1. General overview
In December 2001 and after over ten years of economic deregulation, the Central Bank of the Republic of Argentina (the "Central Bank") imposed very tight exchange controls. As from the end of the year 2002, the Central Bank has gradually loosened some restrictions until October 2011, when it started to strengthen the restrictions again as consequence of the global economic crisis and the depletion of its foreign exchange reserves. Currently, foreign exchange restrictions are not only imposed by the Central Bank but, in practice, also by the Argentine Tax Authority, through tax regulations. Foreign exchange and tax related regulations are very detailed and specific and are being modified very often. Notwithstanding the regulatory foreign exchange and tax, in addition, since October 2011, foreign exchange transactions have been generally subject to de-facto restrictions, preventing local financial entities or exchange houses from processing operations of their clients that would otherwise be authorized pursuant to regulations. Under this scenario, please note that the following is a general description and that is limited to the regulations currently in effect.
2. Foreign exchange restrictions
2.1. Supply and demand of foreign currency
Under the rules currently in force, Argentine exporters, service providers and loan borrowers have the obligation to transfer to Argentina foreign currency proceeds of such transactions with non-Argentine residents, or funds the disbursed abroad and to sell them in the Argentine exchange market. Through these obligations, the government is trying to ensure the supply of foreign currency in the foreign exchange market.
Besides, under the rules currently in force, Argentine residents are only allowed to buy foreign currency and to transfer it abroad if they are part of a cross-border transaction. The regulations contain a list of items regarded by the Central Bank as falling within the scope of cross-border transactions and establish specific requirements for each item. In general, cross-border transactions include transactions performed between Argentine and non-Argentine residents (e.g. import of goods or services, payment of dividends to foreign shareholders, etc.). Moreover, Argentine residents are rarely allowed to buy foreign currency to keep it outside Argentina or within the country with accumulation or saving purposes. Finally, non-Argentine residents are allowed to buy foreign currency in order to repatriate their investments subject to the prior compliance of a number of requirements. By this way, the government is intending to curtail the demand of foreign currency in the foreign exchange market.
The exchange rate in the foreign exchange market is determined for the supply and the demand of foreign exchange currency. This notwithstanding, the Central Bank not only intervenes in the market by establishing the obligation to sell the foreign currency and curtailing the ability to buy it, but also by selling and purchasing foreign currency by its own account.
Below follows a summary of the main requirements applicable to the inflows and outflows of foreign exchange market.
2.2. Inflows of funds through the Foreign Exchange Market
- Exports:Argentine exporters
are obliged to bring into Argentina and exchange for Argentine
pesos the export proceeds within certain time frame which varies
depending on the exported merchandise (in general between 30 and
365 days), since each tariff position in the nomenclature schedule
has a different term. An extension of the term can be requested by
the exporter and granted by the authorities in special cases.
In principle, the terms and their eventual extensions are only applicable to exports made as consequence of sales made between independent parties, since in the case of sales made between related companies exporters are obliged to bring and exchange the export proceeds in 30 business days.
Oil, gas and mining importers which have formerly been granted with partial or total exceptions are currently obliged to repatriate all their export proceeds.
- Services: Argentine residents that provide services to non-Argentine residents are also obliged to bring into Argentina and sell in the foreign exchange market the amount in foreign currency collected for consideration of the services.
