Argentina’s Economic Reform Law expected to pass: Top points

Argentine President Javier Milei's administration is poised for a landmark achievement this week, with an economic reform bill expected to pass on Thursday (the Economic Reform Law). This would mark a significant victory for President Milei, whose party holds a minority presence in Congress with 10 percent of Senate seats and 15 percent of the lower chamber. 

The Economic Reform Law, coupled with an executive decree of necessity and urgency adopted in December, will serve as the foundation for an ambitious agenda aimed at achieving long-term sustainability, deregulation, and pro-market incentives.

Encompassing over 200 sections across 150 pages, the Economic Reform Law tackles a wide range of issues, including public works, administrative procedures, labor regulations, tax and customs matters, energy, environment, and foreign investment. This comprehensive approach signifies the administration's commitment to dismantling bureaucratic hurdles, fostering a business-friendly environment, and attracting large investments through attractive tax packages.

Argentina has the second largest unconventional gas basin in the world. Under the new incentive package, over $9 billion has already been committed to the oil and gas sector, encompassing new oil and gas pipelines, the reversal of existing gas lines to boost exports, the establishment of liquefaction plants, and new exploration in the maritime basin. Massive investment is also expected in the mining industry, including some of the largest lithium mining fields in the world.

Below, we provide a brief description of the main topics contained in the Economic Reform Law.

Incentive regime for large investments

The Economic Reform Law includes an incentive regime for large investments, known as RIGI, which provides a framework for offering fiscal and tax incentives, legal stability, long-term certainty, and property rights protection to investors who meet the conditions outlined in the law.

It will apply to entities in the agroindustry, infrastructure, forestry, mining, oil and gas, energy, and technology sectors that have large investment projects and comply with the requirements established by the relevant laws.

The adhesion period to the RIGI is two years from the entry into force of the Economic Reform Law, with the possibility of a one-year extension.

Single project-owner vehicles (VPUs, for their acronym in Spanish) that own a project may apply for RIGI membership, provided that their sole purpose is to execute a specific RIGI investment project and they do not engage in any other activities or hold assets unrelated to the project.

The VPUs can be limited liability companies, public limited companies, joint ventures, branches, and dedicated branches may also be subject to this regime.

Dedicated branches shall be created for LLCs or corporations that wish to adhere to the RIGI while simultaneously carrying out other activities unrelated to the investment project.

Among the requirements for their adhesion, dedicated branches must be registered in the applicable corporate public registries, have their own tax identification number, and maintain separate accounting records.

Providers of imported goods and services can also adhere to the RIGI if these providers are aiming to provide goods and services to a VPU.

Minimum investment to qualify under the RIGI the investment project should be of a minimum of USD200 million in computable assets. The Executive Branch can set a higher minimum for each project depending on its type. However, the Executive Branch cannot set a minimum investment higher than USD900 million.

Investment term: Depending on the investment project, 40 percent of the investment should be made in the first two years from the date the investment project is approved. Exceptionally, the Executive Branch can authorize a lower investment amount for the first two years.

National interest: A notable aspect of the Economic Reform Law is that it designates all projects approved under the RIGI as being of "National Interest," as per Section 75, subsection 18 of the Argentine Constitution. This designation somewhat limits the potential intervention or interference of provincial governments in the activities carried out under these projects and provides an extra layer of protection.

Importers: Goods and services providers that import goods and services can also adhere to the RIGI if they aim to supply goods and services to a VPU. 

Force majeure: Project owners will face no liabilities if a RIGI project needs to be suspended or canceled due to force majeure or unforeseeable events.

Stability: A VPU with an approved RIGI project will have tax, customs, regulatory and FX stability for a period of 30 years. This also foresees tax stability by which the taxes to be applied will be only those in force at the moment of adhesion without considering new or increased taxes at a federal level and at a provincial level in those cases in which a province has adhered to RIGI regime.

Some of the incentives established by the project for the RIGI and protected by the stability include the following:

Income tax benefits

There is a fixed income tax rate of 25 percent.

There is an accelerated depreciation of assets.

Losses can be carried forward indefinitely. Any losses not utilized within five years can be transferred to third parties. Losses will be adjusted using an inflation index.

All accounting adjustments will be applied using the consumer’s price index.

The withholding tax on dividends will be 7 percent during the first seven years. After year seven, the withholding tax on dividends will be reduced to 3.5 percent.

