Buenos Aires Technology District: An Interesting Option for Tech Companies

Today I met with Carlos Pirovano, the Undersecretary of Investments for the City of Buenos Aires to learn about the Buenos Aires Technology District. The district is a 200 hectare zone that circles Parque Patricios.

Objective of the Technology District
The goal of the district is to revitalize the area surrounding Parque Patricios, which is an area that the undersecretary said has been targeted by Macri's government as a zone they want to focus on. Although they said they are not in competition with the technology park in the Province of Buenos Aires, I'm sure that the city doesn't want to lose technology jobs to the Province.

Benefits
Tech companies that move into the district are given a 10 (multinationals) or 15 (small businesses) year exemption from payment of most city taxes, including municipal taxes (ABL), sales taxes (ingresos brutos), and stamp taxes (impuesto de sellos). In fact, the district's largest company, Iron Mountain, was able to take advantage of the benefits even though they didn't actually move into the district. The district was actually created around their preexisting offices.

Who Qualifies
Just about any technology company will qualify, but only technology companies. As long as 51% of the company's income is related to technology, the company will qualify for the benefits. This means -- software development firms, hardware companies, technology education companies, internet companies, and even retailers that sell online (as long as 51% of the company's income comes from a website and not a physical store location).

Every technology company qualifies, no matter its size. The district already has companies with as few as 4 employees and as many as 1400.

Progress
The law become active in June of 2009 and there are already 22 companies operating in the district, most notably TATA, Iron Mountain, and Clarin Global. There is a lot of interest, however. At today's meeting with the undersecretary there were 11 companies present, including Oracle. According to the Ministry of Economic Development, in addition to the 22 companies already in the district there are currently 35 companies looking for offices with the assistance of Ministry and they are receiving 150+ inquiries every week. So, it looks like 2010 will be an important year for the district.

My Impressions
I have to say that the project appears very intersting and I am going to consider it seriously. My software company's office rental contract expires soon and we need to either renew or move anyway, so it will be an interesting option for us to consider.

I was impressed with the representatives for the technology district and how they help the companies through the process of registering. Each company is assigned to a specific investor representative who has an email address and phone number and can help your company through the process. Anyone who knows anything about doing business in Buenos Aires knows that this is very rare. Usually interactions with a government entity mean going to some faraway office, standing in line for 2 hours and then being told that you're missing a paper and have to leave and come back later and repeat the process.

The undersecretary told me that after submitting the documentation, they will review it and give you a yes or no answer within 5 days as to whether your company will qualify. If you qualify, they put you on a "pre-approved" list. After you're on this list, you then just need to go and rent or buy a property within the district and submit your rental contract or title. After that, within 15-30 days you'll be given notification from the city tax office that you've been granted the exemption from city taxes.

Given that this is Argentina, I have to say that it is a very efficient process. The national software promotion law can take 9 months - 1 year to qualify for and it is much more difficult for the companies to prove that their activities fall within the scope of the law. How do you prove that your business qualifies for the city? Simple, you sign an affidavit stating your company's line of business. That's it. They review your statement and will decide whether your business fits within the law, but it all seemed very simple.

I would suggest anyone that is looking for more information to contact the City of Buenos Aires' Center for Investors to receive the details directly. They have representatives who speak English and are perfectly equipped to attend to international investors.

Buenos Aires Technology District: An Interesting Option for Tech Companies

Overview of the Monotributo System

Monotributo - An Excellent Tax System For Sole Proprietors
This post will cover the monotributo system, a special parallel tax system that frees the sole proprietor from having to comply with the complex federal tax system Argentina imposes on businesses. A business owner starting out as a sole proprietor in the general system needs to pay the following federal taxes: autónomos (a monthly social security tax for independent workers that covers health and retirement), VAT (on a monthly basis), and income tax.

Four Federal Taxes In One
The monotributo system allows self employed people to avoid the complications of paying these taxes each month and, instead, use an alternate system which requires the payment of a fixed monthly tax, which varies depending on three variables: gross annual receipts, the physical space occupied by the business, and annual electricity consumption. In almost all cases, the monotributo system will result in the sole proprietor paying less taxes.

