In a few months, the "Regime of Promotion of the Knowledge Economy" will come into force1 in Argentina. Its grants very relevant benefits to companies that can apply in it, significantly reducing the tax burden to the lowest rates in Latin America, especially as far as Income Tax is concerned.
I.- Activities included.
Act Nro. 27,506 promotes, with tax benefits at the national level, those legal entities incorporated in Argentina -or authorized to act in the country- that develop any of the following economic activities2:
- Digital computer software and services.
- Audiovisual production and post-production.
- Biotechnology, Bioeconomy, Biology, biochemistry.
- Geological and prospecting services.
- Services related to electronics and communications.
- Professional Services.
- Nanotechnology and Nanoscience.
- Space industry and technologies.
- Engineering for the nuclear industry.
- Services oriented to automation solutions in production.
These activities must represent at least 70% of the total turnover.
The registration in the regime must be filed before the "National Register of Beneficiaries of the Knowledge Economy Promotion Regime", which will operate within the scope of the "National Directorate for Knowledge-Based Services" which depends on the "Secretary of Small and Medium Enterprise Entrepreneurs".
It must be emphasized that the benefits of this Knowledge Economy Regime ("KER") can be implemented together with other promotional regimes, namely:
- Act No. 23,877: Section 9 b) Act on the Promotion and advancement of Technological Innovation.
- Act No. 24,331: Duty Free Zones Act.
- Act No. 26,270: Act on the Promotion and Development of Modern Biotechnology.
II.- KER Registry Registration Requirements.
Anyone who registers with the KER Registry must prove that are fulfilled at least two of the following requirements:
- Prove the accomplishment of continuous improvements in quality, or by means of a recognized quality standard3.
- Certify the execution of expenditures of:
- Research and development in activities promoted by at least 3% of its total turnover for the period.
- Training of its employees affected by the activities promoted in at least 8% of the total gross salaries (free of non-remunerative concepts).
- Export of goods and/or services arising from the development of any of the activities promoted in at least 13% of the total invoice for the relevant period. In the case of professional services, exports are required for 70% of the total turnover (in the case of S&MEs, it must represent 45% of the turnover).
On the other hand, small businesses with less than 3 years from the start of their activities should only prove as their main activity any of the activities incorporated into the KER Regime. After the 3 years have elapsed, to remain within the KER Registry, they must comply with the abovementioned general conditions.
III.- KER Regime Tax benefits.
From the date of entry in the Register there shall be no increase of the total national tax burden determined by beneficiaries at the time of their application to join the Register. This includes all national taxes, import and export duties as well as tariff items.
Since the burden being considered as separate in each jurisdiction (in principle, an overall increase in the burden in local jurisdictions cannot be challenged), Fiscal Stability is extended to City of Buenos Aires, Provinces and Municipalities provided they adhere to the KER Act.
- Deduction equivalent to the maximum amount Section 4 from Decree No. 814/2001 (no progressive scheme of application).
- Tax credit certificates:
- Equivalent to 1,6 times or 2 times4 the amount of employer's contributions calculated on the basis of the maximum amount provided for in Section 4 of Executive Order No. 814/2001.
- Transferable only once and to be used against VAT and/or Income Tax5.
- Cannot be used to cancel debts accrued prior to the date of registration in the Regime.
- Request of refunds do not include any tax credit that may give rise to them.
Tax on the Profits
- Tax rate: 15%6.
- Withholding income tax on dividends: 13%.
- Final and effective tax rate (total tax burden IT)7: 26,05% against general effective rate: 34,75%.
Maintenance of the payroll is a condition for receiving the tax rate reduction.
There will be a reduction if there is a difference of more than 10% regarding the average number of workers in the last six months declared at the time of the application for registration.
Withholdings and Collections
Beneficiaries shall not be liable to withholding and collection at source in IT and VAT regimes.
IV.- Obligations to be paid by subjects registered in the KER Register
The calculation basis will be the amount representing the tax benefits of the individual subject ("taxable base").
The following shall be paid:
- Up to 4% for the performance of audits, verifications, inspections, controls, etc. in order to verify compliance with beneficiaries obligations.
- 1,5% for financing, in the Trust Fund for the Development of Entrepreneurial Capital.
V.- Functions of the Enforcement Authority.
The Enforcement Authority shall be the Ministry of Production and Labour and/or whomever it designates and shall have the following functions:
- It shall monitor the applicant's compliance with the requirements for access to registration.
- Where applicable, it shall define in each particular case the benefits to which the applicant will be entitled upon entry into the Register.
- It shall verify on an annual basis that the conditions for maintaining the profit are kept.
As we can see, this regime grants significant tax reductions that in turn may be cumulative with those proposed by local jurisdictions as Buenos Aires City that has a technological pole with benefits on taxes and local taxes, which makes it otherwise attractive.
We believe that everything was done to ensure that the ten-year "fiscal stability" promoted by this regime will be respected, given that the Act was passed by Congress, voted positively by a large majority, which suggests that this is a policy of a state with no ideological prism of the current government.
The development of these industries is vital for the development of Argentina's export activity in products and services with high value added, that is why the creation of this Regime is a strong incentive to intensify this path.
1. From 01/01/2020 until 12/31/2029.
2. These definitions are developed in the regulation. It is for this reason that we recommend a preliminary analysis of each situation. Note that Branches would not be included within the universe of subjects liable to apply to the benefits of the law.
3. According to Annex IV and Res. V 449/2,019 with the support of the competent entities and departments.
4. If the employee holds the title of "Ph.D" ("Doctor" in Argentina), as established by the Ministries of Education and/or Foreign Affairs - Annex X Res. 449/2019-.
5. This is pending regulation by F.A.P.R.
6. Except period/s with downsizing, (See next point "Condition").
7. In the case of dividend distribution.
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.