Global Tax Alert (News from Americas Tax Center) | 29 August 2013

Argentine tax reform submitted to Congress - Significant changes to taxation of dividends and capital gains

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On 27 August 2013, the Argentine Executive Power submitted a tax reform bill to Congress proposing significant changes to the income tax law regarding the taxation of dividends and capital gains. This Alert describes the main characteristics of the bill.

Capital gains

Foreign beneficiaries

Currently, foreign parties (non-Argentine residents) are exempt from income tax on income deriving from the sale of shares, titles, bonds and other securities (by means of Decree Nº 2,284, originally enacted in 1991). The tax reform bill would eliminate this exemption, applying a 15% income tax to net gain derived from such transactions.

For foreign beneficiaries the net gain would be presumed to be 50% of the gross sale price, which would mean an effective taxation of 7.5% of the gross sale price (15% new capital gain rate x 50% presumed net income). Alternatively, the bill would maintain the possibility of calculating the net income by deducting from the sale price the actual costs allowed under Argentine regulations (the way in which this would work in practice remains unclear).

Individuals

Currently, Argentine individuals are generally not subject to income tax on the sale of shares, titles, bonds and other securities. The reform would incorporate the sale of such instruments within the scope of the tax (even for taxpayers not habitually engaged in these kinds of transactions), applying a 15% income tax on the net gain derived from such sales. Note that other income is generally subject to the individual income tax rate at a scale ranging from 9% to 35% (after some deductions and allowances); however, this type of income would be separately subject to a 15% capital gain tax under the reform bill.

In the case of Argentine individuals, an exemption would be established for income arising from the sale of shares, titles, bonds or other securities which are publicly traded in stock exchange markets.

Dividends

Argentine corporate taxpayers are subject to a 35% income tax on net taxable income. Dividends paid up to the amount of accumulated taxable income are not subject to dividend withholding tax. Any dividend payment exceeding the accumulated taxable income calculated in accordance with the income tax rules (plus certain adjustments) is currently subject to a 35% withholding tax, known as “equalization tax.”

The reform bill would impose a 10% dividend withholding tax. This tax would be imposed in addition to the potential application of the 35% equalization tax in cases where dividend distributions exceed the amount of the taxable income at the corporate level.

Implications

According to the text of the bill, the reform would apply to taxable events occurring after the entry into force of the law. The tax reform bill needs to be approved by both Chambers of Congress, then promulgated by the President and finally published in the Official Gazette.

Several clarifications and regulations should be expected, through changes to the income tax regulatory decree or new resolutions by the tax authorities. Topics, among other matters which may require further regulations, include the collection mechanism applicable for foreign beneficiaries to pay the capital gain tax, the way in which the tax cost basis will be calculated and guidance in relation to the application of dividend withholding.

Finally, it is important to point out that this reform was introduced in the context of the government decision to increase personal tax deductions for individuals (especially employees) in order to lower their personal income tax burden (this action was already taken by means of Decree 1242/2013, published on 28 August 2013). The described changes on the capital gains tax treatment and the new dividend withholding tax are aimed at partially offsetting the decrease in tax revenues derived from the reduction of individual income taxes.

For additional information with respect to this Alert, please contact the following:

Pistrelli, Henry Martin & Asociados S.R.L., Buenos Aires
  • Carlos Casanovas
    +54 11 4318 1737
    carlos.casanovas@ar.ey.com
  • Gustavo Scravaglieri
    +54 11 4510 2224
    gustavo.scravaglieri@ar.ey.com
  • Ariel Becher
    +54 11 4318 1686
    ariel.becher@ar.ey.com
  • Pablo Baroffio
    +54 11 4510 2271
    pablo.baroffio@ar.ey.com
Ernst & Young LLP, Latin American Business Center, New York
  • Alfredo Alvarez
    +1 212 773 5936
    alfredo.alvarez@ey.com
  • Pablo Wejcman
    +1 212 773 5129
    pablo.wejcman@ey.com

EYG no. CM3777