Enrolling in Monotributo
To enroll in monotributo, the taxpayer will need a DNI, a CUIT, and will need to complete AFIP form 183/F. If you don't have a CUIT, you can apply for one at AFIP while you are there to enroll in monotributo. If you do not yet have your DNI, you will need to bring a certificate from the Dirección Nacional de Migraciones which has your file number and states your residency status. If you don't have a visa which gives you work authorization, you won't be able to enroll. So, the first step for expats looking to enroll is to make sure you have your visa in order.

Choosing a Category
The taxpayer will need to enroll in one of the 13 monotributo categories, depending on the type of business activity that he or she is engaging in and based on the three variables discussed above. Categories A-E are for service businesses, while cateogories F-M are for retail and manufacturing type businesses. The table is listed on this AFIP page. All values are listed in pesos.

Recategorizing
If you start a retail shop and, based on the size of your store, you fall into Category I, for example, you will need to recategorize if one of the variables listed in the table above is exceeded. For example, if your monthly sales exceed $4000 pesos, you will need to move up a category.

Recategorizing can be done three times per year between the first and the seventh of the month in January, May, and September. This can be done online through the AFIP web page.

Resigning from Monotributo
Make sure to resign from the monotributo system if you no lnoger operate your business. Stopping the monthly payments is not enough. If you don't resign, you will accumulate debt with AFIP and the interest rates and penalties for non-payment are rediculous. It is the equivilent of owing money to the mob.

If your business becomes successful and you start earning above and beyond what is permitted by the monotributo system, you will need to resign from the system and join the general system (VAT, income taxes, autónomos, etc).

Overview of the Monotributo System

When a Sole Proprietor Should Pick the General Tax System

In previous posts I covered when a sole proprietor should pick the monotributo system. It is a system I highly recommend for people just starting out with a small business in Argentina. However, there are some cases when monotributo is either not allowed or recommended for sole proprietors.

Exceeding the Monotributo Limits
If you exceed or expect to exceed the monthly monotributo limits, you can't enroll in this system. The limits are currently $72,000 pesos annually for service activities and $144,000 pesos annually for other activities. On an annual basis, the business cannot consume more than 10,000 KW of electricity for service businesses and no more than 20,000 KW for other businesses. Additionally, the business cannot occupy more than 85 m2 for service businesses or more than 200 m2 for other businesses.

Large Capital Investments
If you're starting a business that is going to require a large capital investment with purchases of equipment and materials, it probably is not a good idea to start as a monotributista and then switch to the general system. The reason being is that if you start in the monotributo system, all the VAT that you pay to purchase the equipment and materials is going to be lost. Keep in mind also, that since monotributistas are not subject to income tax, you won't be able to take the depreciation on your capital equipment or be able to deduct your materials.

Businesses that require large upfront investments may not pay any VAT taxes for a year or two due to all the VAT credit they have from their initial investments. Additionally, income taxes could be minimal after depreciating the equipment, materiales, and other expenses.

Importing
Monotributistas cannot import, period. If you have a business that is going to import, you will have to be in the general system.

Expats without a DNI
Finally, if you don't have a DNI, you can't enroll in monotributo. You'll need to form a company and operate within the general system.

Practical Advice
I would like to finish this article just by saying that if you have a small business and provide some small product or service and want to operate legally in Argentina without much difficulty, monotributo is a good option. Anyone looking to run a serious business with growth prospects needs to look to the general system.

Frank, from Sugar & Spice, commented on a post I made the other day about the monotributo system and some disadvantages. To use a cookie analogy, if you're an expat looking to bake cookies in your house and sell them to a few restaurants or shops, monotributo is fine. If you're going to be opening big stores (like Frank has done in Palermo), investing in expensive commercial ovens, selling your products to Jumbo or other supermarkets, monotributo is not going to work.