- c)Financings:Argentine borrowers that receive loans or any other financial indebtedness from foreign lenders are required to bring into Argentina the funds received and sell them for Argentine pesos within 30 days. Moreover, financial loan with non-resident parties (including inter-company loans) should have a minimum tenor of 365 days as from the date the loan proceeds are transferred into Argentina. Finally, at the time the borrower transfers the proceeds of the loan into Argentina, unless subject to one of the applicable exceptions, a compulsory non-transferable US dollar-denominated deposit must ordinarily be made in an Argentine bank for at least 30% of the amount of such loan proceeds. This mandatory deposit will not earn interest, will have a minimum term of 365 days, and cannot be used as collateral for any transaction. Subject to the compliance of certain regulatory requirements, the following transactions are exempted from constituting mandatory deposit before referred: (i) foreign loans to finance Argentine imports and exports (foreign trade financing); (ii) loans to the Argentine residents and local entities (excluding banks and other financial entities) with an average duration of at least two years (calculating principal and interests payments) to the extent funds are used exclusively for investments in non-financial assets; (iii) loans granted by multilateral and sovereign credit agencies; iv) financing obtained to repay foreign financial debts, when the proceeds of the loan entered to Argentina are used simultaneously to repay such foreign debt; (v) financing obtained for investments in long term foreign assets, when the proceeds of the loan entered to Argentina are used simultaneously for such investment; and (vi) financing obtained for initial public offering of debt securities in local stock markets.
- Investments from non-Argentine residents: Argentine residents receiving direct investments from non-Argentine residents are, in principle, not obliged to transfer the foreign currency to Argentina, but should do so in order to ensure their ability to repatriate those investments to abroad. At the time that the investment is brought into Argentina, a compulsory non-transferable US dollar-denominated deposit must be in principle made in an Argentine bank for at least 30% of the amount of the investment proceeds. This mandatory deposit has the same characteristics of the one described in the paragraph above, and its aim is to discourage of short time investments. Foreign investment can be classified as "direct investments" or "portfolio investments". Direct investments comprises real estate investments and participations in local companies of at least 10% of the ordinary shares or voting rights, while portfolio investments are participations below this cap, debt securities of Argentine issuers, holdings in Argentine pesos and deposits in Argentine banks. Direct investments are in general exempted from the compulsory deposit subject to the compliance of formal regulatory requirements (e.g. the company receiving a capital contribution must file its registration with the local office of corporations before executing the foreign exchange transaction and must prove the effective registration within a specific timeframe). Both direct investments and portfolio investments should exceed 365 days in order to be repatriated, unless a specific exception applies.
2.3. Outflows of funds through the Foreign Exchange Market
- Imports: Argentine residents may pay imports abroad through the Foreign Exchange Market subject to the compliance with formal requirements, which include the holding of the special authorization granted by the Argentine Tax Authorities that will be described in detail in chapter 3 below. At the time of clearing customs, importers are obliged to appoint a local bank which will be the entity in charge of controlling the payment of such import.
- Services: Argentine residents are allowed to purchase foreign currency and transfer it abroad for paying services rendered by non-Argentine residents subject to the compliance with formal requirements and provided that the suppliers are not related parties or companies located in low tax jurisdictions. In these last cases the prior approval of the Central Bank is needed unless the amount to be wired does not exceed US$100,000 per year, and said approval is rarely obtained. The formal requirements related to the payment of services to unrelated foreign parties not located in low tax jurisdictions consist in the submission before the bank intervening in the wiring of the funds of a legalized copy of the underlying contracts, a certification of the registration of the contracts in the applicable registries (e.g. transfer of technology registry) and an external auditor's report certifying the actual rendering of the service, the existence of the foreign debt and the reasonability of the price.
- Dividends:Argentine residents are allowed to remit profits and dividends to foreign equity holders when resulting from annual financial statements certified by external auditors. To the extent that profits or dividends are declared in annual financial statements certified by external auditor, Central Bank regulations do not differentiate between dividends paid as a result of retained earnings of previous fiscal years or from the net income of the last fiscal year approved.
- Financial debt: Argentine residents are allowed to make payments of financings granted from abroad subject to the compliance of the requirements referred in 2.2.c. above.
