the results or voting rights on behalf of the Argentine Resident. It will also be fulfilled when the person has the right to dispose of the entity’s assets, select or remove directors or administrators, or hold rights over the benefits.
- Requirement of the activities developed: given the lack of substance, which is when the foreign entity does not have the material or personal means needed to carry out its activity, or when the income is the result of passive revenues equivalent to 50% or more of the income for the fiscal year; or revenues of any kind that directly or indirectly generate deductible expenses for the Argentine resident.
- Tax Position Requirement: The entity from abroad is in a jurisdiction of low or no taxation or a non-cooperating jurisdiction.
Therefore, when the fiscal transparency of the foreign entity is applied, the Argentine resident partner will have to include the income in its tax return in the year that corresponds to the closing of the annual fiscal year of the foreign subject, regardless of whether that income has been distributed or not.
Guillermo Jaime Poch
Alberto Fabián Mastandrea