Originally published in ARGENTINE BUSINESS LAW WATCH 1 January 23, 2004
This edition of Argentine Business Law Watch reports on a recently enacted federal tax regime designed to encourage Argentina’s burgeoning software industry. We also discuss a favorable change in the tax on directors serving on more than one board.
A New Federal Tax Regime for the Software Industry
Earlier this month the Argentine Congress passed Law No. 25,856 (short title: Software; Industrial Activity; Productive Promotion Policies) to qualify the software industry for special federal tax incentives.2 This law adds software companies (i.e., those involved in the design, development or manufacture of software) to the list of specific industries qualifying for special federal tax treatment. The new law refers only to federal tax rules and benefits to be regulated in the future. Nonetheless, the law encourages the provinces to follow suit and we expect the government to issue a decree that will permit software companies to accede to existing tax incentives.
Argentina’s tax-preference regimes modify tax rules to encourage activity and investment in specific industries and regions of the country. These regimes entitle qualifying companies to 15-year exemptions from the payment of federal taxes with a scheduled phase-out. Investors in the specified activities are often entitled to choose between a tax deferral of 75% of their investment (eventually the tax is paid in five installments but only after the company receiving the investment is deemed to have operated six years) or a deduction of the entire investment as a business expense for income tax purposes.
Prompted by the preferred tax treatment, software companies already operating in Argentina may consider relocating operations to a province where tax-preference rules apply. The new law, coupled with Argentina’s relatively low salaries and abundance of highly-skilled professionals, could also strengthen the country’s bid to become a regional hub for multinational software companies doing business in Latin America.
Eliminating a Redundant Tax on Directors
Since the reform of the social security system in 1994, the Argentine Federal Tax Authority has steadfastly maintained that a director must pay social security contributions for each board position held. In doing so, the government has refused to consider directors of more than one company as engaged in a single activity. This position has been widely criticized as a redundant tax levied at the expense of the individuals serving as directors (or for the shareholders that assume the payment of the tax).
Reflecting a series of federal court decisions, a recent administrative resolution has instructed the administrative bodies charged with social security and tax to adhere to a different criteria.3 As a result, individuals serving as directors on more than one board will be taxed as a person engaged in a single activity. The individualized tax on each board position will no longer apply.
Despite the administrative resolution, the Tax Authority has exploited a difference of opinion among the courts to maintain a disputed calculation of the tax, which is levied in two brackets, the higher bracket being reserved for directors of companies with more than 10 employees.4 The government has taken the view that the higher bracket applies if the aggregate number of employees of all companies served by the director exceeds the 10- employee limit. For those serving on various boards of small companies, this means the fight isn’t over.
Leandro M. Passarella, a partner specializing in tax matters, and Ana Lucía Ferreyra, an associate of the Firm, contributed the article on the software tax regime. Special thanks to Mariano Ballone, a partner specializing in tax matters, and Lucila Tagliaferro, an associate practicing labor law, for their contribution of the article on directors’ taxes.
1 "Argentine Business Law Watch" is a periodic news service provided free of charge to clients and friends of Negri, Teijeiro & Incera. To read past editions of "Argentine Business Law Watch", visit our website at www.negri.com.ar.
2 Law No. 25.856 (published in the Official Gazette on January 8, 2004).
3 See Resolutions 3/2003 (DGRSS) and 7/2003(DGI). See also Soldati, Santiago c/Administración Federal de Ingresos Públicos – DGI s/Impugnación de Deuda, sentencia N° 76660, 12 de marzo de 2001, (Sala III).
4 The social security tax payable by directors is AR$ 245.12 for the lower bracket (categoría D) and AR$ 409.28 for the higher bracket (categoría E).
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.