When a Sole Proprietor Should Pick the General Tax System

The General System vs Monotributo

Today I received a comment from a reader about the advantages / disadvantages of starting a sole proprietorship under the monotributo system (which I have recommended) vs the general tax system.

Reader's Comment
The monotributo is fine for very small businesses or to generate some side income, but from my own experience you rapidly exceed the sales limit and are forced to register for IVA, pay for an accountant, autonomos, etc., which is then only slightly cheaper than operating as a corporation.

However transforming a business that started as a sole proprietorship into a corporation costs quite a lot of time and money, which easily takes away any initial tax advantage you may have gained by starting as monotributista.

If the growth projection of your business plan estimates that you will reach the monotributo limits within one or two years, you are better off forming a SRL or SA right from the start. And if the estimated growth is smaller you might want to reconsider starting the business in the first place...

Reasons to Pick Monotributo
Let me start by saying that everything stated above by the reader is correct. However, I still recommend monotributo for sole propritors starting out, especially ones from the United States. I'll go over a few of the reasons for this, despite the extremely low limits for monthly sales that monotributo provides.

• Most businesses fail within the first two years. If, for some reason, the business venture doesn't go as planned, it is easier and costs much less to unwind a monotributo registration with AFIP than get rid of a failed SRL or SA. I personally know of a case where it took a business associate of mine more than two years to successfully wind down a company she was involved with. In the mean time, she had to pay monthly self employment tax (autónomos) until the company could be disolved.
• Monotributo limits, while currently low, are likly to be increased in the near future. It is widely known that many adherants to the monotributo system surpass the yearly income limit by not declaring all their income. The government has a project designed to increase those limits (last I heard they were giong to be more than doubled). This obviously makes monotributo a more realistic option and gives the entreprenur more growing room.
• No need for a fiscal controller (controlador fiscal). Sole propritors who are selling to the public do not need to purchase and operate these machines.
• No tax retentions by banks, credit card companies, or other payers. Companies enrolled in the general system have money retained by banks and credit card companies (if they have a merchant account) for VAT and income tax. Sole propritors enrolled in monotributo are payed in full.
• No monthly reports to file with AFIP. Assuming there are no employees, a monotributista doesn't have to file anything monthly with AFIP. The only requirement is to save and make the invoices available for inspection when AFIP requires it.
• Pay your tax by credit card. Yes, you can even put your taxes on autopilot by having AFIP charge your credit card each month. Pay 11 months on time and then'll give you 1 month free.
• Manage it yourself, no accountant needed. Accountants will always advise against enrolling in monotributo, since it won't generate work for them that will justify a monthly fee. Monotributo is easy enough that you can enroll yourself and manage it yourself without third party help.
  

For an expat who has recently arrived here and has a million other things to worry about and learn, monotributo is a system that is simple to enroll in and forget about it. You pay your monthly payment and you have the security that you're complying with the tax laws here in Argentina.

My next post will explore issues relating to the general system and when a sole proprietor might want to start-up directly in the general system.

The General System vs Monotributo

Property Transfer Tax (impuesto a la transferencia de inmuebles or ITI)

Argentina has a federal property transfer tax called the impuesto a la transferencia de inmuebles or ITI. This tax is paid by the seller of a property and is currently 1.5% of the value of the property transferred. The notary (escribano) who is handling the sale will act as a retention agent and pay this tax to AFIP on behalf of the seller.

There is currently an exception to this tax if the seller declares that the property is his primary residence and that within one year, he will be acquiring a new primary residence. The exception will only be granted if the seller has just one property in his name.

The procedure to apply for the exception can be found on the AFIP website. After applying and receiving permission for the exception, the seller will receive a certificate from AFIP which should be presented to the escribano who is handling the operation for the buyer in order to avoid this 1.5% tax.

