This is an overview of (i) the general tax, customs and labor applicable framework of the software industry in Argentina, (ii) the recent discussions regarding the Income Tax treatment of payments of software royalties to foreign beneficiaries, and (iii) the tax benefits of the newly created software promotional regime.
I. General Tax and Customs Applicable Framework
Regardless of the consequences that may arise from application of the newly created software promotional regime (please see Section IV below), the following general tax applicable framework applies to the software industry:
(i) Federal Taxes and Customs Duties
(a) Income Tax: This is a federal tax that levies income obtained abroad by local individuals and corporations and income from Argentine sources obtained by foreign beneficiaries.
- Individuals are taxed at a sliding scale ranging from 9% to 35%. Corporations are taxed at a 35% flat tax rate.
- The income derived from the exploitation of copyright software registered with Dirección Nacional del Derecho de Autor shall be exempted from the payment of Income Tax up to the amount of AR$10,000 per fiscal year.1
- A distinction should be drawn with regard to the Income Tax treatment of import of software: (i) the import of "off-the-rack" software is considered as an import of goods and, thus, it is not subject to Argentine Income Tax withholding; on the other hand, (ii) the import of "tailor-made" software is considered as a service of Argentine source, thus, the local payer must make the corresponding Income Tax withholding when making payments to a foreign beneficiary (see Section III bellow on the withholding rate).
- Payments to foreign beneficiaries for the adjustment of software will be deemed of Argentine source, and are therefore subject to Income Tax withholding, provided the adjustment includes, in any manner, the counseling services.2
(b) VAT: This is a federal tax that levies the trading of goods and a wide range of services at each exchange transaction at a 21% tax rate.
- Local trading of software and provision of software-related services are subject to VAT. Authors debate about whether transactions involving software registered with Dirección Nacional del Derecho de Autor are taxed or not3; however, the interpretation that sustains the exemption has not been tested yet.
- The import of both "off-the-rack" and "tailor-made" software is subject to VAT.4
- The payment made to a foreign beneficiary for the adjustment of software will be subjected to VAT.5
- Unlike the assignment of software rights for exploitation purposes, the Federal Tax Bureau considers that the assignment of software rights only for use purposes is subject to VAT.6
- Exports of software are VAT exempted and the exporters might request the reimbursement of the VAT related to the development of the exported software.7
(c) Customs Duties: Import and export of movable assets are subject to the payment of customs duties, which may vary depending on the tax position of the corresponding goods in the Nomenclatura Común del Mercosur, which follows the worldwide Harmonized Merchandise Designation and Coding System.
- Import and export customs duties applicable to software will be assessed over the value of the tangible support device (i.e.: CD, DVD, Diskette).8 In this sense, the import applicable rate is 16% assessed over the CIF value of the tangible support device and the export applicable rate is 5% assessed over the FOB value of the tangible support device.
- Additionally, import of software is also subject to the payment of a Statistical Fee at 0.50% and, in certain cases, to a Destiny Verification Fee at 2%, both assessed over the CIF value of the tangible support device.
- It is important to bear in mind that in the case of imports, the Customs Office acts as an Income Tax, Value Added Tax and Gross Revenue Tax withholding agent. The withholding rate will vary depending on the fulfillment of certain registration requirements.
(ii) Provincial Taxes and Municipal Contributions
(a) Gross Revenue Tax: The Gross Revenue Tax is regulated by the City of Buenos Aires and by the provincial governments, and levies the gross income arising from primary activities, manufacturing, business and services carried out within the respective provincial venues.
- In general, the software industry is levied at the general tax rate which, depending on the corresponding venue, ranges between 3% and 3.5% of the taxable base.
- Exports of "off-the-rack" software are not subject to Gross Revenue Tax.
(b) Stamp Tax: This tax is only applicable to software agreements made for consideration and with effects on certain provincial venues. In certain venues, there are legal avoidance alternatives ―like applying acceptance by performance methods for the execution of the agreements.
(c) Municipal Contributions: Depending on the municipal venue and on the way the activity is carried out, municipal contributions may apply in some cases (i.e.: Publicity Contribution).
II. General Labor Applicable Framework
Due to their special characteristics, from the standpoint of their human potential, software companies are closely linked to the outsourcing of certain internal aspects of their customers, specifically, IT processes related sectors, which currently regulate a significant portion of the company’s operations.
