New Regime for Large Investments

Law 27742 Bases and Starting Points for the Freedom of the Argentine People, published in the Official Gazette on July 8, 2024, creates an Incentive Regime for Large Investments (RIGI) which is included in its Title VII.

 

The RIGI introduces an innovative promotion tool to the Argentine legal system. Although the RIGI has certain similarities and points in common with previous laws (such as the Mining Investment Regime of 1993 the Legal Regulations on National Promotion for the Use of Sources of Renewable Energy of 2007 and 2017) it provides a comprehensive system of tax, customs, and foreign exchange incentives, as well as guarantees and stability. This system of incentives is considerably superior to previous incentive frameworks.

 

Listed below are some of the RIGI’s most relevant features.

 

1. Application conditions

 

1.1. Subjects that may request registration

 

As a rule, adhesion to RIGI has to be structured through single project entities (VPU or VPUs) holding a project that qualifies as a Large Investment. To that end, the following will be considered VPUs:

 
 

1. corporations, including Sole Shareholder Corporation (SAU) and limited liability companies,
2. branches established by companies incorporated abroad,
3. joint ventures and other associative contracts,
4. dedicated branches (Sucursales Dedicadas) considered SPEs. These are branches used to join the RIGI, incorporated by corporations, LLCs, and/or branches established by companies incorporated abroad that carry out one or more activities that would not be part of the investment project or own one or more assets that would not be affected to the RIGI project, provided that the dedicated branches also comply with the requirements established in the RIGI.

 

In addition to VPUs, the following may also request registration:

 

1. concessionaires of infrastructure works and/or services provided in competition with other concessionaires or operators, either locally or regionally if they submit an investment project that qualifies as a Large Investment,
    
2. suppliers of goods or services that import merchandise to supply goods and services to VPUs adhered to the RIGI, which may register exclusively to obtain certain customs benefits. They do not have to submit an investment project that qualifies as a Large Investment, but they must comply with other requirements.

 

1.2. Large investments. A “large investment” is a project in the forestry, tourism, infrastructure, mining, technology, oil and gas, energy, and iron and steel industries that meets these criteria:

 
 

1. The project must involve a long-term investment. A project is considered long-term if it has a ratio of no more than 30% between, on the one hand, the present value of expected net cash flow (excluding investments) during the first three years after the first capital disbursement and, on the other, the net value of proposed investments during the same period. The nforcement authority is entitled to modify this ratio.

 

2. The project must commit to a minimum investment amountin computable assets equal to or higher than USD 200,000,000, which must be fulfilled within the term proposed by the subject adhered and approved by the Enforcement Authority. The Federal Executive Branch may establish a higher amount per productive sector and/or phase up to USD 900,000,000.

 

If the minimum investment amount in computable assets is equal to or greater than USD 1,000,000,000 and results in the positioning of Argentina as a long-term supplier in global markets in which it does not a relevant participation, the project may be qualified as “Long-Term Strategic Exports” and secure additional benefits.

 
 

3. The project must commit to a percentage of the minimum investment amount, to be determined by the Federal Executive Branch, within the first two years from the approval of the application request. Such percentage must be at least 40% of the minimum investment amount. Exceptionally, the Federal Executive Branch may reduce this percentage to 20%. 

 
 

From subparagraphs b) and c) it follows that a percentage of the committed minimum investment amount must be invested within the first two years of the approval of the application request and the balance must be invested within the term proposed in the application request and approved by the enforcement authority.

 

1.3. Investment in computable assets. This is an investment made after the entry into force of the law. It consists of the acquisition, production, construction, and/or development of assets used in activities included in the RIGI to develop the subject’s adhered investment project.

 

The calculation of computable assets must be analyzed on a case-by-case basis, since the RIGI establishes different limitations (e.g., units, shares, and/or equity interests in corporations with computable assets; usufruct rights over real estate; mining, oil, and/or gas concessions, can be computed for the 15% of its value). Moreover, this calculation, to a certain extent, would be subject to the parameters to be determined by the implementing regulations.

 

Besides computable assets, amounts assigned to pay the hiring of essential services for the investment project can also be considered for calculating the minimum investment requirements, subject to certain limitations. The amount may not exceed 20% of the minimum investment amount.

 

1.4. Application request

 

The deadline for submitting the application request is two years as of the entry into effect of the law extendable for one year.

 

There are requirements relating to the investment plan that must be included in the application request. These are, among others:

 

1. project description,
2. total investment amount,
3. investment schedule,
4. source and mode of financing,
5. direct and indirect employment (estimated local integration),
6. local supplier development plan,
7. estimated production and exports,
8. technical, economic, and financial feasibility,
9. permits and authorizations required,
10. submission of an affidavit stating that the investment project will not distort the local market.

