«Channeling Investments In Argentina Through Spanish Entities: Tax Issues»
Artículo publicado en septiembre de 2007 en Practical Latin American Tax Strategies, Volume 10, Number 9. Co-escrito con Matías Olivero y Pedro Saavedra.
Foreign investments in Argentina are being made in recent years via Spanish holding companies under the ETVE (Entidades de Tenencia de Valores Extranjeros) regime, due in large part to the favorable tax treaty in effect between Spain and Argentina and the benefits derived from exemptions from Spanish taxes on dividends and capital gains. This article examines the tax effects on the Argentine company and on the Spanish entity.
From an Argentinean perspective
From the perspective of Argentinean legislation, the following tax implications should be highlighted:
• Argentinean companies are subject to income tax (Impuesto a las Ganacias, IG) on the total net earnings obtained in Argentina and abroad, at the rate of 35%.
• It should be borne in mind that the distribution of dividends by Argentinean companies, as a general rule, would not be subject to IG in Argentina. An exception could arise where the dividends distributed exceed the company’s taxable income accumulated at the close of the fiscal year immediately preceding the distribution. In that case, a withholding (Impuesto de Igualación) could apply, at the rate of 35% on the amount of distributed dividends exceeding taxable income which, pursuant to the Spain-Argentina Tax Treaty, is limited to:
i) 10% of gross dividends if the beneficial owner is a company (excluding partnerships) that directly holds at least 25% of the capital of the company paying the dividends; or
ii) 15% of gross dividends in the rest of cases.
If the Spain-Argentina Tax Treaty applies, it would be necessary to apply the lower of either 35% of “net dividends” (pursuant to Argentinean legislation), or 10% / 15%, whichever corresponds, of “gross dividends” (pursuant to the tax treaty).
• The holding of shares of Argentinean entities by foreign companies is subject to an annual tax on personal assets (Impuesto sobre los Bienes Personales). The tax due is determined by applying the rate of 0.5% to the proportional net worth value of the stake at December 31 of the fiscal year in which it is liquidated. The Argentinean entity in which the foreign taxpayer holds a stake is directly liable for payment of the tax, although the company is subsequently entitled to reimbursement of the tax paid on behalf of the shareholders. Under the Spain-Argentina Tax Treaty, this tax is not applicable to Spanish shareholders.
• Capital gains derived from purchase and sale transactions or from exchanges, swaps or disposals of shares of Argentinean companies by foreign companies or individuals are exempt from IG. However, the sale of shares by off-shore companies could be subject to IG (it would be subject to a withholding of 17.5%, which can be reduced to 10% or 15% under the tax treaty, according to the shareholding percentage in the local entity). The exemption does not apply to the income obtained on the sale or transfer of shares in limited liability companies (Sociedades de Responsabilidad Limitada).
• The interest obtained by the Spanish company on any loans granted to the Argentinean subsidiary would be subject to IG withholdings of 35% on the interest received, unless:
i) The lender is a bank or finance entity domiciled in a jurisdiction that is not considered to have null or low taxation, or the financing transaction is deemed an importation of depreciable movable property, in which case the rate applicable is 15.05%;
ii) The beneficial owner of the interest is a Spanish taxpayer, in which case the withholding rate is reduced to 12% (pursuant to the tax treaty and the most favored nation clause); and
iii) If, apart from what is stated in the preceding paragraph, the interest is paid in relation to the sale of industrial, commercial or scientific equipment, such interest would be exempt from IG in Argentina (under the tax treaty).
• The royalties obtained by the Spanish company from the Argentinean subsidiary would be subject to IG withholdings in Argentina as follows:
i) With respect to the payment of fees for technical assistance, engineering or consulting services that could not be obtained within the country, provided that the relevant contracts are duly registered with the Industrial Property Institute and fulfill all the requirements established by the Technology Transfer Law, the withholding rate applicable would be 21%. Under the Spain-Argentina Tax Treaty, this rate would be reduced to 10% or 15%, depending on the concepts for which the payments are made.
ii) Regarding fees paid for services derived from the assignment of rights or licenses for the use of patented inventions, provided that the relevant contracts are duly registered with the Industrial Property Institute and fulfill all the requirements established by the Technology Transfer Law, the withholding rate applicable would be 28%. Under the tax treaty, this rate would be reduced to 10%.
iii) If the services provided do not meet the requirements mentioned in the preceding paragraph, the withholding rate applicable would be 31.5%.
From a Spanish perspective
From the perspective of Spanish legislation, the following tax implications for the Spanish company should be highlighted:
• The Spanish company would be subject to tax on the income obtained at the standard rate of 32.5% (which will be reduced to 30% for tax years commencing as of January 1, 2008) – we are assuming that the general tax regime will apply.
• Notwithstanding the foregoing, the dividends obtained for its investments in Argentinean companies could be exempt from Spanish tax if they meet certain requirements, the most notable being:
i) That the Spanish entity holds at least 5% (directly or indirectly) of the capital stock or equity of the Argentinean entity. In the case of lower direct stakes, the 5% requirement could be deemed as fulfilled if their acquisition value exceeds €6 million and the Spanish company applies the regime established for foreign-securities holding companies (Entidades de Tenencia de Valores Extranjeros, ETVE).
Said stake must be held uninterruptedly for one year prior to the date on which the dividend to be distributed is due and payable (this term could be completed subsequently).
ii) That the Argentinean entity has been subject to a tax that is identical or similar in nature to Spanish corporate income tax.