This labor scheme led the software companies to structure a work system whereby their own personnel must usually render services at the customers’ facilities, a complicated situation from two different standpoints: (i) the internal aspect (relationship of the software companies with their personnel) and (ii) the external aspect (effects of possible labor conflicts of the company on the software company’s customers).
(i) Internal Aspect
In Argentina, the contracting method chosen by the employer becomes highly relevant whether the technical personnel is hired as an employee or, on the contrary, if an IT professional is hired to render services as an independent contractor, in the absence of an acknowledged employment relationship.
The general labor law principles in force and the adoption of the principle of interpretation of the effective facts has led, in many cases, to software companies facing significant conflicts as to labor and social security issues, originated in situations where the effective circumstances involving services rendered by independent contractors were considered similar to those of a permanent labor relationship by the Courts.
(ii) External aspect
The following paragraphs focus on the possible effects of the manner under which employees are hired by software companies as regards customers that request their services. In this sense, in Argentina, backbone of the issue are Sections 29 and 30 of the Labor Contract Law.
The situation described by Section 29 leads us to consider that, as a general rule, an employer is a person that directly requests the rendering of services by a worker (i.e.: obtains a profit by means of such services, even when the software company acts as an intermediary in such relationship).
There is, however, an exception to the foregoing principle: those cases in which a real, autonomous and different company renders another company (the user) a certain service, in relation to an activity outside the scope of the term "works or services corresponding to the normal and specific activity of the facility" of the latter. This case is regulated under Section 30 of the Labor Contract Law, and focuses on the level of identification that may exist between the IT industry (the service provided by the SC) and the main purpose or business of the user company. Thus, if it can be evidenced that the service outsourced by the user company corresponds to its normal and specific activity, the user company will be jointly and severally liable, together with its subcontractor, for the obligations originated in the latter’s labor relationships.
III. Payment of Software Royalties to Foreign Beneficiaries
Another important aspect of the software industry is the applicable Income Tax framework for the payments performed to foreign beneficiaries as a consequence of the import of software.
In this sense, such payments are subject to an Income Tax withholding that may vary between 35% and 90% of the Income Tax rate (35% of taxable income)9, depending on certain circumstances described hereinbelow.
(i) Payments of Royalties for Copyright Software
The income paid to foreign beneficiaries as royalties for the copyright software is subject to an Income Tax withholding of 35% of the Income Tax rate (35% of taxable income)10, that is to say that the payments performed will be subject to a 12.25% or to a 13.96% Income Tax withholding if grossing up is applicable to the payment.
In order to apply this Income Tax withholding rate, the Income Tax Law requires that (i) the software be registered as copyright with Dirección Nacional de Derechos de Autor and that (ii) the payments be performed to the author of the intellectual property or his/her lawful claimants (derechohabientes)11.
However, the Federal Tax Bureau has upheld12 that a corporation cannot be considered itself as the "author" or a "lawful claimant" of such intellectual property. According to this position, this right can only belong to individuals.
Many corporations have challenged the position of the Federal Tax Bureau and obtained favorable decisions within the Federal Tax Court13; however, the decisions were appealed from and reverted by the Federal Court of Appeal14 and the discussion is now being considered by the Supreme Court of Justice.
(ii) Payments of Royalties for Software Not Registered as Copyright
The income paid to foreign beneficiaries as revenue for non-copyright software royalties are subjected to an Income Tax withholding of 90% of the Income Tax rate (35% of taxable income)15, that is to say, the payments performed will be subject to a 31.5% or to a 45.98% Income Tax withholding if grossing up is applicable to the payment.
(iii) Payments Performed under the Canada – Argentina Double Taxation Avoidance Treaty
Notwithstanding the general treatment described above, it is important to consider that Argentina and Canada had signed a treaty to minimize the effects of double taxation of operations executed between parties of such countries.
In this sense, although the treaty does not specifically foresee regulations for software or services related to software, we understand that the payments of software royalties to Canadian parties under the referred treaty are subject to:
- 5% Income Tax withholding rate for copyright software registered with Dirección Nacional de Derechos de Autor. 16
- 15% Income Tax withholding rate for non-copyright software.17
The diverse criteria associated with the possibility of considering corporations as authors or lawful claimants of software should also be taken into account to perform the Income Tax withholding under the treaty.
IV. Tax Benefits of the Software Promotional Regime
The software promotional regime was created by Law No. 25,92218 with the purpose of encouraging investment in the local software industry by means of certain tax, social security and financial benefits (the "Software Promotional Regime").
