Interpretation of Argentina's "shock therapy" new policy: specific measures under the large-scale investment incentive system

LABEL： Engineering, Energy and Infrastructure ,

preface

After taking office on December 10, 2023, Argentine President Javier Milei adopted a "shock therapy" economic policy to restore the Argentine economy in the face of the country's severe economic crisis, and subsequently introduced a series of laws and measures. (Reference article: Changes and prospects of Argentina's electricity, energy, and mineral investment laws from the perspective of Argentina's "shock therapy" new policy)

On December 27, 2023, the Argentine government submitted the "Argentine Freedom Foundation and Starting Point Act" (hereinafter referred to as the "Comprehensive Act") to the Argentine House of Representatives. The bill was unanimously passed by the House of Representatives on June 28, 2024 and came into effect on July 8, 2024. In order to promote long-term investment projects in Argentina, the Comprehensive Act established the Large scale Investment Incentive System (RIGI System) in Chapter 7. This investment system provides a series of specific investment incentives such as taxes, tariffs, and foreign exchange for large-scale investment projects in the fields of energy, mining, technology, agriculture, forestry, and infrastructure.

This article will introduce and interpret the specific measures and application procedures for foreign investment projects under the large-scale investment incentive system based on the Comprehensive Act.
1、 Qualified Investment Projects

The RIGI system applies to entities that have a single project and meet its specified requirements. According to the RIGI system, investment projects must meet the following conditions:

           
2、 Investment Plan

If investors want to apply to join the RIGI system and obtain the rights and investment interests stipulated therein, the SPV established by them first needs to meet the application conditions stipulated in the law and submit an investment plan in accordance with the relevant procedures; Secondly, obtain approval from the RIGI executing department (currently no specific regulatory authority has been designated) for the application and investment plan.

The investment plan submitted by investors shall include the following items [6]:

           

The executing department of RIGI must approve or reject the application and investment plan within 45 days of receipt, and the period during which the executing department requests additional information will not be counted towards this deadline [7].

The reasons for rejection of investment project applications are limited to: (i) not meeting the application requirements; (ii) Failure to complete the payment of 40% of the minimum investment amount within the previous two years, or failure to complete the payment within the prescribed time; (iii) The investment plan lacks sufficient or necessary information; (iv) Lack of relevant or necessary licenses required for implementing investment plans; (v) It is clearly impossible to meet the investment plan in terms of technology, economy, or finance; Or (vi) the project may disrupt its domestic market. If the investment application is rejected due to the above reasons and cannot be appealed, the investor may resubmit the investment application within the same year, but not more than twice.
3、 Specific measures for investment incentives

The RIGI system is established through Chapter 7 of the Comprehensive Act, and in Sections 4 to 6 of the system, corresponding provisions are made on the stability of tax incentives, foreign exchange, and investment incentives applicable to qualified projects. The specific investment incentives are as follows:
1. Income tax

(1) The general income tax rate is 25% to 35%, and the income tax rate applicable to SPVs that meet RIGI conditions is 25%, not applicable to the general tax rate;

(2) For tangible assets, minerals, quarries, forests, and infrastructure projects, investors can use the accelerated depreciation method stipulated in the RIGI system in their income tax calculations, including: (i) for depreciable movable property purchased, processed, manufactured, or imported, depreciation shall be carried out twice a year in equal installments; (ii) Reduce the useful life of minerals, quarries, forests, and similar assets to 60%;

(3) Other income tax adjustments stipulated in the Income Tax Law should take into account inflation adjustments based on the Consumer Price Index. Non RIGI entities also have inflation adjustment mechanisms, but their adjustment scope is limited;

(4) If the net operating loss incurred by SPV cannot be offset by the taxable income of the same period, it can be carried forward without any time limit. If the net operating loss has not been recovered after five years, it can be transferred to a third party. Meanwhile, specialized branches may absorb the taxable income of their affiliated companies or transfer it to third parties. Non RIGI entities are only allowed to carry forward net operating losses for 5 accounting years and are not transferable;

(5) When distributing profits, dividends distributed to individual residents and foreign investors are subject to a general tax rate of 7%. From the seventh year of joining RIGI, the tax rate will be reduced to 3.5%;

(6) The capital weakening rule in the income tax law does not apply to SPVs within five years from joining RIGI;

(7) Transactions between SPVs and their partners, members, or other affiliates are subject to fair trade rules. However, such transactions do not require submission of transfer pricing declarations;

(8) The expenses covered by sea freight charter services, international transportation services, as well as engineering, procurement, and construction management services paid to foreign suppliers in long-term strategic export projects are exempt from withholding income tax. Except for the above-mentioned payments, for other payments made to foreign suppliers, unless more favorable tax treatment is provided for in the Income Tax Law, it is presumed that the net taxable amount of SPV is 30% of the total payment. In such cases, the determination of withholding tax will not take into account the increased payment amount paid by the SPV;

(9) SPVs composed of joint venture (operating) enterprises are the taxpayers of corporate income tax. The profit distribution of the enterprise to its partners shall not be included in their respective taxable income;

(10) Enterprise restructuring for the establishment of SPVs can be exempted from taxes without meeting the tax-free restructuring conditions stipulated by the Income Tax Law;

(11) SPV can calculate the full amount (100%) of bank loan tax paid as a deduction for income tax.
2. Value added tax [9]

SPVs can settle value-added tax generated from the purchase, construction, manufacturing, processing, import of fixed assets or investment in infrastructure and/or other important services related to their business by delivering tax credit certificates to their suppliers or Argentine tax authorities (abbreviated as "AFIP" in Spanish).