 

The local supplier development plan mentioned above must include a commitment to allocate 20% of the total investment amount to of hire local suppliers if the local suppliers are available and at competitive market conditions in terms of price and quality.

 

2. Requirements for maintaining adhesion to the RIGI

 

The main requirements include fulfilling the investment amount and the percentage to be fulfilled within two years of approval of the application request.

 

Once the application request has been approved, subjects adhered to RIGI assume the obligations to stay in the regime.

 
 

3. Incentives, guarantees and stability

 

Once the application request has been approved, subjects adhered to the RIGI start enjoying the incentives, guarantees, and stability as from the date of adhesion. This date is the date the application request was submitted.

 

5. Tax incentives

 

Income tax. VPUs (from now on, references to VPUs imply their adherence to the RIGI) adhered to the regime may be subject to a special tax treatment.

 

1. The tax rate will be 25%, and the progressive scale of Income Tax Law (ITL) will not apply.

 

2. VPUs may, for the investments they make, choose to practice the corresponding depreciation of the assets, in accordance with the rules provided for in the ITL, or according to the regime below, with certain limitations:
    

 

1. 1. 1. On depreciable movable assets acquired, manufactured, produced, or imported: at least in two equal and consecutive annual instalments.

 

1. 1. 2. In mines, mineral quarries, forests, and similar assets;, or in infrastructure works started in that period: at least in the number of annual, equal, and consecutive instalments resulting from considering their useful life reduced to 60% of the estimated useful life.

 
 

3. Net operating losses of the VPU in a tax period that may not be offset by taxable profits of the same period may be deducted from taxable profits realized in the immediately following years, with no time limit. After five years without having offset such losses against taxable profits, they may be transferred to third parties. And in the case of Dedicated Branches, they may also be used to offset taxable profits of the company.

 

Net operating losses may be updated taking into account the variation of the wholesale domestic price index between the month of the end of the fiscal year in which they originated and the month of the end of the fiscal year to be settled.

 
 

4. Update by inflation of all the assets for tax purposes would be automatic (based on percentage variations of the CPI), and section 93 of the income tax law will not apply.

 

Dividends and profits. After 7 years from adhering to the RIGI, when dividends and profits from VPUs are distributed, they will be subject to a 3.50% Income Tax rate (instead the 7% Income Tax rate currently applicable).

 

Long-term Strategic Export Projects

 

1. Payments made to non-residents by the VPU holder of such projects related to maritime leases or charters; to international transport services for exports; and to services included in engineering, procurement, and construction contracts, are exempt from income tax. 

 

2. If payments made by VPUs to non-residents are not included in any of the above cases, they will be subject to income tax on a presumed net income equal to 30% of the amounts paid, unless there is a provision including a more favorable treatment.

 

3. If the relevant payments are subject to income tax, grossing up will not apply.

 

Transactions between VPUs and related parties. Transfer pricing rules of section 17 of the ITL apply, except formal obligations.

 

Value Added Tax (VAT). A system based on "Tax Credit Certificates"  is established to pay obligations, based on these considerations:

 

Under certain conditions, VPUs may pay VAT to their suppliers, or to the Argentine Tax Authority in the case of imports of goods, by delivering Tax Credit Certificates. Suppliers will consider the favorable VAT balance generated by the application of the Tax Credit Certificates as freely disposable. When the supplier requests the refund or transfer to third parties of balances derived by the use of such certificates, and the Argentine tax authorities do not refund or approve the transfer within three months, the beneficiary may transfer said Tax Credit Certificates to third parties without needing prior approval of Argentine tax authorities. Beneficiaries may not compute current tax credits paid with Tax Credit Certificates.

 

Tax on debits and credits on bank accounts. VPUs may compute 100% of the amounts paid and/or received for the tax as a credit for income tax.

 

Deductions for interest and exchange differences linked to the financing of the Project: The regulation related to with the limit on interest deduction will not apply during the first five years from the date of adherence.

 

Accounting records in USD. VPUs may choose to keep their accounting records and financial statements in USD using International Financial Reporting Standards.

 

Tax treatment of Dedicated Branches. A special treatment is established for this type of VPUs:

 

1. Income Tax. They will be considered subjects of income tax. Distributions of profits to the company to which they belong will not be computable by their beneficiaries to determine their net profit.

The assignment of assets made from the company to the Dedicated Branch to establish, register, and incorporate it into the Regime will enjoy the tax benefits the company to which it belongs had, in proportion to the assigned assets and certain tax rights and obligations corresponding to the company they belong to will be transferred to the dedicated branch, depending on the value of the assigned assets, such as losses, positive balances of the inflation adjustment, tax exemptions, among others.

 

2. VAT. They are subject to the tax and are included in this tax treatment separately from the company to which they belong.

 Allocations made as a result of establishing the Dedicated Branch to adhere to the RIGI will not be considered sales. Tax balances existing in the company will be attributable to the Dedicated Branch in proportion to the assigned assets.

