New ArgentinaChile tax treaty creates fresh structuring opportunities
Argentina and Chile have signed a new double tax treaty to replace the treaty unilaterally terminated by Argentina in 2012. Ignacio Rodriguez and Andres Edelstein of PwC in Argentina outline the new structuring opportunities that are available for taxpayers.
Argentina and Chile signed a new double tax treaty on May 15. The Argentine government terminated the previous treaty in 2012. We expect the treaty to be ratified soon and apply from January 1 2016 (except for certain provisions for income derived from international transportation which would retroactively apply from 2012). In general the treaty drastically changes the former source¬based approach now sharing taxation rights between the contracting states along the different types of income and no longer providing relief from the 0.5% Argentine wealth tax.
This is an important development in the Argentine treaty network including a limitation of benefits (LoB) clause which may be relaxed in some ways under specific facts and circumstances.
The tax treatment of Argentine transactions under the newly signed tax treaty with regard to (i) interest, (ii) royalties, (iii) dividends and (iv) capital gains would be as follows:
Under domestic law interest payments on related¬party loans to a foreign beneficial owner are subject to 35% withholding tax. However, under this treaty, interest payments to Chilean beneficial owners should be subject to a maximum withholding tax rate of (i) 4% if the interest is paid in respect of financed sales
of machinery and/or equipment and the financing is provided by the same supplier or seller to the buyer; (ii) 12% if the interest stems from listed securities or from loans granted by financial entities and/or insurance companies; and (iii) 15% in all other cases.
A most¬favoured¬nation¬clause has been foreseen for interest described in (iii) above. However, this applicable rate could never be lower than 12%.
Although the treaty contains non¬discrimination provisions, they do not override domestic thin capitalisation rules. Argentine regulations establish a 2:1 debt¬to¬equity ratio. Therefore taxpayers should still consider these rules if funding an
Argentinean company with debt.
Lastly, an original provision was inserted with respect to interest payments connected with outstanding receivables that have been assigned to a treaty beneficiary with the aim of denying the treaty relief if the assignment was made with the sole purpose of taking advantage of the tax benefits.
Under Argentine law, royalties and technical assistance and software payments may be subject to withholding tax rates as high as 31.5%. Under this treaty such payments made to Chilean beneficial owners should be subject to a maximum withholding tax rate of 15%. In certain circumstances, lower rates may apply.
The main relevant statements arising from the royalty section and related provisions, especially if comparison is made with other treaties signed by Argentina, are as follows:
* Computer programmes are clearly considered as “scientific work” being payments subject to a 10% withholding;
* ‘Shrink¬wrapped’ standardised software licensed directly to the end¬user (with no aim of commercial exploitation) should be treated as ‘business¬profits’ rather than as ‘royalties’ and then no withholding would apply provided other specific
features are also observed; and
Under Argentine domestic law, dividend payments are subject to 35% withholding tax to the extent the payment exceeds the amount of accumulated tax earnings. Also, a flat 10% withholding on the gross amount of the dividend applies. The treaty does not provide any relief in this regard.
Under this treaty taxation on capital gains derived from the sale of shares would be limited to a 16% tax on the gain to the extent that the seller held less than a 20% stake during the year prior to the sale. This would not imply any relief from an Argentine perspective since under domestic law foreign beneficiaries are
subject to a 13.5% effective tax on gross proceeds or, alternatively, 15% tax on the actual capital gain duly supported.
Please note that the above potential relief will not apply if more than 50% of the value of the relevant shares is derived from real estate property.
The treaty also provides that a transfer of assets merely for the purpose of a business reorganisation proceeding shall have no effects for tax purposes in accordance with the domestic laws of each of the contracting states.
Other particular features
Some other particular features the treaty provides are as follows:
* Dual¬resident or binational companies may ask for a Mutual Agreement Procedure in order not to be trapped by doubletaxation schemes.
* For the very first time Argentina includes an LoB clause in one of its treaties. Although these LoBs may be relaxed and some relief may be provided by the relevant contracting state under certain specific facts and circumstances, they are
clearly aligned with current global trends (for example, BEPS) mainly aimed at avoiding treaty¬abuse practices and double non¬taxation scenarios.
* One of the LoB clauses states that no treaty benefit would apply if the income paid by one of the contracting states is allocated by the recipient state to a permanent establishment (PE) located in a third jurisdiction and the resulting effective
(aggregated) taxation is lower than the 60% of the tax that should have been paid if that PE had not been interposed. Although not entirely clear, this provision may raise the longstanding controversy about whether, conceptually speaking
and notwithstanding the limitation provided by the treaty, payments made by Argentina to branches belonging to parties located in treaty jurisdictions would allow for the claiming of the corresponding treaty benefits.
Multinational companies may wish to consider the use of Chile to facilitate holding and financing structures as well as shared services centres (that is, IT services) taking advantage of reduced withholding rates provided by the treaty on certain types of payments.
This development is an encouraging indication that the Argentine authorities are continuing to expand the tax treaty network.