VPUs that qualify as “strategic exporters” and make payments to foreign service providers will benefit from a 0-percent withholding tax on payments related to international transport services and EPC services. Other services considered to be of Argentine source will be subject to a maximum withholding tax of 10.5 percent.

Intercompany transactions between a VPU and any local related party will be subject to transfer pricing rules.

Interests and FX variations can be deducted without limitations for a period of five years.

The VPU will be able to consider 100 percent of the tax on debits and credits paid as a tax credit for income taxes.

VPUs can keep their accounting in USD.

Value added tax (VAT) benefits: The RIGI outlines a system based on tax credit certificates to offset obligations related to VAT tax, tailored to the type of taxpayer involved. 

Customs duties benefits: 

The customs regime will remain stable for 30 years from the date of adherence.

Imports of capital assets such as capital goods, spare parts, components, and inputs will be exempt from Customs Duties and any tax collection on imported goods.

Goods exported will be exempt from customs duties.

A VPU will have the freedom to import and export goods and assets without encountering any direct or indirect limitations, prohibitions, or obstacles.

Foreign exchange benefits: Stability on the FX regulations is also established.

The revenue generated from the exports of products from the projects adhering to RIGI will gradually be exempted from the requirement to be entered and liquidated in the official foreign exchange market, following a specified progression:

In the first year, 80 percent of the export proceeds must be repatriated and settled in ARS. For the second and third years, 60 percent of the proceeds should be repatriated and settled in ARS. Starting from the fourth year, the VPU is no longer mandated to repatriate and settle the export proceeds in ARS.

The funds exempt from the repatriation requirement are regarded as free disposable funds that the VPU can retain abroad.

The government cannot establish any limitations or restrictions to the amount of funds that a VPU can keep abroad.

VPUs shall not be subject to any restrictions regarding access to the official FX market for repaying loans or disbursing dividends up to the equivalent amount of funds repatriated and settled in ARS for loans or capital injections.

If the government implements a more advantageous FX regime for the general public, the VPU will also be entitled to receive that treatment.

Arbitration: In the event of a dispute between a VPU and the government or any official agency, a special procedure is to be followed, commencing with amicable negotiations lasting for a consecutive 60-day period. If the conflict remains unresolved after negotiations, the VPU can initiate an arbitration process. The VPU has the option to select from various arbitration rules, including the PCA rules, the ICC rules (excluding the abbreviated process), the Convention on the settlement of investment disputes between States and nationals of other States, or CIADI rules. The seat of Arbitration cannot be Argentina and should be a country which is a party member of the New York Convention. The tribunal should be of three members, none of them being a national of Argentina or a national of the country from which the owner or controller of the VPU is a national.

Privatization of public companies

The Economic Reform Law designates a list of public companies and state-owned enterprises subject to privatization including: Energía Argentina S.A., Intercargo S.A.U., Agua y Saneamientos Argentinos S.A. (AYSA), Belgrano Cargas y Logística S.A., Sociedad Operadora Ferroviaria S.E., Corredores Viales S.A. 

Conversion of public companies and state-owned companies

For state-owned or -controlled companies where the federal government holds a majority stake in the capital or control of corporate decisions (excluding those subject to privatization), the Economic Reform Law grants the Executive Branch the authority to:

• Modify, transform, or convert its legal structure from a state public entity into a stock corporation.
• Determine mergers, spin-offs, divisions, restructurings, reorganizations, or transfers to the provinces or the Autonomous City of Buenos Aires.

Public bidding and public concessions

The Economic Reform Law intends to simplify biding processes and to secure the benefits of the owners of a public concession.

The Economic Reform Law also amplifies the scope for private initiatives for concession including public services into the scope, previously limited only to infrastructure projects.

Labor matters

The Economic Reform Law aims to deregulate labor relationships to a certain extent by eliminating fines and penalties that were previously applicable in almost all cases of dismissals. Additionally, it extends the trial period from 3 to 6 months, with the possibility of extending it further to 8 months or 1 year in certain cases.

If you require further information or have inquiries regarding conducting business in Argentina, including the comprehensive reforms being implemented, please reach out to Augusto Mancinelli, Head of Taxation in Buenos Aires, or Marcelo Etchebarne, Argentina’s Country Managing Partner, for assistance.