Argentina: Argentina Taxes Capital Gains Of Certain Nonresidents

By Guillermo Teijeiro and Leandro Passarella

Decree 493/2001, published on April 30, 2001, amends the Argentine income tax law to tax capital gains from the sale or disposition of shares if and when realized by Argentine resident individuals, resident undivided estates, or certain nonresident companies. The capital gains now subject to Argentine income tax are those realized from the sale of shares in corporations that are not publicly traded. Capital gains from sales of shares in public companies remain exempt from tax. However, it is not entirely clear from the text of the amendment whether the exemption only applies to capital gains from the sale of shares actually traded in a stock exchange or, more broadly, to gains obtained from the sale of shares in a public company generally (i.e., even those realized in a private transaction not materialized in a stock exchange). Argentine individuals are still not subject to income tax on capital gains from sales of equity interests in other types of companies (e.g., limited liability companies or SRL). Different rates apply depending on the seller's residence and holding period.

Until the issuance of Decree 493/2001, nonresident individuals and foreign legal entities were exempt from Argentine income tax on the capital gains that they realized from the sale of stock in Argentine corporations (i.e., sociedades anónimas). Under the new law, the exemption no longer applies to capital gains from the sale of shares in Argentine privately-held companies realized by (i) foreign entities the principal purpose of which is to invest outside their countries of incorporation pursuant to their own nature or bylaws, and (ii) foreign entities that are not allowed to carry on certain operations or investments within their countries of incorporation, pursuant to their bylaws or the laws of those jurisdictions.

The exclusion from the exemption applies regardless of whether the foreign entity is located or incorporated in a tax haven jurisdiction recognized as such by the regulations issued under the Argentine income tax law. This is because the new rule presumes that those gains are attributable to Argentine individuals or their undivided estates. Consequently, this rule is aimed at taxing capital gains from sales of shares in Argentine companies presumably held by Argentine individuals or their undivided estates through a foreign holding company. However, as designed, this rule may adversely affect genuine investments in Argentine privately-held companies by large multinational enterprises that structure their holdings of stock through pure offshore investment companies. Therefore, unless the scope of this rule is limited by yet to come regulations, multinational enterprises will have to properly structure their stockholdings in Argentine corporations in order to avoid being trapped by the tax in the event of a future disposition of their interests in said companies.

The tax rate applicable to capital gains realized by Argentine resident individuals and undivided estates depends on whether they hold the shares for at least 12 months (long-term capital gains) or not more than 12 months (short-term capital gains). Long-term capital gains are taxed at a rate of 15 percent, while short-term capital gains are treated as ordinary income and, as such, taxed according to the tax rate schedule provided by the income tax law. Capital gains subject to tax are those realized since January 1, 2001 (i.e., the beginning of the individuals' taxable year pursuant to the Argentine income tax law). Foreign entities, on the other hand, are subject to an effective 17.5 percent withholding tax to be assessed on the amount realized from the sale of shares. Alternatively, they may elect to be taxed on the actual capital gains realized from such sale at the statutory rate generally applied to nonresidents and foreign legal entities. In this case, the new rule is effective for sales transactions the price of which is paid on or after April 30, 2001, even though the capital gains may not have been necessarily realized at that time.