 

3. Other national, provincial and/or municipal taxes. No other national, provincial, or municipal taxes may be levied on transactions, acts, or economic relations between the company and the Dedicated Branch.

 

Beneficiaries established under joint ventures or other associative contracts. These will be considered subjects for income tax purposes. Distributions of profits of these VPUs to their members will not be computable by their beneficiaries to assess their net profit. Likewise, no provincial or municipal taxes may be levied on transactions, transfers, sales, leases, services, or any other economic relationship between the VPU and its members.

 

Limits. Tax incentives granted through RIGI will not produce effects if they result in a transfer of income to foreign tax authorities by applying a global minimum tax under the second pillar of the Inclusive Framework of the Organization for Economic Co-operation and Development (OECD).

 

Corporate Reorganization. Reorganizations of companies carried out to establish an VPU or invest in qualifying assets may qualify as tax-free, following section 80 of the ITL, with certain modifications, aimed at relaxing the requirements that must be met.

 

5. Customs incentives

 

Projects will be exempted from import duties, statistical fee, and any other advanced payment regime on definitive and/or temporary imports of new capital goods, parts, pieces, components, and raw materials. These are the only benefits for which suppliers of goods and services that import merchandise to supply goods and services to VPUs could adhere to the RIGI.

 

Export duties will also be fully exempt for definitive exports carried out by projects included in the RIGI three years after their inclusion. For Long-Term Strategic Exports Projects, the exemption on export duties begins after the second year after their inclusion.

 

Projects cannot be subject to direct or indirect restrictions or prohibitions for importing or exporting other than non-economic prohibitions.

 

The law specifically establishes that the benefits of the RIGI are compatible with the use of free-trade zones.

 

5. Foreign Exchange incentives

 

Collections of proceeds from exports of goods arising from the investment projects are exempted from the mandatory repatriation through the Argentine foreign exchange market (FX Market) in these percentages:

 

1. 20% after two years from the initiation of operations of the VPU (‘puesta en marcha’),
2. 40% after three years from the same date,
3. 100% after four years from the same date.

 

In the case of a VPU owning a Long-Term Strategic Export Project, the mandatory repatriation obligation through the FX Market of collections of export proceeds changes as follows:

 

1. 20% after first year from the date in which the VPU starts operations (‘puesta en marcha’),
2. 40% after two years from the same date,
3. 100% after three years from the same date.

Proceeds not subject to the mandatory repatriation obligation through the FX Market will be considered freely available for VPUs.

 

Likewise, VPUs are exempted from the mandatory repatriation obligation through the FX Market of the proceeds or countervalues corresponding to other transactions, such as capital contributions, foreign financial indebtedness, or export services related to the approved investment plan. These proceeds will also be considered freely available.

 

The regime provides the free availability, in Argentina or abroad, of the foreign currency from local or foreign financial indebtedness disbursed after the entry into force of the law.

 

VPUs will not be limited on their holdings of liquid external assets, although the amount of liquid external assets (or not) held abroad derived from the benefits of the regime may be considered before granting access to the FX Market. In other words, VPUs may need to use their freely available funds in the first place to acquire foreign currency in the FX Market.

 

Restrictions or prior approvals to access the FX Market will not apply to the payment of principal or foreign financial and other indebtedness, nor to the repatriation of direct investments of foreign investors, to the extent that the foreign currency proceeds transferred to Argentina and sold for Pesos through the FX Market are at all times greater than or equal to the amounts in foreign currency that such access demands.

 

Likewise, restrictions or prior approvals to access the FX Market will not apply to the payment of profits and dividends, nor interest, provided that, such profits, dividends, or interest correspond to capital contributions or other direct investments, or to foreign financial or other indebtedness, whose proceeds were transferred and sold for Pesos through the FX Market, without a quantitative limit.

 

If the general regime on repatriation of export transactions through the FX Market proves to be more favorable than the provisions of the RIGI, the more favorable general regime will apply.

 

The regime has not yet been regulated by the Argentine Central Bank (BCRA).

 

5. Guarantees

 

VPUs are ensured full availability of the results of their projects, without the obligation to trade their products in the local market; the full availability of their assets and investments—which will not be subject to confiscatory or expropriation acts—; and the right to the payment of profits, dividends, and interest through access to the FX Market, as long as the funds from the Project have been repatriated and settled through the FX Market.

 

5. Stability

 

Regulatory stability: VPUs also benefit from regulatory stability regarding tax, customs, and FX regulations for 30 years. This stability implies that the incentives mentioned above may not be hindered or reduced by any future regulation that could change the tax, customs, of FX treatment of the project;, even if the Law enacting the RIGI is repealed.

