Argentina: Securitization of Consumer Loans

Last Updated: 24 October 2011

Article by G. Gotlib, M. Skiadaressis and J. Tobias*

This article provides an overview of securitization in Argentina, and considers the tax treatment thereof.

1. Securitization Overview

Driven by strong economic growth and a resurgence in consumer credit, consumer loans, personal loans and credit cards, the past five years have seen a solid growth in the securitization of consumer loans. Banks, home appliance retail chains and consumer finance companies have used this mechanism for years, hence the prediction that these types of securitizations are to remain as the base of the market. This assumes the expectation that banks will continue focusing on retail lending.

Numerous factors have encouraged the use of this technique, including:

(1) the current rate of inflation (approximately 25%), which in turn has fuelled a strong consumer demand because there is no incentive in saving in the local market,

(2) the unattractive interest rates of term deposits, which leads investors to seek better investment opportunities,

(3) the absence of investment opportunities with similar rates of return to those obtained through securities issued by a trust (between 13% and 16%),

(4) the absence of a long-term credit market due to the high cost of funding, which has led banks and companies to focus on consumer financing (deposits are usually short term, and mortgage loans are long term),

(5) the possibility for banks and retail chain companies to transform illiquid assets into liquid assets, while at the same time obtaining balance sheet relief,

(6) the possibility of transferring the collections risk from the originator of the credits to the investors,

(7) tax advantages that have been in place for years,

(8) an improvement in the mechanisms for monitoring collections and

(9) cheaper funding costs.

Furthermore, although there was a relative decrease in capital market transactions in 2008 due to the elimination of private pension plans, a new player, the Argentine social security agency (Administración Nacional de Seguridad Social, ANSES) has emerged as a large investor adopting securitizations in order to fuel the economy.

2. Legal Framework

2.1. Securitization

"Securitization" can be defined as a financial transaction in which assets are pooled and securities representing interests in the pool are issued. In this way, illiquid assets are transformed into liquid assets. For example, a company that grants consumer loans aims to raise money in order to grant more loans. It can sell its existing loans, but it is unlikely to find a strong and liquid secondary market to sell such loans. A good alternative in this scenario would be to pool the consumer loans and sell securities or interests in the pool to investors, which, in turn, may find this investment more attractive than others. The debtors of the consumer loans will continue paying their debts, but such cash will flow to the investors (once expenses are paid).

In general, any class of assets with a relatively predictable cash flow can be securitized. The most common assets include auto and consumer loans, credit cards, mortgages, corporate debt and future revenues, and lease payments. However, in Argentina certain requirements are imposed in order to obtain beneficial tax treatment. For example, the assets must consist of credit instruments and must be homogenous (see 3.).

2.2. The Trust Law

2.2.1. Trusts in general

On 9January 1995, Law 24,441 (the Trust Law) introduced the trust concept in Argentina. Under this principle, a trust will be created upon the transfer by one person (settlor) of trust ownership over certain assets to another person (trustee), who undertakes to exercise it for the benefit of whomever is appointed in the relevant agreement (beneficiary) and to transfer the same, upon the expiration of a term or upon fulfilment of a certain condition, to the settlor, beneficiary or trustee. Upon the proper creation of the trust (including certain formalities), and without limitation, the registration of transfers in the relevant registries (if so required) of the ownership of the assigned assets by the trustee or notifications to the assigned debtor, as the case may be, the trustee will become the owner of the assets vis-à-vis third parties. If such requirements are not met, the trust's assets will be vulnerable to possible claims of creditors of the settlor.

Moreover, provided that the transfer of ownership does not constitute a fraudulent conveyance, the trust property forms an estate separate from that of the settlor or the trustee. In this respect, the trust property will be held free from any individual or collective action by the trustee's creditors, and will also be held harmless from action by the trustee's creditors, except where such action arises from wilful misconduct or fraud. The beneficiary's creditors may exercise their rights over the proceeds of the trust property, and subrogate in the beneficiary's rights.

The Trust Law provides certain requirements that should be included in the trust agreement. Among others, the trust agreement must specify:

  • the assets assigned in trust;
  • the manner in which other property may become part of the trust;
  • the duration or condition for fiduciary ownership, which term of duration may never exceed 30 years as of the date it was created;
  • the rights and duties of the trustee, and the manner in which the trustee will be replaced in the event of termination of the trustee's tenure; and
  • the possibility of appointing a manager for administering the assets.

2.2.2. The trustee

Any individual or entity may be appointed as trustee of an ordinary trust. However, only Argentine financial institutions and other entities authorized by the Argentine Securities Commission (Comisión Nacional de Valores, CNV) may serve as financial trustees. The trustee must comply with certain obligations imposed by the Trust Law, such as the obligation to reportat least once a year and to abstain from acquiring the trust assets. In addition, the Trust Law establishes a standard of conduct for the performance of the trustee, such that trustees must act with the care and prudence of a sound businessman and with the confidence with which the trustee has been entrusted. The trustee has a legal duty to manage the trust's assets in the best interests of the beneficiaries. Generally, trustees delegate certain managing functions to administer the trust on behalf of the beneficiaries according to the express terms and provisions of the trust agreement.

The trustee is entitled to receive certain fees for its services and to be reimbursed for the expenses related to the trust.

2.2.3. The beneficiaries

The trust agreement must identify the beneficiary, who may be an individual or an entity, and may or may not exist at the time the agreement is executed. If the beneficiary does not exist, information must be provided to identify the beneficiary in the future. Should no beneficiary accept the trust, all of them waive or not come to exist, and no substitute be found, then the beneficiary will be the settlor.