This means that SPV will only pay the net amount of invoices issued by suppliers (excluding value-added tax). In the case of excess deduction of value-added tax, suppliers are free to transfer tax credit certificates.
3. Tariffs

RIGI does not impose any restrictions on the import and export of goods and services manufactured or provided by SPVs, including direct restrictions, quota restrictions, or any other government actions that affect the value of trade projects (such as expropriation or requisition).

For goods produced by long-term strategic export projects, they will no longer be subject to export restrictions that prioritize the domestic market. Capital goods, spare parts, and components imported by SPV will be exempt from import tariffs, statistical fees, and any other charges, as well as provisions for national and/or local taxes.

After three (3) years from the date of project approval, product exports will be exempt from export taxes. For strategic export projects, the aforementioned deadline will be shortened to two (2) years.
4. Foreign exchange

According to current regulations, exporters must settle foreign currency earned from exports in the Argentine foreign exchange market. The RIGI system provides exceptions to the aforementioned rules, granting SPVs the right to retain their export earnings in the original currency and no longer forcing exporters to settle foreign exchange within Argentina after the statutory deadline. The specific proportion and statutory period of retained earnings allowed are as follows:

(1) From the second year of SPV's commercial operation, it is allowed to retain 20%;

(2) From the third year of SPV's commercial operation, 40% is allowed to be retained;

(3) From the fourth year of SPV's commercial operation, 100% retention is allowed (i.e. exemption from the requirement to settle foreign exchange in the Argentine foreign exchange market);

For long-term strategic export projects, the prescribed period of the above rules will be correspondingly reduced by one year, allowing the project to retain 20% from the first year, 40% from the second year, and exemption from restriction requirements from the third year, retaining 100% of export earnings in the original currency.

In addition, foreign exchange regulations that require prior authorization for current or future foreign exchange restrictions or market access will not apply to the following situations: (1) payment of principal for any external borrowing; And, (2) pay profits, dividends, or interest to any non resident beneficiary, provided that such profits, dividends, or interest come from foreign investment, direct investment, or loans entered into the foreign exchange market and settled after joining RIGI.
5. Policy stability

The SPV enjoys a stable period of 30 years for investment incentives under the RIGI system, including tax, tariff, foreign exchange, and regulatory stability.

SPV is required to pay valid existing taxes from the date of approval of the investment project. Any additional taxes and/or increases in existing taxes from that day onwards will no longer apply to the SPV, meaning that any direct increase in future taxes and/or potential burden on existing taxes based on future regulations will not apply to the approved SPV, including the following situations:

(1) Raise tax rates;

(2) Cancel tax-free items;

(3) Revise the tax base determination procedure;

(4) Add tax payable items;

For payments to foreigners, stability also applies to: (i) changes in the percentage and/or recognition mechanism of presumed net income from Argentina, and (ii) possible increases in current effective tax rates, fees or amounts. At the same time, the RIGI system also stipulates that the current effective foreign exchange system shall not impose stricter conditions on top of current regulations.
epilogue

The implementation of the Comprehensive Act is not only the starting point of Argentine President Millet's policy vision, but also signifies a significant change in Argentina's investment environment, with the RIGI system being an important part of his economic reform policy measures.

The RIGI system provides corresponding special policy measures for taxes, tariffs, and foreign exchange involved in foreign direct investment, and establishes a 30-year policy stability period for these specific measures. In terms of the investment rights provided by the specific measures of the RIGI system mentioned above, these regulations have made transformative measures to address Argentina's economic problems such as fluctuating tax and tariff regulations, and foreign exchange shortages caused by international balance of payments. Argentina's economic policy has shifted from excessive state intervention to a free market orientation, creating a more favorable investment environment for investors.

From the perspective of the energy and mining sectors, the RIGI system clearly emphasizes the promotion of investment in industries such as mining, energy, and infrastructure. On the one hand, it provides the aforementioned investment incentives, and on the other hand, it reduces many domestic investment restrictions. Therefore, under the RIGI system, many pain points faced by investments in the mining and energy sectors can be improved or resolved. For example, a 30-year policy stability period ensures the controllability of the impact of policy changes on investment projects with longer cycles, restrictions on the outflow of investment returns, and tariffs faced by equipment and product imports and exports.

It is worth noting that although the application period of the RIGI system is set at thirty years, its longest application period is only three years, which means that the Argentine government may hope to attract foreign investment in the country in the short term to achieve short-term economic benefits in order to stimulate the domestic economy. From a long-term perspective, it remains to be seen whether policies will have a sustained impact on Argentina's overall economic environment.

In summary, the RIGI system is an important legislation for changing the investment environment in Argentina, especially for investments in industries such as mining, energy, and infrastructure, which have significant development implications. If investors have recent intentions to invest in Argentina, they should pay attention to the investment opportunities provided by the RIGI system, estimate the cost-effectiveness of the system within the observation period not exceeding the application deadline, and make a reasonable investment decision based on comprehensive considerations.