Legal promotion to attract large foreign investments and deregulation for local SMEs
On June 27, 2024, Argentina passed Law 27,742 on the Bases and Starting Points for the Freedom of Argentines (Ley de Bases), with 238 articles, dedicated to the reform of the state and the administrative procedure, the labor regime, tax whitewashing and economic emergency, among other matters. Title VII, with its articles 164 to 228, establishes a large investment incentive regime (RIGI) that has just been regulated by Decree 749/2024 on August 22.
This new framework aims to attract a flow of foreign investment to Argentina. Through the RIGI, the country is trying to generate essential conditions for its international economic integration, such as predictability, stability and competitiveness after decades of breaches of private and public contracts that generated distrust among investors and numerous processes in the World Bank's dispute resolution system. With this legal framework, Argentina legally understands that in order to begin to be reliable, it needs to be honest and encourage its macroeconomic potential.
As a federal promotion regime, it must grant benefits to foreign investors without having a negative impact on provincial and municipal finances and legal systems. A rigorous determination of the sectors and interests incentivised makes it possible to avoid any technical distortion due to the application of the RIGI.
Who can access the RIGI
The legal promotion should allow Argentina to position itself as a new long-term supplier in markets in which it does not yet have a relevant participation through a strategic export project worth more than 1,000 million dollars. It may consist of the expansion of an investment in a pre-existing project. The law creates extraordinary benefits for nine sectors, such as the forestry industry, tourism, mining, steel, gas and oil, infrastructure, technology and energy through tax and customs incentives, in addition to impacting the exchange control regime so controversial in international and local courts. Regulatorily, the federal government must approve a VPU (Single Project Vehicle) to request access to the RIGI. Corporations and limited liability companies, subsidiaries of foreign companies, companies dedicated to a specific project and joint ventures can be active subjects to apply for the RIGI regime.
What are the benefits?
The RIGI will also maintain a significant exemption from taxes and tariffs. Approved VPUs will gain a 10% benefit in income tax (from 35% to 25%), a reduction from 7% to 3.5% in taxes on dividends, an acceleration of the depreciation of capital goods, the use of tax credit certificates to pay taxes, an exemption from the import tariff on goods and an exemption from export taxes in the third year. These exports will not suffer the retentions challenged in court as confiscatory by the agro-industrial sector in a country with the capacity to produce and export food for hundreds of millions of people.
The large investment must involve the acquisition, production, construction and development of capital goods to be used in the designated activities for an initial minimum of 200 million dollars. To remain in the RIGI, they must provide a minimum computable investment in assets of no less than 40% of the project in the first two years.
Another important benefit is the refund of 21% VAT within a maximum period of three months and the calculation of 100% of the tax on bank debits and credits (check tax) as payment on account of taxes. Companies have two years (August 2026) to join the RIGI with the possibility of extension for an additional year.
Impact on mining
Gold and silver accounted for 4.4% of Argentine exports in 2023, including 56 Canadian companies whose projects are valued at $9 billion, mainly dedicated to gold mining.
Lithium production is undoubtedly one of the stars of the RIGI's focus, as it has grown in Argentina to 4,440,000 metric tons in 2022. Silver and gold represent 3,624,000 and 1,256,000, respectively, for that same year.
For the extractive and export gas and oil activity, the minimum investment is raised to 300 million dollars, without affecting processing, refining, and fertilizer production, which remain at a minimum of 200 million. Other investment projects in exploration and exploitation, on the other hand, require a minimum of 600 million dollars.
Caring for local suppliers and protecting industrial SMEs
The definition of a local supplier in the RIGI regulations requires that they be incorporated and domiciled in Argentina, that the holders of 51% of the share capital of these companies or the voters required to form the corporate will at the corporate meetings have a tax domicile in the country. The number of non-resident directors is not important. The purpose of these supplier companies must be the provision of services or sale of goods to a VPU adhering to the RIGI.
One of the most important legal requirements for preparing the RIGI membership project is the presentation of a plan for the development of local suppliers, including a commitment to hire them in the form of a sworn declaration, for a percentage value of at least 20% of the total amount of the investment intended for the payment of suppliers. This rule was introduced as part of the parliamentary debate.
The RIGI regulation has caused a certain mistrust among Argentine associations of industrial SMEs. While the regulation delegates to the Ministry of Economy the creation of the RIGI project evaluation committee, it does not establish anything about the sanction for violations of the 20% purchase made from Argentine suppliers.
The lack of enforceability of the rule is what worries small business owners. However, after the RIGI regulation, Argentina is preparing new deregulation legislation and a specific plan to support SMEs, called “mini-RIGI”. It is the same Ministry of Economy that qualifies the RIGI projects that carries out the prior consultations to determine the measures that will speed up the operation of these companies and the reduction of the exorbitant tax cost that they publicly claim to suffer as the highest tax cost in all of Latin America. One of the projected measures is the future reduction of 50% of the employer's burden on an SME for each new worker it hires. Symmetrically, this reduction is accompanied by a whitewash as part of another title of the Basic Law.
Accelerated amortization and VAT refunds are also advantages designed to contribute to the economic recovery of Argentine SMEs, perhaps aimed at attracting new capital investments as occurred in other countries in the region previously. The association of regional companies and investors, particularly Brazilian ones, with Argentine SMEs may be one of the most efficient ways to legally revitalize Mercosur. To do so, it is necessary to reform the regulatory treatment of foreign companies, as that country did this year.
These new measures, among others also included in the Basic Law, propose to facilitate regional and international business from Argentina. Starting over better than before represents a reconstruction on solid and reliable legal bases for all those who want to do business in Argentina.
Published on Legal Today el 29.08.2024
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