- Repatriation: Non-Argentine residents are allowed to repatriate investments (either by the sale of the shares of the investment vehicle, sale of the property located in Argentina, liquidation or capital reduction of the local investment vehicle) made in Argentina subject to the compliance of the requirements referred in 2.2.d. above. Further to such requirements, portfolio investments are also subject to a monthly cap of US$500,000 and are required not to be located in a low tax jurisdiction. When the case does not comply with these requirements, the repatriation is subject to the prior authorization of the Central Bank, which is rarely granted
- Investments from Argentine residents: Argentine residents, including individuals and legal entities incorporated or registered in Argentina, are currently prevented from buying foreign currency in order to make direct or portfolio investments abroad and also to keep in the country for saving purposes. These transactions are subject to the prior authorization of the Central Bank, which is rarely granted.
- Derivative transactions: Argentine residents are not allowed to enter into and to buy foreign currency to make payments abroad under derivative transactions with non-Argentine residents without the prior authorization of the Central Bank, unless an exemption applies. Among the exemptions it could be mentioned one available for derivatives governed by Argentine law and that provide for settlements exclusively in Argentine pesos in Argentina, and derivatives that serve to hedge certain features of external debt or international trade transactions of Argentine residents.
2.4. Reporting obligations
Argentine residents are allowed to purchase foreign currency and transfer it abroad for paying indebtedness in general (imports, services, dividends voted and not distributed, financial debt, etc.), provided the debt has been duly informed to the Central Bank pursuant to a special reporting regime. This regime establishes the obligation to inform to the Central Bank their indebtedness (debt outstanding for more than three-month) in relation to non-Argentine residents on a quarterly basis.
Certain transactions (e.g. direct investments received by Argentine residents from abroad, repatriation of investments by non-Argentine residents, etc.) are also subject to prior compliance with another special reporting regime. This regime regulates the information to be provided to the Central Bank by non-Argentine residents with direct investments in Argentina, and by Argentine residents with direct investments abroad. The reporting requirements establish different limits to determine the degree of obligation (optional or compulsory) and frequency (annual or semi-annually). In general, it could be said that non-Argentine residents are obliged to inform direct investments in Argentina that are more or equal to US$500,000, while Argentine residents are obliged to inform the direct investments or real estate held abroad that are more or equal to US$1,000,000. Participation in local and foreign corporations is calculated at the book value of the net worth of each relevant corporation. The value of non-Argentine residents' or Argentine residents' real estate is calculated at their fiscal value.
Special software provided by the Central Bank will be made available through the financial institutions in order to comply with these reporting regimes.
2.5. Discretionary powers
In addition to the regulatory requirements set by the Central Bank regulations, the bank or foreign exchange office intervening in the foreign exchange transaction has discretionary powers to request further proofs to show the authenticity of the transaction including its nature and amount. Therefore, the parties could be required to submit further elements before the corresponding financial institution in order to execute the foreign exchange transaction.
2.6. Failure to comply with foreign exchange regulations
Failure to comply with or breach of exchange regulations is punished under an escalating array of criminal sanctions, including fines rising up to 10 times the amount of the transaction. Prison may also be applicable after the first recidivism. The Foreign Exchange Criminal Law holds liable for the infringements the company as well as the directors, legal representatives, managers and syndics that intervene in the commission of such infringements.
Cases under the Foreign Exchange Criminal Law are filed and pursued first by the Central Bank. Afterwards, upon report of the Central Bank, the file is submitted to the federal criminal courts for resolution.
2.7. Securities transactions
As an alternative to the foreign exchange purchase procedure, it should be mentioned that the market has developed a securities exchange mechanism that enables to obtain an amount of foreign currency abroad with an amount in pesos held in Argentina. This is effected by purchasing in Argentina with pesos, government securities or shares listed abroad (ADRs or CEDEARs), and later selling them against a dollar amount. The legality of this mechanism and the assessment of resulting risks deserve a thorough analysis.
3. Tax restrictions
In some cases and according to the Central Bank's regulations, the purchase of foreign currency requires the prior approval of the Argentine Tax Authority in addition to the compliance with the foreign exchange restrictions.
These "tax" restrictions basically apply to the foreign exchange transactions involving payments of imports and services, and to the purchase of foreign currency by Argentine residents for travel and tourism purposes. Below follows a brief connected with the restrictions related to import and services payments.
