Introduction
Software regime
Requirements for qualification
Extended benefit period
Advantages
Comment
A special preferential tax regime for the software industry has been in force in Argentina since 2004 (Law 25,922). Congress recently passed amendments to the regime through Law 26,692 (published in the Official Gazette on August 18 2011), adding new tax advantages and an extended benefit period. These changes are aimed at promoting the establishment of new software manufacturers in Argentina and encouraging the export of services and the resulting intangible property, as considered strategic for the development of the Argentine economy.
Under the incentive tax regime, software companies (ie, those involved in the design, development, manufacture and implementation of software) could register to qualify for the specified benefits. In turn, 'software' was limited to operating systems, enterprise resource planning, educational tools and other specifically described tools and applications, specifically excluding self-developed software for internal use or use by a related party.
Benefits under the former regime included:
- a 10-year tax stability;
- tax credits for the employer's contributions to the social security system; and
- reduction of the income tax.
In general terms, the new statute maintains this scope of application and the tax benefits, as well as providing a number of new advantages. In addition, the requirements for qualifying for the regime have been slightly modified.
Requirements for qualification
Under the new statute, the regime is open to Argentine legal entities or local branches of foreign companies; the new statute bars individuals from joining the regime. Applicants must register with the Registry of Beneficiaries of the Software Industry Promotion Regime and fulfil at least two of the following conditions:
- invest in research and development related to the software industry;
- perform software export transactions, in which case the applicant must be registered with the registry of exporters held by the Argentine tax and customs authorities; and
- demonstrate compliance with a recognised industry standard for quality control of software products or provide evidence that the process of obtaining the relevant compliance certificate has been initiated.
One of the most significant amendments relates to the benefit period. Under the old law, the regime was designed to last 10 years (ie, until 2014). The new statute extends this period until December 31 2019.
As a consequence of this extension, tax stability is afforded for the term of the regime instead of a 10-year fixed term (as was the case before the new statute was passed). As a result, if beneficiaries under the old regime apply for the new regime (which is expressly permitted), they may benefit from a tax stability period of up to 15 years.
The new statute now provides an exemption from value added tax domestic withholding and perception regimes. Domestic withholding and perceptions are widely spread in Argentina. Although the amounts so withheld or perceived are credited against the taxpayer's tax liability, and therefore not generally an extra cost, they might (depending on the circumstances) end up in excess withholdings and perceptions, thus implying a significant financial burden for taxpayers. This change is therefore extremely important.
Under the old law, the regime provided a tax credit for up to 70% of the social security contributions duly paid. However, taxpayers were not allowed to credit these contributions against their income tax liability. The new statute allows this to occur, subject to a maximum equivalent to a set percentage, calculated as a proportion of the taxpayer's export transactions over the entirety of its transactions.
The new statute maintains the reduction of income tax for the same 60% as provided for by the old regime. However, the new statute now expressly provides that the reduction will be available on income tax arising not only from domestic but also from foreign sources.
In line with the old regime, the new statute sets forth that no restraints will be applied to money transfers destined for the payment of hardware imports and other computer components required for the manufacture of software.
It is widely acknowledged that the government intends to incentivise software export transactions. The advantages added by the new statute are unquestionable and it is hoped that the broad regulatory powers given to the competent authority will not distort the dynamic and purpose of the new statute.
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]).