Credits in UVA as a Financing Alternative: Tax Treatment

1. Background

With the aim of stimulating the local real estate market, in 2016 the Argentine government promoted the granting of mortgage loans denominated in Units of Purchasing Value (“UVA” after their acronym in Spanish), which allows to update the capital based on the variation of inflation, understood not as a financial concept but as a monetary expression of the underlying necessity to maintain the value of the capital.

The credits denominated in UVA are particularly attractive due to their system, which allows for the establishment of significantly lower installments when compared to other credits due to their lower interest rates because of the capital adjustment. In 2017 there was an increase in real estate transactions due to the possibility of celebrating these agreements. According to the regulations of the Argentine Central Bank (the “BCRA” after its acronym in Spanish), the only ones authorized to grant this type of credit were the financial institutions.

The bill of the 2019 Budget Law, promoted by the Argentine Executive, has included the possibility of having any subject granting loans denominated in UVA, regardless of whether they are financial institutions or not, as long as they are guaranteed with a registrable pledge.

We will analyze the main characteristics and their tax treatment.

 

2. What is UVA?

The UVA is a unit of measurement established by the BCRA, which calculates the average construction cost of 1 square meter of housing.

The calculation is based on the construction costs of the City of Buenos Aires, the Provinces of Cordoba, Santa Fe, Rosario, Salta and Parana. That average cost divided by a thousand, results in the unit of measurement of the UVA.

The value of the UVA is adjusted on a daily basis through the Reference Stabilization Coefficient (the “CER” after its acronyms in Spanish), which is an index of inflationary variation in Argentine pesos published by the BCRA. The CER reflects the evolution of inflation based on the variation of the Consumer Price Index recorded by the Argentine Institute of Statistics and Census (the “INDEC” after its acronym in Spanish).

 

3. How are the installments of the credits denominated in UVA calculated?  

Take for example a loan of ARS 100,000, to be paid in 96 months, with an annual interest rate of 3%.

1. The amount must be determined in number of UVAs. For this, the amount of the capital in Argentine pesos is divided by the value of the UVA at the date of its granting.

In the example: If at the time of the granting the value of the UVA was ARS16, the credit will be 6,250 UVAs.

2. The installments to be paid are also denominated in UVAs.

In the example: 96 installments of 65,10 UVAs will be owed.

3. The interest rate agreed with the financial institution is applied to the capital denominated in UVA.

In the example: 3% per year, payable in each installment and calculated on the amount owed.

4. When it is denominated in UVA, its value will be adjusted according to the CER index, in order to have the capital permanently updated.

In the example: At the time of paying the 25th installment, the value of the UVA is ARS 19.

Original loan: 6,250 UVAs.

Capital owed (96 installments minus 24 already paid): 4687.50 UVAs.

At the grant date, the 4687.50 UVAs were equivalent to ARS 75,000.

As of today, that same amount of UVAs equals ARS  89,062.50.

 

4. How does the tax treatment of the UVA adjustment work?

The adjustment of the credits denominated in UVA does not obey a financial concept of updating as pure interest, but rather a monetary expression of the value pending return. This difference impacts on the applicable tax treatment.

 (i) Income Tax

In the case of legal entities resident in Argentina, if it were considered that the UVA capital denomination is a method of capital restatement, it would be taxed by income tax. On the other hand, if it were not a component of capital restatement, but simply the monetary expression of the value owed by the borrower, no taxable income would be recognized.

In the example used, according to this second interpretation, the variation of ARS  3 that the UVA suffered from the moment of granting until the payment of the 25^th installment, would not be taxed with the income tax, while the accumulated interest at that date corresponding to 3% annual, would be taxed.

In the case of natural persons and foreign subjects, regardless of whether it is considered a method of restatement of capital or the monetary expression of the value owed by the borrower of the credit, it would not be taxed by the income tax.

 (ii) Value Added Tax

The VAT taxes the difference between the "tax debit" and the "tax credit". In this case, the "tax debit" is the corresponding tax to the services provided and the "tax credit" is the tax indicated on the invoices for the services provided to the taxpayer. If the difference between the "tax debit" and the "tax credit" is positive, it constitutes the amount to be paid to the AFIP.

The current interest rate is 21%. However, for banks and financial institutions regulated by Law No. 21,526, the applicable rate for interests is 10.5%.

In the case of financial benefits, VAT applies only to the payment of interests and the regulation does not establish exhaustively the taxability of the restatement of the monetary expression owed. The amount resulting from the capital update, either because they are denominated in UVA or because any other term that could be understood as an update of capital has been applied, would not be taxed by the value added tax.

(iii) Turnover Tax

The turnover tax is a provincial tax levied on gross income. Each of the provinces and the City of Buenos Aires establish different applicable rates depending on the activity. The tax is applied on the gross income that results from commercial activities carried out within the respective provincial jurisdictions.

With respect to the credits adjusted by the CER index, they are considered a capital reimbursement, regardless of whether it is denominated "UVA" or that any other term that can be understood as an update of capital is used. Most provincial tax codes establish that the capital reimbursement does not integrate the taxable base by which the tax is calculated, so the adjustment resulting from the application of the CER index is not taxed by the turnover tax.