By Alejandro Candioti

Candioti Gatto Bicain & Ocantos

It can be hard to be optimistic about investment opportunities in Argentina. For a second consecutive year, the country's economy has endured inflation at an annual rate of 25%, which gradually deteriorates the competitiveness of most economic activities. Imports of all kinds are subject to significant restrictions and bureaucracy, causing considerable delays in customs clearing, or worse, effective bans. Exchange control restrictions imposed by the Central Bank constitute insurmountable obstacles for the payment of dividends or repatriation of capital to foreign investors. Official statistics are considered unreliable and companies often resort to private consultants for more accurate data.

In 2012, the Argentine government renationalised YPF, the largest oil producer of Argentina that had been sold by the government to Spain's Repsol in the early 1990s. Restrictions on the access to foreign currency by individuals has greatly increased and more recently, during the first quarter of 2013, the government imposed a three-month freeze on supermarket's retail prices and restricted retail.

A slowing of the Argentine economy, combined with a weakening of the global demand for commodities produced by Argentina are at the origin of such trade restrictions and capital controls. Various independent consultants forecast Argentina's GPD growth for 2013 at a disappointing 0.9%.

In September 2011, China's Ministry of Commerce, the Ministry of Foreign Affairs and the National Development and Reform Commission published the Industry Guidelines for Outbound Investment in Various Countries (对外投资国别产业指引), which is intended to provide small and medium-sized enterprises (SMEs) with an overview of foreign investment priorities, foreign investment regulations and industrial development zones in 115 countries around the world. Argentina is excluded from the industry guidelines, most likely because Chinese state-owned companies already dominate most of the promising investment opportunities here, leaving little room for SME activity, according to Dereck Scissors, senior research fellow at The Heritage Foundation, a conservative think tank based in Washington DC.

In spite of this seemingly unattractive business environment, Chinese companies continue to invest in Argentina, mainly in the oil and gas and mining sectors. Total investment in Argentina by Chinese businesses over the past 10 years surpassed US$20 billion at the end of 2012.

Two areas for Chinese investors to focus on in the coming years are the pharmaceutical industry and oil and gas exploration. Relative to its size, Argentina has a significant pharmaceutical drugs market with annual sales of almost US$5 billion. There are approximately 300 pharmaceutical laboratories in Argentina, out of which the eight largest companies control nearly 80% of the pharmaceutical drugs market. Due to increasing labour costs and inflation, smaller laboratories are faced with the need to merge or sell their products. A trend of consolidation of the pharmaceutical sector in Argentina has already been observed since 2010 and it is expected that in a few more years, the total number of laboratories will be significantly reduced by way of mergers and asset acquisitions.

Equal treatment under law for Chinese investors

Argentine law protects foreign investors on an equal footing with local businesses. The US Constitution inspired the Argentine Constitution, which was promulgated in 1853. However, its drafters set the distinct goal of developing immigration policies to settle the territory, stimulate commerce, avoid desert territories and enlarge the country. From the outset, the Argentine Constitution declares in its preamble that it is adopted for “all men of the world who wish to dwell on Argentine soil”.

More specifically, Article 20 of the Constitution guarantees equal treatment under the law to all foreigners living or carrying out any business in Argentina. It literally provides that: “foreigners in the Argentine territory enjoy all the civil rights of a citizen; they may engage in their industry, trade or profession, own, purchase or transfer real property, … They are not obligated to assume citizenship, or to pay extraordinary compulsory taxes.”

The Argentine foreign investment law No. 21, 382 of 1976 and its implementing regulations further establishes that:

1) Foreign investors may invest in Argentina in any economic activity whether industrial, mining, oil and gas, agricultural, commercial, financial, retail or services, without the need for any type of prior approval and under conditions equal to those applicable to Argentine investors. Only a few activities are excluded from this principle, like broadcasting and the acquisition of real estate in frontier areas. There is also no obligation to be associated with domestic investors or any other type of restrictions or conditions.

