Gustavo Ariel Boruchowicz and Alejandra Bugna of Baker & McKenzie evaluate the impact of recent regulations on the real estate market in Argentina.
For many years, the Argentine real estate market was very active and received foreign investment in many different areas, including residential and rural land for agribusiness and tourism. In general terms (there being certain limited exceptions), Argentine law did not restrict foreign individuals or corporations, or Argentine corporations owned by foreigners, from acquiring real estate in Argentina from private companies or individuals.
Recent regulations have now been passed and the above-mentioned principle has changed. Although many real estate investments are still available for foreigners, these regulations restrict or make cumbersome their acquisition of real estate.
We shall describe below the most relevant aspects of the current real estate market in Argentina.
Any transfer of real estate located in Argentina must be instrumented in the form of a public deed before an Argentine notary public. In addition, to produce legal effects against third parties, the transfer must be registered with the Real Estate Property Registry (the “Registry”) of the jurisdiction where the real estate is located. The Registry of each jurisdiction keeps a separate record for each piece of real estate. The record shows the history of the property and its current status, containing information such as the owner(s), attachments, mortgages, easements, other encumbrances, and any other “real right” affecting the real estate.
It is typical, but not legally necessary, for parties to execute a private contract before closing the transaction. This preliminary contract sets forth the parties’ intention to buy and sell the real estate, the date of the closing (that is, the date on which the public deed of transfer is to be executed), any conditions precedent to the closing, the designation of the notary public before whom the closing will take place, and other miscellaneous provisions. Also, the buyer typically advances a proportion of the price, usually around 25 per cent, upon execution of the preliminary contract. Real estate may be purchased using local currency, US dollars or any other foreign currency.
As indicated above, the transfer document must be executed before (or protocolised with) a notary public. The notary public is customarily appointed by the purchaser. To authorise the transfer document, the notary public must have previously secured a certificate from the Registry regarding the legal status of the real estate. The effective term of this certificate is generally 60 days, within which the parties must execute the public deed of transfer and the notary public must submit it to the Registry to register the transfer. The Registry’s record of the real estate for certain purposes is “blocked” during this 60-day term following the issuance of the certificate on the formal request of the notary public. This is why deeds of transfer are generally granted within this term.
The notary public must verify that all taxes and contributions imposed on the real estate are totally paid as of the date of the closing. If the seller does not have perfect title to the real estate, and/or if the real estate is not free from any attachment and/or encumbrance (as advised by the Registry), the notary public must inform the parties before execution of the deed of transfer. Equivalents of US title insurance or mechanics liens are not available in Argentina. Where financing of the price is agreed, a mortgage may be imposed on the real estate to guarantee repayment.
Purchases of Argentine real estate involve a number of taxes and associated expenses. Briefly they are:
• a local documentary tax (stamp tax) which varies depending on the jurisdiction where the real estate is located and generally ranges between 1.5 to 4 per cent of the purchase price. Generally, the buyer and the seller bear the stamp tax equally. Stamp tax is payable upon execution of the preliminary contract and/or the public deed of transfer;
• notary public’s fees: 1 to 2 per cent of the purchase price (usually negotiated);
• real estate broker’s fees, if any: generally 4 per cent of the purchase price (usually negotiated); and
• other fees and expenses, which depend on the purchase price but would not usually exceed 2 per cent of it.
In general, real estate transfers are not subject to VAT. However, VAT is applicable on construction activities carried on within real estate property and the transfer of such construction at the rate of 21 per cent, or 10.5 per cent in some cases. Exemptions may apply depending on the construction’s purpose and ownership term.
EXCHANGE CONTROL REGULATIONS
Argentina has put in place certain exchange control regulations that have recently been developed further, and we may expect more changes in the near future. As a general principle, according to applicable local Central Bank regulations and as a general reference, 30 per cent of the monies to be transferred into Argentina shall be immobilised in a 365-day deposit with a local financial entity. Moreover, and as a point of general reference, all monies transferred into Argentina shall have to be in the country for at least a 365-day term, starting from the date of their settlement in the local foreign exchange market. The deposit of 30 per cent of the incoming funds will not bear any interest and should be made in US dollars (however, it is worth mentioning that foreign currency entering into Argentina shall first be converted into pesos and reconverted into US dollars for the amount of the deposit, with the consequential loss of differential currency sale/purchase rate). Furthermore, the deposit may not be used as collateral to secure other transactions.