Property Transfer Tax (impuesto a la transferencia de inmuebles or ITI)

Retentions on Payments from Argentine Companies

Reader's Question

How do you bill your clients for services without them retaining 33%. Just billed my client in Argentina(large S.A.) for consulting services in the US and they withheld. I am a US sole proprietor with invoices from the States so I dont know why they have to retaing for services performed outside of Argentina. I do have my own Argentinian S.A. which can emit a Factura "A" but once the money hits that account how do I get it to my personal account in the U.S. From what I here even if they pay my Argentinian S.A. they would still have to withold?

Suggestions
What the company is doing is retaining Argentina income taxes for the services you performed and paying that to AFIP. You should request a certificate from the company showing the money was paid to AFIP with your details. If you file an Argentine tax return, you’ll probably be able to use the payment to offset your income taxes. If you don’t file taxes in Argentina, the money is basically lost to you.

Consider charging 33% more to your Argentine clients or specify in your consulting contract that all retentions or taxes are the client’s responsibility. As a consultant, you should be entitled to the full amount you bill and it should be the responsibility of your clients to ensure that they deal with the local regulations of their country. Once you make the tax consequences your client’s problem, you’ll see that they’ll quickly find a way to pay you without any retention.

On the other hand, if you have an Argentine S.A., you could just bill from your S.A. You’ll need to include IVA, which is 21%. If you are the owner of the S.A., the company can pay you dividends (which are taxed at 35%). After paying the dividends in Argentina, you can transfer the money from your local bank account to your foreign (US) bank account. The foreign account will need to be in the same name as the local bank account or the bank probably will refuse to transfer the money. This is generally going to be more expensive and difficult than simply billing the client from the US.

If you can't pass the cost on to your customer and you expect to be doing significant business with this customer in the future, you may look into getting a bank account and a virtual office in a country that has an income tax treaty with Argentina. The U.S. does not have a double tax treaty with Argentina and therefore payments to U.S. persons or companies have withholdings taken at the highest rate. It is possible that if you had a bank account in a treaty country and billed from a virtual office address, you may have a lower retention rate.

Overview

Remember that any wiring of money in or out of Argentina is going to be complicated with many different forms to file and requirements to comply with. Argentina has active currency controls in place, so you can't expect to get money out without complications, taxes, or other controls. Argentina practices retentions for many different types of foreign payments -- dividends, interest payments, royalties, services, etc.

Foreign Tax Credit

You should consult with your U.S. accountant, but you may be able to claim the money withheld in Argentina as a foreign tax credit on your U.S. return, since it was withheld in concept of income taxes. This is why it is vital for you to obtain proof the money was actually deposited by the foreign company as income taxes (in your name) instead of a payment in their name. They should be able to supply you with a retention certificate showing the payment.

Foreign tax credits are interesting because they allow you to offset the payment dollar for dollar on your U.S. tax return, but only when the payment was made for income taxes.

Retentions on Payments from Argentine Companies

Transactions Between Related Entities: Transfer Pricing in Argentina

When a parent company pays a subsidiary for goods or services or vice versa, complications can arise between the interests of the company and the government. The government wants the local company to charge the highest price for its goods/services and pay the least on goods and services purchased abroad when it comes to transactions between related parties -- thereby increasing the earnings (and thus the income tax that results) of the local company.

In Argentina, companies performing transactions with related entities are required to submit transfer pricing reports, transfer pricing tax returns, and documentation that supports the price that was charged. The government may administratively "modify" the price that was charged for tax purposes if it feels the company is trying to intentionally undercharge related entities (or overpay them in the case that the subsidiary is making payments).

The principle at work is called the "arm's length standard" and it states that the price to be used must be the market price for the goods or services in questions, had the Argentine company been dealing with a non-related party on the open market. This is the principle used for transfer pricing issues in the United States and practically every other country. When it comes to commodities and other goods for export where prices are readily available on a world market, export taxes will be charged based on market prices, without regard to what appears in the invoice, even when the transaction is not between related parties.

Be aware that large multinational corporations often have entire departments dedicated to developing the documentation required justify the prices they charge between their subsidiaries in different countries. It may be more convenient for smaller international businesses that are unwilling to spend the time and money necessary to justify these arrangements to source their goods and services from independent suppliers or distributors rather than through the parent company itself.