2) Foreign investors are entitled to repatriate their investments and to remit profits abroad at any time, subject only to the compliance of Central Bank foreign exchange regulations.

3) The principle of equal treatment between domestic and foreign investors is reaffirmed. Those foreign investors making capital investments in Argentina, either for the promotion of economic activities or the extension or improvement of existing activities, have the same rights and obligations conferred by the Argentine Constitution and local laws as Argentine investors.

Chinese investment protection

All guarantees available to Chinese investors under Argentine foreign investment regulations have been reinforced and enhanced in a treaty for the protection of bilateral investment signed between the People's Republic of China and the Republic of Argentina on November 5 1992, which was subsequently ratified by both nations and came into force on August 1 1994.

With regard to Chinese investors, the aim of the treaty is to encourage investment in Argentina. The treaty provides Chinese businesses with a safe environment in which to develop their activities through several guarantees and commitments voluntarily assumed by the Republic of Argentina. These guarantees deal both with foreign investor protection issues and dispute resolution clauses providing for international arbitration.

The rules and guarantees contained in the treaty may not be overridden or restricted by the Argentine state through local laws and regulations. This is because the Republic of Argentina has signed and ratified the Vienna Convention on the Law of Treaties, which provides that a party may not invoke the provisions of its internal law as justification to avoid performance of its obligations under a treaty. Furthermore, according to the Argentine constitution, treaties in force between the Republic of Argentina and a foreign nation enjoy a higher legal ranking than federal and local laws and regulations.

The treaty includes the following principles relevant to Chinese investors:

• Fair and equitable treatment, full protection and legal security, which require the Argentine state to provide Chinese investors with a stable and predictable investment environment. Government measures challenging the stability of the investment environment by changing the rules and creating uncertainty, for example, may constitute a breach of the referred to standards of treatment. This is particularly so if they contradict reasonable expectations based on which Chinese investors were induced to act.

• Exclusion of arbitrary or discriminatory measures, which prevents the Argentine state from impairing the management, use and enjoyment of Chinese investments.

• National treatment, which assures that the Chinese investor shall be subject to a treatment not less favourable than that granted to local investors, and the most favoured nation treatment, by means of which the Argentine state shall recognise any better treatment which was previously granted to investors and investments from other countries.

• Prompt, adequate and effective compensation in case of nationalisation, expropriation or measures tantamount to expropriation, regardless of the form, intent or purpose of such measures.

• Unrestricted remittance abroad of liquid assets belonging to Chinese investors, comprising dividends and other current profits, loans and capital repatriations.

• An umbrella clause, arguably elevating the Argentine state's breaches of contractual rights to the level of breaches of an international obligation under the treaty.

• International arbitration for investment disputes, submitting all controversies, which may arise between Chinese investors and the Republic of Argentina to the jurisdiction of an ad hoc arbitration tribunal.

Foreign exchange regulations

Argentine foreign exchange regulations discourage speculative and flight capital by imposing a one year no-interest bearing mandatory deposit on 30% of all inbound foreign exchange that does not qualify as exempt from such measures, pursuant to the regulations of the Central Bank of the Republic of Argentina. Remittances of currency to be used as contributions required for direct investments in the country or for the purchase of stock in domestic companies by direct investors are exempt from such restriction, and particularly:

1) Capitalisation of local companies representing 10% or more of the recipient company's total equity;

2) The inflows of funds from non-residents for the purpose of the purchase of real estate, under certain conditions;

3) Income arising from loans taken out with multilateral and bilateral credit organisations as well as official credit agencies and;

4) Income arising from foreign financial loans within the non-financial private sector.

These are aimed at investment in non-financial assets or training for micro-enterprises or improvements to be made in residences and family homes. This is as long as such loans are incurred and repaid over a period of no less than two years, including capital and interest repayments.

