Although we hoped with this third edition of our newsletter (see others on Argentico.com – “newsletter” tab ) to give information on new real estate developments in Argentina, and how one, as a foreigner, might best take advantage of this tantalizing market, we are humbled to say we can not provide this, yet.
However, as our friends at the accounting firm Miguel A. Monti Associates like to say, quoting from Charles Darwin, “It is not the strongest or the most intelligent who will survive but those who can best manage change.” With this in mind, we provide you from them two things: Information related to properties overseas and their tax consquences for Argentines; and, a tid bit, or hors d’oeuvres, on how to bring foreign money into Argentina for real estate investing.
We hope by Argentine Spring/US Fall, to serve a newsletter which may better make accessible the Argentine real estate market for foreign investors.
PROPERTY PURCHASES ABROAD BY ARGENTINE RESIDENTS – Julián Monti
The average Argentine investor thinks of buying property abroad as something extremely complicated, especially pertaining to taxes and the Argentine government – AFIP (Federal Administration of Public Income). “I will be charged a lot of money in taxes, AFIP will come after me, it is very complicated’, are justifications made.
However, when one becomes acquainted with the Argentine tax system, one might conclude, with respect to matters related to the purchase itself, of a property abroad, the issue of taxes might be the simplest of them all; and issues such as projected profitability, location, maintenance and how to execute the purchase are more complex and delicate.
First, one must understand how taxes related to assets and/or income abroad are tabulated for the Argentine resident. Currently, according to Sections 5 and 127 of Argentine Income Tax Law, AFIP operates under the concept of “world income.” This means an Argentine resident pays taxes on income and assets in Argentina, as well as taxes for assets abroad. To avoid double-taxation, Articles 168 to 169 of the Tax Law allow taxpayers to deduct from their local tax the amount of tax paid abroad. Therefore, one may deduct the tax paid abroad from one’s Argentina tax and only pay the equivalent rate to the country with the higher rate. (It is said unoffically there is an agreement for the avoidance of double-taxation with the United States, but there is currently no such agreement between the United States and Argentina.)
Most important with respect to taxes is how to move money and structure tax presentations. This must be divided into two alternatives: Either the funds are already abroad, or they are to be transferred to another country. This is the difference between having the source of the funds in an account in Argentina, or having the source in a foreign account.
If the investor’s “papers are in order,” and therefore the investor’s bank accounts are declared on the investor’s tax returns, the purchase is very simple, and the purchase’ effect on the investor’s taxes will be neutral. When it comes time to payment, the purchaser can simply make a transfer from the investor’s account abroad to the seller’s account, and the matter is finished. These declared funds pay the tax on personal property, therefore the investor is changing one good for another so the taxpayer continues to pay the same tax.
When one considers the option of a funds transfer abroad, we find the exchange regulations of the Central Bank currently do not allow the outflow of currency to buy property abroad. However, having pesos in Argentina, one has the option to send those funds with the famous “*contado con liquidacion,” but one faces a higher exchange rate. (*”Contado con liquidacion” is an Argentine term, with no easy translation, other than “contado” means when one pays cash; so essentially it might mean “cash with bond liquidation.”)
How does this system work? One buys national Argentine bonds in Argentina, and sells them in the foreign market through a broker, depositing the proceeds of the sale in U.S. dollars in a bank account abroad. If one looks at the tax-side of this, one sees the funds reported in Argentina, with taxes already paid on them, which are then tranformed into dollars abroad, and consequently can be used to buy property. Again, these funds are declared in the investor’s statements, the Personal Asset Tax (“Bienes Personales”), have already been paid, so when the money is changed for property, then the same tax which was paid on the money, is no longer to be paid on the funds but for the property.
Once the purchase and tax statements on assets are made, the only item left to study is the income derived from the property, and to do this in two schemes: Any rent and/or capital gain at future sale.
With respect to rental income, this must be declared and added to the local, Argentine, income statement, by paying the tax due based on the general table of income tax. It is important to know Section 84 states that property depreciation and fees paid to maintain on property are deductible expenses from income tax.
In the event of a subsequent sale of the property, the transaction is exempt from tax according to provisions of Section 2 of Law 20,628 since it leaves out operations that are not habitual for the person. Therefore, as long as the person does not engage “habitually” in the sale of properties, these transactions would be exempt.
Another matter to determine as applicable, or not, is the statement of rental value as it may pertain to property for summer or vacation, or property transferred without charge to family members. This matter depends on the property’s characteristics and location.
Obviously, it is important to be well-advised with respect to these matters.
PURCHASE OF ARGENTINE PROPERTY BY NON-RESIDENTS – Julián Monti
Among the main questions for foreign buyers of Argentine property derive from tax issues at purchase.
The first issue is the transfer of the funds for the purchase, since the exchange controls imposed by the government complicate the issue for foreign investors.
Today, a foreigner may make payment in three ways: By transferring abroad to a seller’s account outside the country, a transfer to the country through a “contado con liquidacion inverso” (See asterisked note above for a partial, informal explanation of this term), or a transfer through the local exchange market in Argentina.
Any of the three alternatives is feasible from a legal point of view, but only the third (the most economically unattractive to the purchaser due to unfavorable-to-investor exchange rates) has no future consequences.
The first two options have consequences. There is a provision of the Central Bank which states that if a foreign investor purchases a property in Argentina without paying through the local exchange market (option 3) at the time of a future sale of said property in Argentina, the investor must request authorization from the Central Bank to repatriate foreign currency to his native country. This is an important issue to consider when thinking about what the investor intends to do with his investment medium term.
Among the tax issues, the foreign investor must have a CDI, which can be obtained at any AFIP agency, but for paying taxes the investor must have a tax representative, or tax substitute. The tax substitute is the fiscal representative for a foreigner to pay Argentine taxes.
The tax substitute must be an Argentine citizen, and have a CUIT and tax code “clave fiscal,” which is the registration number a tax payer needs to function in the system. The substitute will need to register with the AFIP and be responsible for filing and paying all taxes due from the investor.
Taxes paid by the taxpayer will consist in income tax for the rent and the tax on personal property at a rate of 1.25% per annum.
If the investor wishes to sell, according to Section 2 of Law 20.628, the property is exempt from income tax but subject to ITI (tax on real estate transactions) at a rate of 1.5%. To not have to pay any income tax and to register for the the ITI in order to sell, the investor must run an AFIP process request (Resolution 2139).
Again, it is important for foreigners to be well-advised with respect to these matters, to best determine how to formalize operations.
Public Accountant Julián Monti was trained at the University of Buenos Aires, where he graduated magna cum laude. He is a partner at Miguel A. Monti & Associates. www.estudiomonti.com.ar
We are pleased to announce this newsletter recently received it’s United States Patent and Trademark registration (#4.521.589), on April 29, 2014.
This newsletter is not intended to provide legal or accounting advice or opinion. Such advice may only be given when related to specific fact situations, and under consultation of legal and/or accounting professionals. Circular 230 DISCLAIMER – any US federal tax advice which may be mentioned by professionals in this newsletter is not intended to be used, and cannot be used, for the purpose of avoiding federal penalties due.
Traducido por Hernán Merea, RGA Language Services rgalanguageservices.com