EY Argentina: Argentina’s Promotional Tax System for Knowledge-based Companies is Gaining Ground in the Local Market

After more than two years of the enactment of the “knowledge-based” Law, time has come to ask whether this new promotional system have truly improved the capacity of the knowledge-based industries to generate employment, federal economic development, and foreign exchange reserves.

As a way to recap, Law No. 27,506 had been published in the Official Bulletin on June 10, 2019. Such law had established the promotional regime for the knowledge-based economy. The system created a legal framework that removed those types of industries of the uncertainty in which they were.

However, the regime was suspended by the Government in January 2020 with the intention of introducing certain changes. Later, in February 2020 a bill was submitted to the Chamber of Deputies to amend certain items of Law No. 27,506. Finally, on 26 October 2020, the Congress enacted Law No. 27,570, which is currently in force.

The last amendment divided the benefits according to the size of each local company and the level of maturity of each production sector, among other, while continuing to promote and accompany the development of large companies, which are essential for the growth of the country. In addition, new requirements to qualify for the regime and modifying certain benefits were introduced. The regime will be in force until 31 December 2029.

Few industries have grown as much in the world since the beginning of the pandemic as those one linked to the knowledge-based economy. On this path, the new and progressive local tax promotion embraces the generation of quality employment, technological development, and exports of high-added value.

The great universe of activities included within the promotional tax regimen should not be overlooked. Those activities are the following: (i) software and IT and digital services, including several ways of implementing and developing these tools; (ii) audiovisual production and postproduction, including digital formats; (iii) biotechnology, bioeconomy, biology, biochemistry, microbiology, bioinformatics, molecular biology, neurotechnology and genetic engineering, geoengineering, and their trials and analyses; (iv) geological and prospective studies, and services related to electronics and communications; (v) professional services, only insofar as they constitute export services; (vi) nanotechnology and nanoscience; (vii) aerospace and satellite industry, space technologies; (viii) engineering for the nuclear industry; (ix) manufacturing, fine-tuning, maintenance and introduction of goods and services aimed at production automation solutions, including feedback cycles from physical to digital processes and vice versa, characterised at all times exclusively by the use of industry 4.0 technologies, such as artificial intelligence, robotics and industrial internet, internet of things, sensors, additive manufacturing, augmented and virtual reality.

It also comprises engineering, exact, and natural sciences, agricultural sciences and medical science activities related to research and experimental development tasks.

Moreover, professional services qualifying as exports include legal, accounting, management, public relations, audit, tax and legal advisory, translation and interpretation services, human resources, advertising, design, engineering, and architectural services are also included.

Tax Benefits

In general terms, companies that achieve the inclusion within the knowledge-based regime will receive the following benefits:

• Tax stability for the taxpayers.
• A 60% reduction in the income tax rate for micro and small enterprises, a 40% reduction for medium-sized enterprises and a 20% reduction for big enterprises, applicable on the income originated in the promoted activities (which, considering the current general rate of 30%, would result in effective income tax rates of 12%, 18% and 24%, respectively).
• A tax credit bond that equals 70% of the amount payable as Social Security contributions on employees working in the promoted activities (80% if those employees are female employees, professionals graduated in engineering and/or exact or natural sciences, people with disabilities and other specific groups) and applies to up to 3,745 employees (and to new hires for promoted activities that increase the total headcount).

Status of Applications for the Tax Promotional System in Argentina

During the last twelve months, local companies have made progress on certain pre-feasibility analysis to internally validate whether they are in good shape to access to the promotional system.

It is worth noting that a large amount of documentation and information must be gathered and analysed when applying to the knowledge-based regime. This is not extremely difficult, but it does require companies to spend some time to be prepared for the submission.

On the other hand, the forecast and previous estimations on the tax and social security savings and the fees of regime’s inclusion are extremely useful to give companies a picture of the actual benefits that will enjoy once the registration is approved. The assistance of skilled tax advisors at this point can generate added value for the fiscal strategic planning.

It could be said that as of December 2021, several enterprises have already performed the submission of the documentation and information required by the local enforcement authority to be categorised as “knowledge-based company”.

On the other hand, there are companies that have already obtained the resolution of the enforcement authority approving the application and the registration in the “National registry of beneficiaries of the promotional regime for knowledge-based economy”.

It is worth reminding that companies intending to enjoy the tax benefits shall be required to prove that 70% of their total billing in the last year arises from promoted activities. The professional services must meet this requirement to the extent of their export.

The law also sets forth that those interested in applying for the promotion shall meet two out of three requirements in relation to the promoted activity: (i) provide evidence of continued improvements in the quality of their services, products or processes, or through a well-known quality standard; or (ii) prove the disbursements made in (a) training a percentage of their payroll employees, or (b) research and development as a percentage of total billing; or (iii) prove the export of goods or services arising from promoted activities or their development and intensive application as a percentage of total billing.

The market shows that companies and their stakeholders are truthfully interested in obtaining the certification needed to access to the tax benefits. Enterprises doing business in Argentina are now relying on this regime to develop a growing strategy if knowledge and technology are key drivers of their business models.

About the Authors

Sergio Caveggia is a tax partner currently in charge of Transaction Tax area in Argentina. He joined EY Argentina in 1994 and has developed expertise over 24 years in international taxation and merger and acquisition matters. Sergio is also focus on servicing clients in the Private Client Services (PCS) area. He is highly experienced in inbound and outbound investments, buy side, sell side and restructuring services within the Transaction Tax area.

Sergio has served in a variety of industries and has also been involved in many due diligence procedures performed in the past 20 years. He has given lectures in national universities and is a frequent speaker in tax seminars. He has also written several articles dealing with Argentina tax issues.

He is a Certified Public Accountant who graduated from University of Belgrano in Argentina. He obtained his Tax Specialist’s Degree at the University of Belgrano and has a postgraduate certificate in Business and Management from Universidad Catolica Argentina (UCA). He is also member of the Professional Council of Economic Sciences of Buenos Aires and the Argentina Fiscal Association.

Jimena Garcia is a Manager currently working in the International Tax and Transaction Services (ITTS) and Private Client Services (PCS) areas in Argentina. She joined the firm in 2014.

She has extensive experience in social security & labor law buy-side and sell-side due diligence services in numerous companies in different industries. She also participated in the coordination of many cross-border engagements, dealing with foreign labor and social security legislation matters on each transaction. Jimena participates in numerous seminars related to payroll taxes and labor law matters.

Jimena is a Lawyer graduated in 2010 from UNLAM (Universidad de La Matanza). She is enrolled in the Bar Association of the City of Buenos Aires.