Big multinationals are so concerned about this issue they will sometimes sign "advance pricing agreements" between the two governments involved and the company, which allow them to avoid costly tax disputes between dueling governments, each concerned with keeping the profits within their territory.

Transactions Between Related Entities: Transfer Pricing in Argentina

Social Security Taxes (Cargas Sociales)

Social Security Taxes or cargas sociales are the primary non-wage cost component of employing Argentine workers. The taxes are paid by employers and employees and they are mandatory.

Employees
The company must retain 17% of the employee's gross wage as the employee's contribution to social security. The employer is responisble for making the payments and serves as the retention agent for the government.

Employers
Small companies pay 23% of the employee's salary while large companies must pay 27%. These contributions are in addition to the discounts made from the employee's gross salary.

The total charges, 40% for small companies and 44% for large companies, are paid on a monthly basis. It is important to note that for all intents and purposes, the entire 40% charge falls on the shoulders of the employer. When hiring an employee, the only thing employees will be asking is how much they will be paid net of all deductions (en mano as they say here).

Social Security Taxes (Cargas Sociales)

The Tax System in Argentina

Argentina has one of the highest tax rates in the world and one of the most complicated tax systems, with multiple overlapping taxes. Taxes paid for one concept can be used to credit amounts due for other taxes. It is essental to have a capable accountant who looks after the company on a monthly basis and ensures the company stays current with monthly tax filings. Companies that are going to be operating in Argentina need to take care to plan their business carefully and conduct their operations to minimize taxes to the extent legally possible.

Taxes are assessed on federal, provincial, and municipal levels. This article lists each tax in brief and subsequent articles will analyze each tax individually.

Federal Taxes

• Income Tax (impuesto a las ganancias)
  
• Alternative Minimum Tax (impuesto a las ganancias presuntas)
  
• VAT (impuesto al valor agregado or IVA)
• Social Security Taxes (cargas sociales)
  
• Bank Account Tax (impuesto sobre los débitos y créditos bancarios)
• Asset Taxes (impuesto sobre los bienes personales)
  
• Excise Taxes (impuestos internos)
  
• Import/Export Tariffs (derechos de importación / exportación)
• Property Transfer Taxes (impuesto a la transferencia de inmuebles)
  
• Single Tax Scheme (monotributo)
• Self Employment Tax (autónomos)
  

Provincial Taxes

• Sales Tax (impusto sobre los ingresos brutos)
• Property, Land, and Car Taxes (impuesto inmobiliario, patentes)
• Stamp Taxes (impuesto a los sellos)

Municipal Taxes

• Retributive Taxes For Services Provided (tasas retributivas por servicios)
• Property Taxes (Alumbrado Barrido y Limpieza or ABL)
  

It is likely that I am omitting taxes that I am not aware of, but these are the taxes I am aware of at the time of this writing. I will attempt to explain each one in detail in future posts, although it will take some time to get to every one.

The Tax System in Argentina

Legal and Tax Considerations of Asset Purchase Agreements

Argentina has specific legislation that covers the transfer of assets from one business to another and places various restrictions on the transfer. Both parties to the transfer are also subject to procedures designed to protect creditors. The goal is to prevent debtors from transferring assets from one person or company to another, thus depriving creditors from the assets they hold as a guarantee against the debtor.

Obviously as a purchaser, executing a properly prepared asset purchase agreement allows you to take ownership of a business without any of the hidden liabilities that can arise from a stock purchase agreement. The problem is in the execution of the asset purchase agreement, however. It takes longer than a stock purchase and there are various formalities to be followed.

Special Case For Labor-Related Liabilities
Argentine law provides for joint liability in the case of labor-related liabilities (i.e. employee wages, social security payments, severance, etc). There is no way to execute an asset purchase agreement and rid yourself of the seller's labor-related debts. Therefore, it is imperative that the buyer ensure that the seller has everything in order with regard to their employees. It is common in many Argentine companies to have employees classified as independent contractors, undeclared, or with an official salary lower than the real salary paid.