The restrictions consist of the obligation to file a special affidavit statement previous to all imports and services contracted from foreign residents (there is no definition of "services", but the regulations list a broad range of concepts covered by the system, includinginter aliaintellectual property licenses). The obligations are locally known as (i) "DJAI", which stands for"declaración jurada de autorización de importación"(affidavit statement for import authorization), which is effective as from February 1, 2012; and (ii) "DJAS", which stands for"declaración jurada de autorización de servicios"(affidavit statement for services authorization), which is effective as from April 1, 2012.
DJAIs must be filed in most of the cases, except for the following exceptions: re-imports of merchandise temporarily exported, imports made under the samples regime, imports made under the special customs regime for substituting defective materials, donations, diplomatic shipments, courier and postal shipments, and imports exempted from duties and taxes. Goods shipped to Argentina, goods related to turn key projects and imports subject to an irrevocable letter of credit are exempted as long as they took place prior to February 1, 2012, and imports in respect of which an anticipated payment was made, are also exempted provided that the importer can submit evidence to prove that they qualify for the exceptions. Finally, importers can also apply for an exception in cases of urgently needed goods, although this possibility would be construed restrictively.
DJASs must be filed for each service agreement, provided that (i) the agreement is for an amount of US$100,000 or more per year; (ii) the installments are for the amount of US$10,000 or more per month; or (iii) the amount is not precise.
The filing of DJAIs and/or DJASs must be submitted before the Argentine Tax Authority prior to the issuance of any request, purchase order or similar document used for executing an international sale transaction, and must include detailed information on the imported good (e.g. description of the good, tariff classification code, value, currency, quantity, condition, country of origin, country of shipment, etc.) or contracted service (e.g. date of the agreement, place of performance of the service, term of the agreement, data of the service provider, price of the services, payment conditions, etc.). If there is no written agreement, the information should be obtained from the invoice or equivalent document issued by the goods' or services' providers. The taxing authority could request electronic copy of the agreement or any other document it may consider relevant.
Objections should be raised within 72 hours, following the filing of the statement. This term can be extended up to 10 calendar days. However, Domestic Trade Agency ("DTA") has established a special term of 15 business days to provide its comments (note the different clashing terms). If objections are raised, the importers must appear before the corresponding governmental agency in order to "normalize" the situation.
As a matter of fact, the DTA is currently raising objections in most of the cases without providing explanations and requiring to the importers of goods or services to provide additional information, such as price lists (current and for previous years), together with a 12-month program describing how the companies would intend to balance the amount of its outflows and inflows. Please note that the balance between outflows and inflows is rather ade factorequirement than a legal one, and it is part of the government's so-called import substitution plan. If there is an imbalance in the company's trade figures, as a result of which the company's imports of goods or services would be greater than its exports, the DTA would favorably look at the company's commitment to increase its exports, to substitute its imports by developing plan with local providers, to enter into strategic alliances with local exporters, to not distribute dividends and/or make investments or capital contributions. The foregoing is not regulated but was conveyed by the head of the DTA to several importers throughout a number of meetings held recently between them.
Once the affidavit is authorized, the approval is included in a special database that has to be consulted by the Argentine Customs Authority before clearing customs and by the banks or financial institutions prior to selling foreign exchange currency to wire funds abroad in consideration of imports or services. Therefore, the filing of the affidavit implies in practice a request for authorization to clear customs and to pay imports and services abroad, where the authorities have a broad discretional power to decide, and which may subject transactions to delays and/or blockages.
The legality of the DJAI and DJAS system seems to be debatable taking into account the WTO rules, matter which deserves a thorough analysis. In fact, currently several countries –including the U.S. and the E.U.- have appeared before that organization in order to voice their complaints. This notwithstanding, the possibility of challenging its validity does not appear to be a practical solution that enables the importers to continue operating normally in the short time.
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.