Guillermo Orlando Teijeiro Ana Lucía Ferreyra August 26 2011 Royalty agreements and registration with INPI: has everything been said? Negri & Teijeiro Abogados | Corporate Tax - Argentina Guillermo Orlando Teijeiro, Ana Lucía Ferreyra Corporate Tax BackgroundFactsDecisionCommentBackgroundRoyalty payments to foreign beneficiaries are subject to a reduced effective withholding tax rate of 28%, for payments that relate to registered trademarks, industrial know-how and other technology transfers. This is further reduced to 21% for payments relating to technical assistance, engineering and consulting services that are not obtainable in Argentina.In order for the reduced withholding rates of 21% and 28% to apply, the agreements must be registered with the Argentine Trade and Patent Office (INPI). Otherwise, a 31.5% rate will apply. On registration, INPI will issue a certificate that indicates, among other things, that the agreement complies with the Transfer of Technology Law. Where technical assistance is not obtainable in the country, this will also be indicated on the certificate (and the lowest 21% effective withholding tax will apply). The Transfer of Technology Law further states that payments made under non-registered agreements are non-deductible by the Argentine payer. As a result, if a transfer of technology agreement is not registered, it may not only result in the application of a higher 31.5% withholding tax rate, but also deprive the payer from the otherwise allowable deduction of the expense.Several interesting discussions have arisen over the past few years regarding the nature of this registration requirement and the timing for its fulfilment. In a recent case, Empresa Distribuidora de Energía Sur, the Supreme Court of Justice finally concluded that payments made under transfer of technology agreements are deductible and therefore benefit from the reduced withholding tax rates, provided that registration with INPI takes place before payments are made.Facts The taxpayer executed a technical assistance agreement in June 1997. This agreement was registered with INPI over two years later, in December 1999. In the interim (ie, between the dates of execution and registration), the taxpayer made payments for royalties to the foreign beneficiary. The taxpayer applied the reduced withholding tax rate of 21% and took the relevant deduction.The tax authorities challenged the application of the reduced withholding tax rate and the deduction of the payments. With respect to application of the 21% reduced rate, it argued that, when stating the applicable withholding tax rates for foreign beneficiaries, the Income Tax Law expressly provides that registration with INPI is an essential requirement for the application of the reduced withholdings. Further challenging the deduction, the tax authorities resorted to Article 9 of the Transfer of Technology Law, which provides that a failure to register impedes the deduction of the expense.The taxpayer, in turn, argued that neither the Income Tax Law nor the Transfer of Technology Law sets forth any guidance on timing or any limitation to proceeding with the registration. Therefore, regardless of when it is made, if an agreement is later registered, the requirement must be deemed fulfilled. In addition, it further argued that Article 9 of the Transfer of Technology Law (which denies the deduction of payments made under non-registered agreements) must be disregarded, based on subsequent amendments introduced by the Foreign Investments Law in 1993. Under such law, agreements no longer needed to be registered with the INPI for approval purposes, but rather merely for informative purposes. The taxpayer added that the unfavourable tax consequences deriving from the lack of registration were unreasonable and implied the application of a punitive regime.DecisionThe Supreme Court of Justice denied that the provisions at stake constituted a punitive regime. On the contrary, it held that the rules merely imposed a legal condition in order to benefit from a more favourable tax regime, and that it is at the taxpayer's sole discretion to proceed with registration.In order to support the application of the higher withholding tax rates, the Supreme Court further held that the Income Tax Law expressly states that the reduced withholding tax rates are available only to payments made under agreements that meet the requirements of the Transfer of Technology Law (evidenced by the INPI certificate issued on registration) at the time that payments are made. In this context, the court considered that it is relevant when the registration requirement is met. In its opinion, there is no doubt that this registration must be fulfilled before the payments are actually made.The court also disregarded the taxpayer's argument that the Transfer of Technology Law does not provide any guidance on timing or limitation for registering the agreement; however, it did not clearly explain the reasons for this understanding. The court held that the lapse of time between the date of payment and registration of the agreement was unreasonable and that the taxpayer had evinced no logical justification for the delay.CommentThe Supreme Court thus appears to have ended a longstanding discussion regarding the nature of the registration requirement - it is a legal requirement upon which the granting of favourable tax treatment (ie, the application of a reduced withholding tax rate and the allowance of the deduction) is conditioned.Furthermore, it is clear from the Supreme Court's decision that, in order for the favourable tax treatment to apply, the registration must take place before the payments are made.This timing guideline gives rise to no uncertainties concerning the applicable withholding tax rates on the payments, as they are to be assessed at the time that the payments are made - it is on such date that the court requires that the agreement (under which payments are made) must be registered.However, with regard to the deduction of the expense, the court stated no additional guidelines concerning the date on which compliance with the registration requirement must occur, merely concluding that such registration must occur before payments are made.It appears that the registration must be complied with in the fiscal year during which the expense is deductible and before the payments to the foreign beneficiary are made. In most cases, the expense is allowed in the fiscal year in which it accrues and it is therefore during that year that registration must be fulfilled.However, a different conclusion may be drawn for cases in which the Income Tax Law adopts the cash method rather than the accrual method for determining when a deduction must be made. This will apply for payments made to foreign related parties - giving rise to Argentine source income to those beneficiaries - where (under a time-matching rule) the expense is deductible in the year of accrual, provided that actual payment to the beneficiary is made on or before the date on which the tax return for that year is due. If payment is made later, deduction of the expense is allowed in the year of payment.In such a scenario, the expense may accrue in a fiscal year, but its deduction may still be pending in subsequent years, conditioned on payment of the income to the foreign related beneficiary. It is reasonable to conclude in such cases that the expense is deductible in the year in which payments are made and the registration requirement must be complied with before the payment date, regardless of whether this is after the year of accrual.Therefore, if registration with INPI takes place after the year of accrual, but before payment, there is no reason to deprive the taxpayer from making the relevant deduction during the fiscal year in which payments are made.For further information on this topic please contact Guillermo O Teijeiro or Ana Lucía Ferreyra at Negri & Teijeiro Abogados by telephone (+54 11 5556 8000), fax (+54 11 4328 5628) or email ([email protected] or [email protected]).