Foreign exchange regulations also regulate the outbound flow of funds from Argentina. Remittance of dividends or
capital to a foreign beneficiary are subject to a double authorisation by the AFIP, the Argentine tax authority, and depending on the amount to be transferred, by the Central Bank of the Republic of Argentina. In 2012, authorisations were seldom granted, in order to protect Argentina's international monetary reserves.

Legal vehicles for investment

Chinese companies and business owners may carry out their activity in Argentina on a permanent basis through various means. These include the appointment of a local commercial representative, the setting up of an Argentine branch, incorporation of a local corporate entity (subsidiary), the acquisition of equity in an existing Argentine company and entering into a joint venture agreement or the settling of a trust.

The main types of investment vehicle utilised by non-resident individuals and foreign companies are the branch and the local commercial company, in the form of a corporation (sociedad anónima) or a limited liability company (sociedad de responsabilidad limitada).

Branch of a foreign company

Any company duly organised and existing in accordance with the laws of the People's Republic of China or any other country may set up a branch in Argentina. In principle, it is not necessary to allocate capital to the Argentine branch. The branch must keep separate accounting records in Argentina and file annual financial statements with the local commercial companies' supervisory authority. From a fiscal and social security standpoint, the branch is treated under Argentine law as an entity separated and distinct from its home office.

Commercial company

Commercial companies must have at least two shareholders or members, which can be either corporate entities or individuals. A minimum capital of AR$100,000 is required for corporations. Contributions in real estate, equipment or other non-monetary assets must be made in full at the time of subscription.

Except for specific cases provided by law, there are no nationality or residence requirements for ownership. Foreign individuals, whether resident in Argentina or not, or foreign companies, may hold up to 100% of the share capital. Transfers of shares of a corporation are generally unrestricted and any limitations included in the company's by- laws may not effectively impair the transferability of shares.

The company can be managed by a single manager or director, or by a board. There is no nationality requirement – all of the directors or managers may be foreigners – but in all companies the majority of managers or directors must be domiciled in Argentina to ensure management's ability to perform its duties.

Other investment vehicles

Other legal vehicles that Chinese companies and businesses may use to invest in Argentina are joint ventures and trusts.

The joint venture instrument most commonly used in Argentina is the Unión Transitoria de Empresas (UTE). A UTE is a contractual business arrangement between two or more persons, which may include foreign companies and individuals, made for the exploitation of a particular business or commercial endeavour. A UTE is not a legal entity separated from its parties, but rather a contract law instrument. However, Argentine federal and local tax and social security laws treat the UTE as distinct taxpayers and employers. One of the key attractions of the UTE legal regime is that it allows the allocation in different proportions of a party's contribution obligations, share of profits and endurance of losses. Joint ventures other than UTEs are also permitted under the general principles of Argentine law.

Argentine taxation

The Argentine tax system may be divided into three categories: taxes, charges and contributions. Charges and contributions are normally lower than taxes and are intended to compensate the state for some specific activity in the form of individualised service to the party called taxpayer. Most taxes are levied as indirect consumer taxes. Certain Argentine taxes, like VAT, turnover taxes and stamp duty, are similar in form and nature to such taxes in China, however rates tend to be higher in Argentina.

Federal taxes

1) Corporate income tax: The general rate applicable to the taxable income of companies is 35%. Dividends distributed up to the net taxable income are not taxed further.

Local companies, branches of foreign companies and foreign individuals domiciled in Argentina are taxed on a worldwide income basis. They may credit foreign income taxes against their Argentine tax liability up to the amount of the increase in such liability resulting from including foreign source income in the taxable base.

Non-resident companies without a branch or other permanent establishment in Argentina must pay taxes only on their Argentine sources of income and capital gains. Tax is normally levied in the form of a final withholding tax at various effective rates depending on the particular type of income. These rates are calculated as the 35% on a prescribed percentage of the gross payment.

Resident individuals in Argentina are liable for income tax at progressive rates on their worldwide income. Rates range from 10% to 35%. Non-resident individuals are taxed only on Argentine-source income. Tax is levied as a final withholding tax at various effective rates depending on the particular type of income.

2) