Argentina: Corporate Governance - Net Worth Of Branches Must Be Maintained Positive

Last Updated: 14 August 2007
Article by Eugenia Botta

Under the Argentine Companies Law (the "ACL"), branches of foreign companies are deemed as not independent entities, being the parent company fully and unlimitedly responsible for all debts, losses and liabilities of its branch. Also, neither the loss of capital nor the capital contribution regimes are applicable to branches, since the latter cannot have a corporate capital of their own, as local companies do.

Even though it is not mandatory for foreign companies to assign capital to its branches, unless a special law requires so (e.g. financial entities, insurance companies), it is usual for parent companies to allocate capital to its Argentine branches to provide them with funds to operate and carry out its business in Argentina. Most importantly, to avoid the 30% withdrawal applied by the Central Bank to funds remitted from abroad1.

Until mid-2005, branches enjoyed of a relative freedom to receive funds from abroad. Capital allocations to branches were regulated by a very general provision2, the corresponding proceedings before the Companies Regulatory Agency ("IGJ") were easy to register, and no specific administrative rules were applicable for capital allocations made to branches.

Then, as part of a general policy aiming to control the movement of funds and the activity of the foreign companies funneling investments into Argentina, the IGJ started to show symptoms of change.

First, on August 2005 the IGJ issued General Resolution No 07/2005, where all the former IGJ resolutions were complied, with amendments, new rules and updates. Among the new rules adopted by General Resolution No 07/2005, the IGJ required to foreign parent companies to give evidence of the full payment of the capital allocations made to their branches: all the funds assigned to the branch shall be transferred to its bank account in Argentina, not being possible to send the funds partially3.

Afterwards, on October 4, 2006, the IGJ denied the registration of a capital allocation carried out by a parent company in favor of its Argentine branch, sustaining that parent companies must commit themselves to hold assets in Argentina for an equal or higher value than the sum of the allocated capital to its branch. The last financial statements of such branch showed a negative net worth; thus, the requirement established by the IGJ was not accomplished4. This decision gave rise to a concrete change of criterion by the IGJ regarding capital allocations in branches and a clear message to their parent companies: the IGJ effectively supervises the net worth of the branches, meaning that in case of capital allocations it is compulsory to show profits on the financial statements.

No positive law having ever stating material requirements for capital allocations to branches, on October 26, 2006 the IGJ issued General Resolution No 11/2006 (the "Resolution"), which regulates the formalities with regard to capital allocations to branches.

Mainly, the Resolution empowers the IGJ to control the maintenance of positive net worth on the ground that it represents a guarantee vis à vis local creditors and third parties.

Further, in case the branch’s net worth is negative or less than the allocated capital, branches must: (i) recompose the net worth or the allocated capital; (ii) reduce or withdraw the capital contribution; or (iii) wind up and cancel the branch’s registration before the IGJ.

Moreover, no capital allocations or increases thereof will be registered if the branch has accumulated losses which have not been previously absorbed.

In comparing branches’ regime with local companies’ regime, the Resolution came to fill a hole; until its issuance, no objective parameters existed, as they always have regarding local companies. In this regard, the ACL establishes that in case the balance resulting from the Statement of Income and Retained Earnings is negative, a corporation may be subject to: (i) mandatory capital reduction, when its accumulated losses exceed all the reserves and 50% of the corporate capital5; or (ii) mandatory dissolution because of corporate capital loss, when the accumulated losses exceed all the reserves and all the corporate capital6.

Foreign investors may consider worth taking into account the recent changes in the corporate legal framework to branches when deciding which corporate structure will be applied to conduct business in Argentina.

Footnotes

1. The foreign exchange regime imposes a 30% mandatory deposit applicable to funds received from abroad by all local companies, regardless of their corporate type (i.e., branch, S.A.), except that those funds are direct investments. Branches may only evidence that such funds are direct investments by registering the funds as capital allocation with the IGJ.

2. Section 26 of Decree No 1493/1982 established, with regard to capital variations, that the requirements for local companies are applicable to branches.

3. Section 187 of the Argentine Companies Law establishes that the amounts allocated to increase the corporate capital of corporations must be integrated in, at least, a 25%. Within 2 years as from the shareholders’ decision to capitalize such amounts, the rest of the monies must be integrated.

4. In re: "Lexmark International de Argentina Inc.", IGJ Resolution No 961/2006.

5. Pursuant to Section 206 of the Argentine Companies Law.

6. Pursuant to Section 94, par. 5 of the Argentine Companies Law.

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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