International tax in Argentina

Income tax in Argentina

After devaluation took place in Argentina, the FX market was regulated by the issuance of Law no. 25,561 which provided rules for the tax treatment of negative results derived from the application of the new exchange rate to be applied compulsorily by local legal entities. We are referring to FX generated by applying the exchange rate of 1.40 peso for USD1.

For local companies meeting a fixed amount of annual revenue or equity in excess of a certain amount, FX net losses originating at the new exchange rate would only be deductible up to 20 per cent annually. The deduction was made in each of the following five fiscal years after 6 January 2002.

Regulatory Decree 2568/2002 defined the assets and liabilities to be considered in calculating net losses as those existing as of 6 January 2002.

Although Argentine resident individuals and Argentine entities are subject to worldwide income taxation, the scope of the tax is different. Argentine individuals are not subject to capital gains (unless they habitually obtain such income) while Argentine entities are subject to tax on all types of income.

Administrative and judicial precedents decided where FX gains and losses were considered a capital or ordinary income for Argentine individuals. In ruling 40/2005, the tax authority analysed the tax treatment of an FX gain arising from a loan granted by an Argentine individual to a foreign entity. The tax authority considered that the gain arising from the revaluation of the principal of the loan pursuant to the devaluation of the Argentine peso was not subject to income tax because it was a capital gain. Only FX gains that were related to taxable income were subject to the tax.

As Argentine individuals are not subject to capital gains, capital losses are not deductible. In the Sergi, Antonio Juan4 case, the Tax Court analyzed the case of an Argentine individual who deducted the FX losses arising from a loan in a foreign currency. The tax authority challenged the deduction on the basis that it was a capital loss, and therefore could not be deducted. However, the Tax Court held that, in the case of a loan, an FX loss should be treated as interest and therefore was deductible for tax purposes.

The question is whether FX gains or losses are a capital or an ordinary gain; this is not relevant for Argentine entities because they are taxed on all types of income.

Once it has been determined whether the FX falls within the scope of the tax, it is relevant to establish whether the FX gain or loss is of Argentine or foreign source.
The qualification of the source is relevant because different rules are applicable to determine the taxation of FX. The general rule is that income arising from assets located, placed or used in Argentina, the performance of any act or activity in Argentina that generates an economic benefit or events occurring in Argentina are considered to be income of Argentine source.5 If income does not qualify as Argentine source, it is considered to be of foreign source.

Prior to the introduction of the worldwide principle, there was some discussion about the source of FX gains arising from direct investment abroad (deposits in foreign financial institutions) made by Argentine residents.

The tax authority considered that such FX gains or losses were of Argentine source because funds deposited abroad were used by the Argentine residents for their activities in Argentina.7 Taxpayers argued that FX gains arising from investments made abroad were of foreign source because the principal was placed abroad.
In the Compañía Minera Aguilar SA case,8 the Supreme Court maintained that interest and FX gains arising from: (a) fixed term deposits and current accounts made in foreign financial entities; and (b) loans granted to non-residents, were of foreign source because the capital was placed abroad.

In other cases, it was analysed whether the FX arising from a deposit in a foreign bank from export proceeds was income of Argentine source. In the case Equipos y Materiales SA,9 the Supreme Court considered that income arising from exports was of Argentine source; however, if the taxpayer had collected the proceeds of the exports and made a deposit in a foreign bank, the FX arising from the deposit would be of foreign source. The taxpayer disposes of the proceeds from the export and makes a new investment that generates foreign source income.

Non-Argentine residents are taxed on Argentine source income. Section 20(v) of the ITL provides that actualization of credits of any origin or nature, including FX gains, is exempt from income tax. This exemption is applicable to non-Argentine residents. In the precedent The Associated Press,11 the Tax Court considered that the FX gain generated since the issuance of the invoice in a foreign currency and its collection was exempt from income tax.