On January 1, 2020, Argentina will put in place a sweeping new tax regime – Law No. 27,506, the Promotion Regime – that aims to advance the Knowledge-based Economy. The new tax regime's main objective is to promote digital, information and communication technologies and the highly skilled human capital that creates and advances those technologies. With its broad reach, the new law seeks to put Argentina at the forefront of the knowledge economy in Latin America.
As noted above, Promotion Regime will come into force on January 1, 2020. On October 16, 2019, through the publication of Decree No. 708/2019, the National Executive Power finally regulated the Promotional Regime.
The most important aspects of the Promotion Regime are detailed below.
I. Covered activities
The Regime for the Promotion of the Knowledge-based Economy has as its objective the creation, design, development, production and implementation or adaptation of products and services and their corresponding technical documentation (both in its basic and applied aspects and including those developed to be integrated into processors and/or other technological devices), that promote the following items:
a) Software, and digital and information services
b) Audiovisual production and post-production, including in digital format
c) Biotechnology, bioeconomy, biology, biochemistry, microbiology, bioinformatics, molecular biology, neurotechnology and genetic engineering, geoengineering, products and services, including their tests and analysis
d) Geological and prospecting services, and services related to electronics and communications
e) Professional services, but only to the extent that they are exported
f) Nanotechnology and nanoscience
g) Aerospace and satellite industry, space technologies
h) Engineering for the nuclear industry
i) Manufacturing, tuning, maintenance and introduction of goods and services oriented to automation solutions for production, including feedback cycles from physical to digital processes and vice versa, being at all times exclusively characterized by the use of 4.0 industry technologies, such as artificial intelligence, robotics and industrial Internet, the Internet of Things, sensors, additive manufacturing, increased and virtual reality.
Engineering activities, exact and natural sciences, agricultural sciences and medical sciences related to research and experimental development tasks are also included in the Promotional Regime.
II. Covered subjects and requirements
Companies that are incorporated in the Argentine Republic (are qualified to act within the Argentine territory) which develop in the country their own account and as their main activity any of the activities mentioned in section I (above), are entitled to apply to the Knowledge-based Economy regime. For that purpose, the relevant companies must register with the National Registry of Beneficiaries of the Promotion Regime of the Knowledge-based Economy and meet at least two of the following requirements:
a) Accredit the realization of continuous improvements in the quality of their services, products and/or processes, or through a recognized quality standard applicable to their services, products and/or processes
b) Accredit indistinctly and/or jointly, the carrying out of expenditures in activities of:
i. Research and development in the activities of section II at a minimum of 3 percent of the total revenue and/o
ii. Training of employees for the activities of section II at a minimum of 8 percent of the total employment costs
c) Accredit the realization of exports of goods and/or services arising from the development of any of the promoted activities of at least 13 percent of the total revenue corresponding to those activities. When the activity promoted relate to the activities contemplated in subsection e) of section 2 (professional services), at least 70 percent of the total revenue from the realization of exports exclusively from said activity is required
In the case that the latter was developed by companies considered micro or small, (under the terms of section 2 of Law No. 24,467 and its amendments), said percentage is reduced to 45 percent for the first five fiscal years counted as from the effective date of the law
With respect to the main activity requirement, Decree No. 708/2019 establishes in its Annex that:
"The requirement of main activity is considered fulfilled when at least 70 percent of the annual revenue of the legal entity is generated through one of the activities included in section 2 of Law No. 27,506, or through the sum of two or more of them. When the sum or all of the activities to achieve the main activity include the professional services provided for in subsection e) of section 2 of the aforementioned Law, those services may only be computed provided that 70 percent of the total billing, or 45 percent of the total billing if it is a micro or small business, corresponds to the export of 'professional services' provided abroad, i.e., those carried out in the country in exchange for consideration and without a labor relationship, whose effective use or exploitation is carried out abroad, being understood as such for immediate use or the first act of disposal by the party paying for the services."
Regarding research and development expenses, the Regulations establish that:
"the requirement of disbursements will be considered fulfilled according to the following detail:
i) research and development activities: when the expenses actually incurred for this purpose represent at least three percent of the total revenue of the period, of the legal entity, in the terms established by the application authority, which will also determine activities that cannot be considered as research and development for the fulfillment of this requirement. The activities may be fully executed by the beneficiaries themselves, or through public organizations, universities or Public Institutes of Science and Technology
ii) training of employees destined to the activities of section 2 of Law No. 27,506: when the expenses incurred for this concept represent at least an eight percent of the gross salary in the terms and deadlines determined by the Application Authority. For the purposes of calculating the gross salary mass, special labor regimes such as those regulated by Chapters II, III and IV of Title III of the Labor Contract Law No. 20,744, t.o. 1976 and its modifications, by Law Nr. 22,250 and its amendments, the modalities of temporary work provided for in Law Nr. 26,727 and its modification, the solidarity line provided for in the Collective Bargaining Agreement Nr. 62/75 and not permanent personnel of hotels foreseen in the Collective Work Agreement Nr. 362/03."
With regard to the realization of exports, the Regulation establishes that:
"the export requirement will be understood to have been fulfilled, in the terms of subsection c) of section 4 of Law Nr. 27,506, when sales made abroad by the beneficiary for exports of goods and/or services developed within the framework of any of the activities provided for in section 2 of the aforementioned Law represents at least 13 percent of the total revenue of the period in these activities..."
Taxpayers who wish to benefit from the Promotional Regime must register with the National Registry of Beneficiaries of the Regime of Promotion of the Knowledge-based Economy, must comply with the conditions described for not less than six months prior to the application for registration in the Registry.
III. Promotional benefits
A) Fiscal stability. The beneficiaries of the Regime for the Promotion of the Knowledge-based Economy shall enjoy the benefits of the Regime, from the date of their registration with the National Registry of Beneficiaries of the Regime for the Promotion of the Knowledge-based Economy, and for the term of their registration. This means that the taxpayers will not have their total tax burden increased at the time of their application to join the National Registry of Beneficiaries of the Regime for the Promotion of the Knowledge Economy. These benefits reach all national taxes and provincial and municipal taxes of the provinces that adhere to the Regime.
B) Social security contributions. The beneficiaries of this regime will also enjoy, for each of their workers under a formal, duly registered labor relationship, a deduction equivalent to the maximum amount provided for in section 4 of Decree No. 814, dated June 20, 2001 (as amended and updated).
C) Additional incentive. Additionally, beneficiaries may obtain a one-time transferable tax credit voucher, equivalent to 1.6 times the amount of the social security contributions that would have been paid on the amount established in the previous section, which must be applied to, as advances and/or sworn statement balances of income tax and value added tax.
D) Income tax. The beneficiaries of this Regime for the Promotion of the Knowledge Economy will be faxed at the reduced rate of 15 percent, to the extent that they maintain their payroll in the terms and conditions established by the Regulation (versus, for example the general income tax rate will be 25 percent as of FY 2020).
The Regulation establishes that there is a reduction in the level of employment when there is a difference greater than 10 percent in relation to the average of workers of the last six months declared at the time of the application for registration in the Registry.
Not taken into consideration for this purpose are the following: reduction of personnel who are in their probationary period; terminations of the labor relationship by mutual consent; and the conclusion of a project, among other cases.
E) Withholdings and perceptions. The beneficiaries of this regime will not be subject to withholding tax or value added tax.
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.