Law 27,260 reduces the tax burden for many taxpayers and provides an opportunity for the settlement of past tax debts. Taxpayers should review the Law's provisions and determine whether they might benefit.

On July 22, 2016, Argentina published Law 27,260 (the Law) in the Argentine Official Gazette, which makes significant changes to the Argentine tax laws and establishes new tax regimes that may significantly affect individuals and companies doing business in the country. The Law was enacted on July 21, 2016.

As described in Tax Alert 2016-1176 {}, the Law includes the following tax provisions:

— Amendments to the income tax (e.g., elimination of the 10% withholding tax on dividend distributions), the minimum presumed income tax and the personal assets tax

— The creation of a Registry of Foreign Passive Entities

— A new system for the voluntary declaration of undeclared foreign and national currency and assets held by Argentine residents

— A new tax debt settlement plan

— New benefits for compliant taxpayers

The Law is generally effective July 23, 2016. The Executive Power will issue regulations related to the amendments to the income tax, the minimum presumed income tax and the personal assets tax. The Federal Tax Authorities will issue regulations on the remaining tax provisions.

Detailed discussion

Amendments to the income tax, the minimum presumed income tax and the personal assets tax

Income tax

The Law eliminates the 10% withholding tax on dividend distributions, which applied to foreign investors and to Argentine resident individuals. Thus, the Law reduces the effective income tax rate on dividend distributions from 41.5% to 35%.

In addition, the Law makes changes to the income tax rules related to foreign-source income of Argentine-resident taxpayers, addressing foreign exchange differences. In particular, the Law introduces important modifications and clarifications about the capital gains determination. Because of the devaluation of the Argentine currency, this provision may significantly affect Argentine taxpayers with foreign-source income.

Minimum presumed income tax (MPIT)

The Law eliminates the 1% MPIT on assets of local entities beginning with fiscal year 2019.

Personal assets tax

For companies, the Law reduces the tax on the net equity value of stock owned by Argentine individuals and foreign individuals or entities from 0.50% to 0.25%.

For individuals, the Law progressively increases the minimum taxable base as follows: (1) from Argentine Pesos (ARS) 305,000 (approx. US$20,000) to ARS 800,000 (approx. US$53,000) in 2016; (2) to ARS 950,000 (approx. US$63,000) in 2017; and (3) to ARS 1,050,000 (approx. US$70,000) in 2018. In addition, the Law replaces the progressive scale that has a maximum tax rate of 1.25% with a fixed tax rate of 0.75% in 2016, 0.50% in 2017 and 0.25% in 2018.

Registry of foreign passive entities

The Law creates a reporting regime applicable to taxpayers who own more than 50% (or act as directors, managers or similar positions) in foreign companies, trusts, foundations and other entities that obtain more than 50% of their income from passive sources within a given calendar year. The reporting regime requires taxpayers to provide certain details about such foreign entities. The Federal Tax Authorities will regulate the regime, including the terms and requirements that will have to be observed. Once the additional regulations are issued, taxpayers should ensure that they comply with this regime.

Taxpayers should take this new reporting requirement into account when designing and implementing foreign structures.

New system for voluntary declaration of undeclared foreign and national currency and asset holdings

The voluntary declaration applies to national and foreign currency and assets (including shares and credits) held by individuals before the date of enactment of the law (which took place on July 21, 2016 through Presidential Decree 881/2016). For entities, the voluntary declaration applies to national and foreign currency and assets held on the date of the last financial statements closed before January 1, 2016.

The Law imposes a special tax - ranging from 0% to 15% - on the declared currency or assets. The specific rate depends on the type of assets being declared, the amounts involved and the date on which the declaration is made. In addition, the Law allows taxpayers to make a declaration without any taxation when funds are invested in specific instruments (e.g., government bonds, mutual funds) with particular characteristics.

Under this regime, individuals and companies would be relieved of their past tax omissions and any related interest and fines would be forgiven. In addition, they would no longer be subject to any related civil, administrative and criminal prosecution.

If the Federal Tax Authorities discover the failure to declare any other assets when the taxpayer makes the declaration, all of the previously mentioned benefits obtained by the taxpayer will be jeopardized.

New tax debt settlement plan

The Law creates a new regime for the settlement of outstanding tax debts as of May 31, 2016, including federal taxes, social security taxes (certain exceptions apply), and import and export duties. Tax liabilities subject to administrative or judicial claims may also benefit from this regime. The deadline to apply for the settlement plan is March 31, 2017.

The plan will provide the following benefits:

— Exemption from fines and penalties not yet determined as of the date of entering into this regime

— Total or partial exemption from compensatory and punitive interest

— Reduction of up to 15% of the consolidated tax debt, depending on the payment conditions chosen (e.g., cash, installments plan)

— Possible payment plan of up to 90 monthly installments, with a monthly interest rate ranging from 1% to 1.5%

Access to the settlement plan will be analyzed on a case by-case basis.

Benefits for compliant taxpayers

The Law grants the following benefits to compliant taxpayers:

— Exemption from the personal assets tax corresponding to fiscal years 2016, 2017 and 2018 to the extent that taxpayers have fulfilled all their tax liabilities in the last two fiscal years before fiscal year 2016 (this benefit also applies to the personal assets tax payable by Argentine resident companies as substitute taxpayers on the participation held by their shareholders)

— For employees, an exemption from income tax on the first half of the payment of the 13th month salary of fiscal year 2016 for those compliant taxpayers not reached by the previously mentioned personal assets tax exemption.

The deadline to apply for these benefits is March 31, 2017.

Implications

Law 27,260 contains several amendments that reduce a taxpayer's tax burden and allows taxpayers to settle past tax liabilities. Taxpayers should continue to monitor the release of the corresponding regulations by the Executive Power and the Federal Tax Authorities.

This development reflects the Government's expressed objectives of attracting investments to the country and it is expected that new tax regulations and measures will be introduced to continue to improve the Argentine tax environment. In particular, the Law mandates the creation of a commission in the Congress to analyze and evaluate proposals to reform the Argentine tax system.

———————————————