2.2.4. The assets

As mentioned above, any asset producing a regular flow of income can be securitized. There are no limitations on the type of assets that may be securitized, provided, however, that (1) rights of a personal nature or that require someone to perform in person (intuitae personae) may not be transferred and (2) the underlying contract prohibits its assignment.

2.2.5. Financial trusts

In general, securitization is carried out through financial trusts. The Trust Law ensures that the trustee may issue debt securities and/or certificates of participation backed with the trust assets. Such securities may be issued in different tranches which may grant different rights to the investors (beneficiaries). The debt securities may also be issued by third parties. In addition, the debt securities and certificates of participation may be offered to the public after obtaining the approval of the CNV.

Financial trusts are required to prepare financial statements on a quarterly basis which must (yes is mandatory) be audited by an independent public accountant and prepared in accordance with generally accepted Argentine accounting principles.

2.2.6. Public offering of trust securities

In order to publicly offer trust securities, an application to the CNV requesting authorization for a public offering of securities must be filed. Such filing is to include a draft of the prospectus (describing the assets, the settlor, the business, the securities, the trustee), a draft of the trust agreement and related documents (e.g. custody agreement, paying agency agreement, administration agreement, placement agreement), copies of the trustee's corporate authorization for the creation of the trust and the issue of securities.

After the Bonesi and Saturno cases, CNV General Resolution 555 was issued on 12 March 2009. This General Resolution increased the requirements for publicly offering securities. It strengthened the information requirements in order to obtain the authorization from the CNV to offer securities, it increased the liability of the trustee (as organizer or expert and responsible for the custody of the instruments and sale of the trust property), it required the appointment in advance of a substitute collection agency and imposed the obligation to specify a procedure for its substitution in the trust agreement, it regulated the obligation to render accounts regarding collections (the trustee must have a special computer system to control collections), and it imposes the obligation to supervise any delegated act and to render account of such act to any interested third party.

3. Tax Framework

3.1. General considerations

For many years the most attractive reason for the use of a financial trust as a vehicle for consumer loans, was the benefit arising under the income tax regime. The income tax regime applicable to financial trusts was first established under Decree 780/95, which regulates Trust Law 24,441, and then under Decree 254/99, which amended the Income Tax Law Regulatory Decree.

This original regulation provided that subject to the fulfilment of certain requirements, for purposes of determining such net income, the trustee was allowed to deduct all sums distributed or to be distributed as earnings of the trust among the holders of the securities. However, Decree 1207/2008 restricted this deduction only in the case of financial trusts related to infrastructure works for rendering public services.

Despite current regulation, the general use of financial trust structures in the securitization of consumer loans has increased over the past five years. The main reason for this increase is that such structure still works out as long as it maintains a high level of debt.

3.2. Taxation of the trust

3.2.1. Income tax

Financial trusts are subject to Argentine income tax on the net income derived from the trust's activities. Those who act as trustees under the Trust Law must pay, as administrators of another person's assets, 35% of any net income obtained, in general, as sole and final payment of the income tax accrued in connection with the trust assets.

Financial trusts are taxed similarly to companies. The deduction of interest payments is generally allowed for Argentine companies. Sec. 121.1 of the Income Tax Implementing Decree excludes financial trusts from thin capitalization rules that restrict the deduction of interest payments. As trusts are normally highly leveraged, the effective tax is considerably reduced.

3.2.2. Tax on debits and credits to bank accounts

In Argentina, there is a tax on debits and credits to bank accounts. This tax applies to all credits and debits on accounts at Argentine financial entities at a rate of 0.6% (34% of the tax paid for the credit in the bank account is a tax credit against income tax or tax on presumed minimum income).

However, the bank accounts of financial trustees that are used exclusively in connection with their respective trust activities are exempted if the trust meets the following requirements:

(1) the trust is a financial trust;

(2) the trust is created for the sole purpose of securitizing assets;

(3) such assets are homogeneous and consist of government or private securities or of credits derived from financing operations evidenced by public or private instruments, being their classification as such and value required to be verified by the supervisory agencies in accordance with regulations in force;

(4) the creation of the trust and the public offering of the relevant participation certificates or debt securities have complied with the regulations of the CNV;

(5) except as set forth in the Trust Implementing Decrees, the trust assets are not replaced by other assets upon settlement or cancellation thereof;

(6) the aggregate trust gross income consists of the income generated by the trust assets and the proceeds from the realization thereof; and

(7) as regards credit instruments, their term of duration for the trust relates to that of final settlement of the trust assets.

3.2.3. Value added tax

The Trust Law provides for a rule applicable to any assignment of credits to a trust (Sec. 84). When the assigned assets consist of credits, the transfers in favour of the trust will not be regarded as levied loans or financial placements. For this reason, they would be exempt from VAT.

3.3. Taxation of the securities

3.3.1. Income tax

Interest payment. Under the Trust Law, interest received by a foreign resident on debt securities issued by a financial trustee are exempt from any income tax withholding as long as the trust is set up with the purpose of securitizing assets and the securities are placed through a public offering. The purchase and sale of the securities is exempt of income tax for non-residents. These exemptions are not applicable to Argentine entities.

Income under certificate of participation. In general, distributions under certificates of participation are treated as dividends. Distributions of dividends are subject to equalization tax if such income was not subject to corporate income tax. Income distributions made by financial trusts will not be subject to equalization tax to the extent that their certificates of participation are placed through a public offering which has been authorized by the CNV.

3.3.2. Value added tax

Interest payments on securities, as well as financial transactions and obligations related to the issuance, subscription, placing, transfer, amortization and cancellation of securities, are exempt from VAT so long as the trust relating to such securities is set up with the purpose of the securitization of assets and placed by means of a public offering pursuant to Sec. 83(b) of the Trust Law.

* Marval O'Farrell & Mairal, City of Buenos Aires, Argentina.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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