The Software Promotional Regime benefits the creation, design, development production, application and tuning of software19 and was created to last for 10 years considered since its enactment on November 17, 2004, thus its benefits will last for the same term, unless the regime is extended.20
Both corporations and individuals are eligible to be beneficiaries of the Software Promotional Regime if they comply with the following requirements: (i) they must be duly incorporated (corporations) or able (individuals) to conduct business in Argentina21; (ii) to be in full compliance of Federal tax obligations22; and (iii) the software or related activities conducted or to be conducted must represent at least 50% of commercial activity of the beneficiary.23
(i) Tax Benefits
- Fiscal Stability: Once the beneficiary is registered with the Software Promotional Regime, the promoted activities will benefit from ten years of fiscal stability on Federal taxes (exception made of custom duties). That is to say, the modifications on the Federal tax burden of the activity will not impact on beneficiaries of the regime.24
- Non-imposition of Income Tax: The income derived from promotional activities will benefit from a non-imposition equal to 60% of the due Income Tax. However, obtaining this benefit is bounded to the evidence of (i) certain amount of expenses on research and development and/or quality certifications and/or the performance of exports.25
(ii) Social Security Benefits
As regards Social Security payments, the Software Promotional Regime provides for a benefit consisting in the possibility to convert up to 70% of the social security payments effectively made and to be allocated to the social security systems and subsystems of Laws No. 19,032, No. 24,013 and No 24,241 in non-transferable fiscal bonds26.
The beneficiaries can use the bonds to pay federal taxes with origin in the software industry, particularly VAT and/or other federal taxes and their advanced payments, with the exception of Income Tax. This bond cannot be used to pay obligations of a date earlier than the date in which the beneficiary was registered with the regime and, in no case will reimbursement or devolution by the tax authority apply.
Among other provisions, the regulation sets forth that the fixed and uniform percentage of the abovementioned benefit will be 70%. In addition, it should be considered that in case of combined activities, the benefit will apply only to the payments to be made in relation to the promoted activities.
1. Income Tax Law No. 20,628 (as amended), Section 20, subsection j).
2. Id. at. 1, Section 12.
3. After the issuance of Law No. 25.036, which included the software within the intellectual property law, Section 3, subsection e) point c) of the Value Added Tax Law No. 23,349 (as amended) conflicted with the last part of the same regulation, which sets forth an exemption for the transactions involving intellectual property.
4. Value Added Tax Law No. 23,349 (as amended), Section 1, subsections c) and d).
5. Id. at. 4, Section 1, subsection d).
6. Resolution (DAT) No. 97/95 of the Federal Tax Bureau.
7. Id. at. 4, Section 8, subsection d).
8. Resolution (MEOSP) No. 856/1995.
9. Id. at. 1, Section 93.
10. Id. at. 1,.Section 93, subsection b).
11. Id. at. 1, Section 20, subsection j).
12. Resolution (DAT) No. 142/94 and Resolution (DAT) No. 68/2002 of the Federal Tax Bureau.
13. "Picapau S.R.L.", Federal Tax Court (Tribunal Fiscal de la Nación), April 19, 1999. and "Application Software. S.A.", Federal Tax Court (Tribunal Fiscal de la Nación), September 20, 2001.
14. "Picapau S.R.L.", Federal Court of Appeal (Cámara Nacional de Apelaciones en lo Contencioso Administrativo Federal), September 20, 2000.
15. Id. at. 1, Section 93, Section 93, subsection h).
16. Law No. 24,938, "Argentina – Canada Double Taxation Avoidance Treaty", Section 12, subsection 2, point b).
17. Id. at. 16, Section 12, subsection 2, point d).
18. Published in the Official Gazette on September 9, 2004.
19. Software Promotional Regime Law No. 25,922, Section 4.
20. Id. at. 19, Section 1.
21. Id. at. 19, Section 2.
22. Id. at. 19, Section 6.
23. Section 2 of the Software Promotional Regime Regulatory Decree No. 1594/2004, set forth that those beneficiaries whose promoted activities represent 80% or more of its total activity can be extended the promotional benefits to its entire commercial activity. On the other hand, if the promoted activities of the beneficiary range between 50% and 79.9%, then in order to benefit from the Software Promotional Regime an Investment Plan should be performed in order to split the different activities and calculate the amounts subject to the benefits.
24. Id. at. 19, Section 7.
25. Id. at. 19, Section 9.
26. Id. at. 19, Section 8.
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.