It is also important to note that employees cannot be obligated to change from one employer to another. Employees who do not wish to be transferred will need to be laid off and paid severance.

Executing the Transfer
To execute an asset purchase agreement, the transfer must be announced in the Official Bulletin and creditors of the seller will have the chance to oppose the transfer unless full payment is received for their debts. If this announcement is not made and creditors are not given a chance to respond, the buyer becomes liable for all debts of the business.

Tax Debts
When transferring a business, AFIP should be notified by the buyer. AFIP has three months from the date the transfer takes place (not the date of notification) to investigate and impose any unassessed taxes. After the three month window, the buyer is in the clear and is not liable for back taxes owed.

Again, this shows the importance of structring the purchase agreement with payments over a long period of time rather than a large upfront payment. In the asset purchase transaction I participated in, an upfront payment for half the purchase price was made with follow-up payments over a 6 month period. Undeclared tax liabilites were discovered and we retained one of the follow-up payments until proof of payment of the tax liability was presented.

Tax Consequences of Asset Purchases
The seller will be liable for payment of 21% VAT on the sale of all goods (included would be the business' inventory, machinery, etc., but not any real estate) and income tax on any profits that are generated as a result of the sale.

Due to all these condiserations, it is always much easier to to execute share purchase agreements rather than asset purchase agreements if the goal is to acquire an existing business. The seller will almost always wish to use the share purchase method. However, if there is a particular concern about hidden liabilities the buyer may want to consider the asset purchase method to ensure that their operations begins with a clean slate.

Legal and Tax Considerations of Asset Purchase Agreements

Legal and Tax Considerations of Stock Purchase Agreements

Risks
When purchasing the shares or units of an Argentine business, the single biggest risk to the buyer are hidden liabilities that do not show up on the company's balance sheet -- hidden tax liabilities being the principal risk. A comprehensive due diligence process is required before closing any transaction in order to determine what taxes and other liabilities are owed.

In many cases, sellers are exiting the business because they have faced losses, are not well capitalized and have been unable to turn a profit. I was involved in just such a transaction with a distressed seller and one of the first measures that businesses with cash flow issues can do to relieve some of that pressure is start to fall behind on social security tax payments (cargas sociales), which represent about 30% of a business' total labor expenses. This was the case in the operation I participated in.

Obviously all debt owed by the company must, at a minimum, be deducted from the agreed upon purchase price. This must be explicitly stated in the share purchase agreement because Argentine law does not hold the seller responsible for hidden debts if there is no clause obliging the seller to take responsibility for these debts in the share purchase agreement.

Moreover, I also recommend buyers to refrain from large upfront payments and structure the purchase agreement with multiple payments over a long period of time in order to give themselves time, even after the transaction has closed, to find hidden liabilities and deduct them from follow-up payments made to the seller.

It is much easier for the buyer to retain a payment to a seller after finding a hidden liability than asking for a seller for reimbursement for the hidden liability after it is uncovered. Remember that although you may request guarantees and the seller may sign a document certifying that they will pay for any hidden liabilities, it will be a long and drawn out process if you need to judicially force a seller to pay back any portion of the purchase price.

Benefits
The principal advantage of the stock purchase agreement is that the operation is straightforward in an operational, legal, tax, labor, and paperwork sense. Since the company continues to operate normally during and after the sale, the only issues that arise involve actors external to the company -- the buyer and the seller. The employees, assets, liabilities, etc., of the company are not affected by the share purchase.

The sellers of a company, if they are individuals, will no doubt want to structure the operation as a stock purchase agreement due to the fact that gains from the operation are not taxable to them and due to the fact that they are no longer responsible for liabilities after the sale has been completed (unless the share purchase agreement has provisions to the contrary, as I recommended above). Corporate sellers will be required to pay income tax on capital gains from a share sale.

Legal and Tax Considerations of Stock Purchase Agreements