In accordance with Spanish legislation, this requirement is deemed to be met in the case of participated entities resident in Argentina, since the tax treaty to avoid double international taxation entered into by Spain and Argentina contains an information exchange clause, provided this tax treaty is applicable.
iii) That the revenue distributed derives from the performance of business activities outside of Spain.
Spanish legislation contains specific rules for determining the fulfillment of this requirement, which must be verified on a case-by-case basis, depending on the circumstances of each specific investment and the type of business involved. Nonetheless, the aim of the legislation is to exclude from the scope of the exemption certain investments that could be classified as “passive”.
In the event that the requirements for applying the exemption are not met, Spanish domestic legislation establishes other measures that might apply for mitigating or avoiding potential double taxation (tax credit).
• Said exemption, under similar requirements, could also apply to capital gains arising for the Spanish entity on the sale of the stake in (or the dissolution of) the Argentinean entity (unless the transfer is made to an entity resident in a territory classified as a tax haven). The requirements set forth in sections ii) and iii) above must be met in each and every fiscal year of holding of the stake in the Argentinean entity.
• Spanish legislation does not establish any tax benefit for interest obtained by the Spanish company on loans granted to its Argentinean subsidiary and, thus, it would be subject to tax at the standard rate mentioned previously (32.5% or 30%).
Moreover, there are no specific limitations (other than, if it is the case, the rules regarding thin capitalization – only applicable under certain conditions to borrowings from non-EU resident related parties – and arm’s length valuation of loans between related entities) on the deductibility of the interest paid by the Spanish company on the acquisition of the stake in the Argentinean entity. However, the Spanish tax authorities are questioning the deductibility of the interest borne by the Spanish company in certain intragroup transactions.
• The portfolio provision recorded to cover the decline in the value of the stake in the Argentinean entity would, in principle, be deductible if certain requirements are met. However, the fact of having previously applied the exemption for dividends distributed by the Argentinean subsidiary could limit such deductibility.
• Lastly, the contribution of equity to the Spanish entity would, in principle, be taxed at the rate of 1% (it could be avoided by means of certain contributions or share exchanges, as the case may be).
With respect to the foreign investor, the following tax implications in Spain should be borne in mind (for purposes of this article, we will assume that the investor does not have a presence in Spain and is not resident in a territory that could be classified as a tax haven):
• The dividends received would in principle be subject to tax (withholding) in Spain at a rate of 18%. Nonetheless, they could be non-subject to tax in Spain if (i) the Spanish company distributing the dividend is an ETVE and the dividend derives from foreign-source income that would be exempt in Spain pursuant to the comments made above, or (ii) the Parent-Subsidiary Directive applies. Alternatively, a reduced tax (withholding) rate could apply to the dividends or they might even be exempt depending on the provisions of the tax treaty that might be applicable.
• The capital gains arising on the transfer of the stake in the Spanish entity would, in principle, be subject to tax in Spain at a rate of 18%, unless:
i) The Spanish company is an ETVE and the capital gain corresponds to reserves recorded out of the mentioned exempt foreign-source income or with value differences allocable to the holdings in non-resident entities that meet the above-mentioned requirements for the foreign-source income exemption; or
ii) If the investor is an EU resident, the assets of the Spanish company do not mainly, directly or indirectly, consist of real estate located in Spain, and the percentage of the Spanish company’s capital stock or equity held was less than 25% in the 12 months preceding the transfer.
Alternatively, a reduced tax rate, or even an exemption, could apply to the capital gain depending on the tax treaty applicable.
Interest received by the non-Spanish resident investor from the Spanish entity would be subject to tax (withholding) at a rate of 18%, unless the lender is resident in the EU. Alternatively, a reduced tax (withholding) rate, or even an exemption, could apply to the interest depending on the tax treaty applicable.
The application of the ETVE regime to the Spanish entity requires the fulfillment of certain formalities (i.e. (i) the company’s corporate purpose must include the management and administration of securities representing the equity of non-Spanish resident entities, (ii) the shares or participations must be registered (nominativas), (iii) the Spanish tax authorities must be notified of application of the regime) and the Spanish company must have the corresponding organization of material and human resources (substance requirement) to carry out the management and administration of foreign securities. Notwithstanding the above, there is no specific limitation on forming an ETVE based on the residence or nationality of the shareholders; in this respect, the ETVE could be an entity owned entirely by one or more persons or entities resident abroad (in the EU or otherwise), but if they are resident in a territory classed as a tax haven, they will not qualify for certain exemptions or benefits established in Spanish legislation, such as the non-taxation in Spain of dividends or gains on the sale of the holding in the Spanish company.
Furthermore, the ETVE regime cannot be applied by, among others, mere securities or real estate holding companies (passive investments) or by entities that are listed on any of the official secondary securities markets set forth in Securities Market Law 24/1988, of July 28, 1988.
In summary, investing in Argentine entities through a Spanish company provides a number of advantages. From an Argentine standpoint, it makes it possible to avoid the tax on personal assets arising from the shareholding (which is only provided for in the treaties signed by Argentina with Spain, Chile and Switzerland) and to obtain more beneficial tax treatment for payments of dividends (to the extent that they exceed taxable income), interest and royalties. And from a Spanish standpoint, it makes it possible to channel investments without any tax cost arising from dividends or gains, with the possibility of deducting the financial burden which, on an arm’s-length basis, and in general for non-intragroup transactions, arises from the investment.