Note: this article was written in 2017 and some of its definitions might have been updated. Specially tax benefits
By end March 2017, Congress passed Law N° 27349 with immediate effects by a Decree of the Executive Branch. This regime promotes and supports entrepreneurial activities and it is a complement for SMEs (Small and Medium-Sized Companies) regulation which was treated in our previous article, with tax benefits for those supporting this type of activities. In this post we will focus on the legal aspects, leaving for future posts two topics: the new Crowdfunding System and SAS (Simplified Stock Companies).
What is “entrepreneurship” for law?
Considering it is a broad term, it is important to understand what is understood by “entrepreneurship” in legal terms for benefits entitlement. Pursuant to Section 2, it is defined as “any activity, for profit or not, carried out in the Argentine Republic by a newly created legal person or by one that was incorporated no more than seven (7) years ago.” According to this definition, NGOs (Non-Governmental Organizations) and projects or ventures set up by citizens are included within this category, since they are non-profit organizations. The only requirement is to have been set up no more than 7 years ago. In my opinion, it is a technical error but it appears to be the only feasible alternative to determine who is entitled to such benefits or not.
Tax benefits for investors
I consider it is one of the most attractive aspects of this legislation. Capital contributions made by investors in entrepreneurial activities (always subject to law) can be deducted from the investor’s taxable earnings base subject to the conditions set forth by law. Deductions will be equivalent to 75% of the net taxable income up to 10% of the investor’s annual profits (if the amount exceeds the 10%, it can be deducted in subsequent fiscal years). Tax deduction will be equivalent to 85% for under-developed areas with less financing, always in liquid capital contributions.
The fact that private investors can co-invest with private parties deducting the 75% from the net taxable income implies that the investment reduces to one-quarter of the whole investment amount with the yields and products if the commercial venture turns to be a feasible successful one. The aim of this law is to enable individuals and legal persons with important taxable earnings base, to assign up to 10% of these amounts to develop entrepreneurial activities, thus creating employment and with high economic impact in the market.
This percentage may be reduced by the Executive Branch. Although it seems unfair, it is reasonable in order to keep the public sector financing. Anyway, it is not clear if such amendment may have retroactive effects or not.
Additionally, investment must be kept for 2 years at least to grant deduction benefits. This helps to avoid fraud and to enjoy friendly conditions to run business. The question is if the 2 years’ period should have elapsed to enjoy such credit or not. Due to the constant Peso devaluation, it does not seem likely to happen.
This benefit cannot exceed 0.02% of the PBI (Gross Domestic Product) and it will be allocated against investment commitment. Those individuals or legal persons seeking to be benefited without carrying out the investment project are likely to be sanctioned in order to preserve these resources and the entrepreneurial community interests.
The following persons can engage and be “investors in entrepreneurship activities”: legal persons, investment funds or trusts with their own or third parties’ capital contributions, natural persons making personal contributions to entrepreneurship entities and/or to new projects. The alternative for natural persons to invest directly is very attractive, giving investors the possibility to fully commit themselves with the project involved and improving the dynamics of this system. Less requirements may be connected with the investment amounts involved.
The law stipulates that beneficiaries can be micro, small and medium-sized enterprises pursuant to Section 1 of Law 25.300 subject to compliance with the stated requirements (even if connected with enterprises that do not comply with such requirements). We assume from this section that big companies would be able to enter the system through the creation of “satellite” small and medium-sized enterprises for certain projects, making capital contributions and enjoying tax incentive (saving 75% of the net taxable income). This issue requires to be legally defined to avoid “legal tax evasion” and to protect the spirit of the system; otherwise, the benefit could be enjoyed by “SME affiliates” set up by parent companies.
Besides, beneficiaries are required to report to the enforcement authorities if, at any time, they cease to comply with legal requirements, within a period of thirty (30) days. Failure to comply with this requirement will operate as a transitory or permanent discontinuance from the Registry of Entrepreneurial Capital Institutions.
Entrepreneurial Capital Institutions (Instituciones de Capital Emprendedor)
The law introduced the figure of “Entrepreneurial Capital Institutions”; they can be legal or natural persons, funds or national trusts with the sole purpose of contributing capital resources to a group of entrepreneurial ventures. They are subject to compliance with stated requirements and they are the only authorized channel to enable legal entities to make capital contributions deductible from their Income Tax Affidavits. Some control over capital contributions by these institutions seems to be reasonable.
These institutions must issue a certificate (affidavit) in order to report to the Registry of Entrepreneurial Capital Institutions all contributions made by investors to enable them to enjoy tax benefits. This is helpful to avoid tax evasion since these institutions are jointly and severally liable with investors.
Registry of Entrepreneurial Capital Institutions
It was created by law aiming to register all entrepreneurial capital institutions, their administrators and investors seeking to enjoy tax benefits. Investors shall report to this Registry all commitments undertaken, contributions made and commercial ventures involved, as established by law.
Neither the institutions nor the investors shall be entitled to tax benefits until registration is completed with the Registry. In the case of institutions, they are responsible for their investors’ registration.
FONDCE (Trust Fund for Entrepreneurial Capital Development)
It is a trust fund created by law to provide financing for entrepreneurs and entrepreneurial capital institutions. It is not very clear how it will be sourced; we assume it will be sourced from resources allocated through the National Government, by the Secretary of Entrepreneurial and Small and Medium-Sized Companies of the Ministry of Production or through international funds (except for donations made by private parties, although it seems unlikely to happen).
FONDCE shall be entitled to grant loans, to make non-reimbursable contributions and to make capital contributions directly to entrepreneurial activities. We insist, it is an interesting entity though with a doubtful recourses source.
To conclude, the topics of this post are listed by order of relevance (in my opinion). In the following posts we will focus on Collective Financing Platforms (Crowdfunding) and SAS (Simplified Stock Companies) which, in theory, could be set up in 24 hours with a simple online step. As usual, we remain at your disposal to assist you with confidence and reliability.