Juan Pablo McEwan and Agustin Lacoste of McEwan & Asociados take an in-depth look at wealth and estate planning in Argentina:
"This combination of economic instability and high taxes has increased awareness among wealthy individuals of the need to use structures geared towards protecting their assets and easing the tax burden."
It is said that Argentina faces an economic and political crisis every 10 years. Whenever a crisis arises, Argentinians’ right of ownership is at risk. Devaluation, asymmetric pesification and the current foreign exchange restrictions are a few examples of the challenges we face. What’s more, according to a recent OECD study, Argentina has the highest tax burden in Latin America.
This combination of economic instability and high taxes has increased awareness among wealthy individuals of the need to use structures geared towards protecting their assets and easing the tax burden.
Individuals in Argentina used to keep their financial assets in foreign banks and companies, mainly in low or zero-tax jurisdictions, including the Cayman Islands, the British Virgin Islands and the Bahamas, among others.
In 1999, a change was made to the tax regulations providing for the taxability of passive income generated by legal entities, located in jurisdictions listed as non-cooperative jurisdictions. This rapidly altered the existing structures, transferring them to unlisted jurisdictions and placing them under holding regimes.
This has enabled Argentinians to familiarise themselves with the use of holding companies, whether in nearby jurisdictions such as Uruguay or Chile, in European countries, or even in the United States.
When organising this type of holding company, there are three main issues that should be taken into account: the corporate form; the taxability of dividends; and the application of a double tax treaty.
Dividends and profits derived from non-Argentine entities are subject to tax for the Argentine-resident individuals or corporations participating in such entities. The time it takes for income derived from foreign entities to be recognised varies, depending on the type of foreign entity involved and the nature of the income obtained by such foreign entity.
In the case of foreign corporations whose capital is represented in shares, the general principle is that their profits are not taxable until a real distribution of dividends takes place. The law acknowledges the corporation as an entity independent from the shareholders and assesses income upon distribution, except when certain international fiscal transparency rules apply (ie, when they are located in a low or no-tax jurisdiction and more than 50 per cent of their income qualifies as “passive income”). In this sense, any passive income (interest, dividends, royalties, rentals, etc) obtained by the corporation should be recorded directly in the hands of the Argentine shareholder.
In the case of corporations whose capital is not divided into shares – limited liability companies, partnerships and so on – the Argentine legislation sets forth that results should be recorded in the hands of the Argentine resident, even if those dividends have not been paid or distributed by the foreign entity.
Thus, when organising a family structure, special consideration should be given to the fact that a vehicle directly owned by an Argentine resident or a company domiciled in Argentina should not belong to a partnership, but instead to a company – the capital of which must be represented by shares, so as to avoid an unwanted tax burden.
Following the structure of a stock company (or corporation), it should be noted that the Argentine resident shall pay taxes at the 35 per cent rate on the dividends he or she may receive from the foreign company. Notwithstanding this, there is an indirect tax credit regime, subject to the satisfaction of certain general requirements. For example, in the case of direct shareholdings, the Argentine resident must evidence a shareholding of not less than 25 per cent; for indirect shareholdings, the Argentine resident must evidence a 15 per cent shareholding interest.
Also, reference should be made to the different double tax treaties (DTTs) that might be applicable to this particular case. Argentina has 19 DTTs that are currently effective, most of them OECD model tax conventions, and others that are in the process of being negotiated.
Notwithstanding the importance of financial protection, Argentine individuals and families have little background in the creation of complex structures, such as the use of trusts for estate planning.
Traditionally, families used to make inheritance advances (gifts) to their successor to avoid court succession proceedings. With respect to tax matters, there were benefits in the use of certain DTTs (such as those made with Austria and Chile) that permitted, through the use of simple structures, the exemption of property that was subject to personal assets tax, as well as the exemption of income tax with respect to the income generated by it.
As of 1 January 2013, the agreement is no longer in force. Argentina now has the right to charge 1.25 per cent asset tax over the value of the bonds and 35 per cent income tax on interest paid, as well as on capital gains upon sale of such bonds.
With the implementation of the estate tax, and as a result of the absence of other DTTs with similar benefits to those described above, the current trend is to look for new ways of family gift and succession planning.
The tax impact of maintaining the assets in the individual estate have led to a gradual change of trend in this respect, and wealthy families have become more prone to plan through fiduciary structures, supplementing them with holding companies which allow them not only to keep their financial holdings but also the assets that belong to the family business.
Even though there is no comprehensive tax regulation concerning trusts, it is clear, according to the Argentine tax administration and courts, that family trusts are not subject to tax in Argentina (provided certain requirements are met), both for the settlor and for the beneficiaries.
If structured correctly, revenues derived from the assets held in trust would not be subject to tax in the jurisdiction of the trustee. The trustee, becoming the legal owner of the assets, will allow neither personal asset tax nor income tax to be levied on the settlor for such assets and their revenues.
In this regard, the Eurnekian case has shown the importance of following the right trust set-up. The decision in that case confirmed that, in the view of the Argentine courts, the trust must be discretionary and irrevocable to not receive any complaint from the tax administration and achieve the desired impact. This means that the settlor must give up control and ownership of assets when handing them over to an independent trustee, and that the possibility of revocation is interpreted as excessive control of the settlor.
Notwithstanding the fact that the transfer in trust to be made by the settlor to a third party (trustee) usually generates resistance in the individuals in countries such as Argentina, the use of a trust may give rise to benefits concerning both taxes and successions.
Certainly, a trust should always provide for related tax matters (assignment of assets to the trust by the settlor), not just when it is created. There should also be adequate planning when the assets are distributed to the beneficiaries. In this respect, all aspects should be examined.
When the trust is created, and assets are assigned to the trust, it should be understood which property is assigned to the trust and whether such assignment might be subject to gift tax (estate tax).
When assets have already been incorporated into the trust and are being held by the trustee, this should be evaluated in connection with the assets so incorporated, along with the generation of income from them, the allocation of the vehicle company and its reduced tax impact, by using jurisdictions with DTTs or convenient holding regimen.
Finally, certain considerations should be made concerning distribution of the assets to the beneficiaries. The income tax that may be assessed upon the distribution received by an Argentine resident beneficiary should also be evaluated.
Any capital surplus, with respect to assets contributed by the settlor upon assignment of the trust, shall be subject to income tax at the time of distribution to Argentine resident beneficiaries.
The beneficiaries’ permanent residence should also be considered: if they are in Buenos Aires, there might be a considerable impact with respect to gift tax. This may also occur if the property to be distributed is located in the same place.
With the right structuring and proper management, it is possible to achieve asset protection and succession planning on assets, placed on both a corporate and a fiduciary-based structure. However, it is crucial that one keeps the big picture in mind, if one is to avoid an unnecessary and unwanted tax burden.