In the specific case of real estate transactions, according to a specific regulatory exemption, foreign currency flowing into the local foreign exchange market shall be exempted from the 30 per cent deposit obligation, provided that such transfer is related to a non-resident direct investment applied to purchasing real estate if the funds are settled simultaneously to the signing of the public deed of transfer. However, as mentioned above, the foreign currency entering into Argentina shall first be converted into pesos and reconversion into foreign currency may not be allowed due to recent controls imposed on the acquisition of foreign currency. These restrictions have, in practice, made these transactions more complex and a thorough analysis should be made in each case of the applicable scenario and legal framework.
The transfer of monies abroad is also subject to a regulatory framework which provides that a non-resident will be able to purchase foreign currency and transfer it abroad if such monies are related to the definite liquidation of the non-resident direct investment in the country in the non-financial private sector.
This had been an exception to the generally permissive rules and Argentina has historically requested prior approval of a foreign investment in the cases relating to security areas.
A “security area” includes all of those areas along the border, either terrestrial or maritime, and an area around military or civil buildings which are considered important for the sake of the country’s defence. The width may vary as determined by the government. There are specific descriptions for each province described in a government decree.
The identity and status of the purchaser is important because the requirements vary.
In these cases the foreign investor needs to complete and file a preliminary authorisation. To do this there are several forms that should be completed. The forms request general information on the person or entity purchasing the piece of land, a description of the piece of land itself and the activity to be developed. Also, in the case of a legal entity, an investment plan should be filed. Securing these permits has become a long and cumbersome process which may delay any investment. Therefore, this issue needs to be analysed in detail upon making any decision involving real estate located within a security area.
Finally, a new restriction has been passed that restricts the acquisition and possession of rural land by foreigners, as defined in Law 26,737. The Law was passed last December, 2011, and partially ruled after that. No acquired rights shall be affected.
It shall apply to all foreign individuals (whether or not they have a real domicile in Argentina) and to legal entities (organised in Argentina or not, in which more than 51 per cent belongs to foreign individuals or legal entities), that either directly or through someone else acquire land (rural land is defined as any land located beyond the urban areas) for the use or production of forestry, agriculture, tourism and any industries or destiny.
The reference made to foreign ownership affects mainly the following: either foreign individuals residing or not in Argentina, or legal entities in which 51 per cent of its corporate capital belongs to foreigners. The latter includes:
• legal entities either related or controlled in a percentage higher than 25 per cent, or with enough votes to prevail in the decisions;
• foreign legal entities that own more than 25 per cent of other legal entities;
• foreign individuals or legal entities that even without being registered as shareholders, act as such; and
• transfers through a trust where beneficiaries are foreigners in a percentage higher than the above-mentioned ones, etc.
There have been some debates in relation to several paragraphs of the Law that have yet to be definitely settled.
A maximum 15 per cent of Argentine rural areas may be owned by foreigners. Foreigners (individuals or legal entities) of the same nationality may not own more than 30 per cent of the percentage mentioned above. The way in which the above-mentioned percentages must be calculated is still uncertain.
The land owned by one foreign owner shall not exceed 1,000 hectares in total, regardless of its location.
Foreigners, as this term is defined by the Law, cannot purchase rural land if it contains any kind of permanent water within the land or at any border.
A Registry of National Rural Land was created (a survey is being carried out to determine cadastral situation of rural land and ownership). As a condition precedent to acquiring rural land, a certificate should be obtained. At the time of writing, the above-mentioned certificates are not being issued.
The Law has many open issues and lacks definition on certain aspects. All these issues are under analysis and the transfer of rural land is at present still waiting for a clear definition of parameters and interpretations