 

Tax stability. Taxes to be applied to the VPUs will be the ones in force on the date it was included in the regime, considering the modifications above. New taxes created after the date of inclusion other than those in force at that date or provided for in this regime will not apply to such VPUs. Increases in existing taxes will also not apply (the same applies to increases in existing taxes).

 

VPUs may benefit from the elimination or reduction of taxes that could be established in the future, if they are more favorable. This benefit does not include VAT or social security contributions.

 

This benefit grants the right to reject any claim made by Argentine tax authorities for amounts exceeding the tax payable in accordance with the paragraphs above. If the VPU pays the amount that does not apply, this benefit will enable it to use it as a tax credit. The VPU may use it to pay any other federal tax.

 

VPUs invoking tax stability will be responsible of proving, in each case, that it has actually occurred. However, when the breach is a consequence of the creation of a new tax, the increase in a tax, or of a legal or regulatory modification of any aspect related to the taxes in force at the date of inclusion, it will be the responsibility of the Argentine tax authorities to prove and justify that the increase has not occurred as a precondition to apply such tax or the higher rate to the VPU.

 

Argentine tax authorities will be waived from filing criminal complaints when the VPU has revealed and informed the criteria used to assess the tax obligation through a document filed before submitting the tax return.

 

Customs stability. Besides providing customs stability, the RIGI aims to ensure the possibility of filing manual declarations and settlements to safeguard customs stability in cases of regulatory or rate changes.

 

Foreign Exchange stability. The current exchange regime will not be affected by exchange regulations that establish more onerous conditions.

 

Stability of long-term strategic export projects. The Enforcement Authority may extend the stability guarantee of these projects carried out in successive stages up to 30 years after the estimated launching date of each stage. In no case it may extend it beyond 30 years, counted as from the 10^th year after launching the first stage.

 

4. Coordination with local jurisdictions

 

Invitation: The Law invites provinces and the City of Buenos Aires to enact the necessary regulations to establish procedures consistent with the purposes of the law.

 

Limitation to local jurisdictions. Large Investments carried out under RIGI are declared to be of federal interest under the terms of section 75, paragraph 18, of the Argentine Constitution. Any regulation or de facto measure issued or implemented at the federal level or local level (provinces, City of Buenos Aires, and municipalities, if they adhere to RIGI) infringing such declaration of federal interest will be null and void and the Federal Justice will prevent its application.

 

The declaration of federal interest will be considered infringed when, among others, they (i) tax the economic relations between the VPUs and their members in the case of VPUs formed by associative contracts; (ii) tax the economic relations between the companies and the dedicated branches; (iii) tax imports made by VPUs adhering to RIGI; (iv) restrict the free import and export of goods for the construction, operation, and development of the projects adhered to RIGI; (v) apply measures that change the price of imported or exported goods.

 
 

5. Coordination with other promotional regimes

 

Compatibility with other promotion and incentive regimes. The RIGI benefits may not be combined with incentives of the same nature in other pre-existing promotional regimes.

 

Adhering to this regime implies there is no waiver or incompatibility with other current and/or future promotional regimes. Incentives of different nature may be combined, if they do not overlap with or duplicate the incentives in this regime.

 

6. Dispute resolution

 

The RIGI has relevant provisions on dispute resolution mechanisms for disputes that may arise between an SPE and the Argentine Government. In this sense, it establishes a "tiered" clause establishing all disputes arising from the RIGI will be resolved by amicable negotiations or, if the dispute cannot be resolved within 60 calendar days, submitted to arbitration.

 

For the purposes of such arbitration, VPUs may choose among three arbitration rules: the Permanent Court of Arbitration (PCA) Rules, the International Chamber of Commerce (ICC) Rules or, notably, the International Centre for Settlement of Investment Disputes (ICSID) and its Additional Facility Arbitration Rules. The arbitral tribunal will be composed of three arbitrators who must not be Argentine nationals or nationals of the state of origin of the majority shareholders of VPU. The seat of arbitration will be determined by the administering institution and cannot be located in Argentina.

 

Likewise, the RIGI vests the Executive with the power to establish dispute resolution mechanisms with the VPUs, specific for each project, in the administrative act that approves the application for adhesion to the regime and the VPU’s investment plan. In case arbitration has been agreed to, it will not be necessary to first exhaust the administrative stage.

 

Finally, the RIGI establishes that the rights acquired under this regime will be considered protected investments included in the meaning of the applicable bilateral investment treaties.

 

7. Entry into effect and regulation

 

Congress has enacted the Law on June 27, 2024 and published in the Official Gazette on July 8, 2024.

The Federal Executive Branch, the enforcement authority, and the different government agencies involved (e.g. the Argentine Tax Authority and the BCRA) must regulate the Law. It must be noted that the law requires the Federal Executive Branch to issue its regulation within 30 days of the publication of the law in the Official Gazette.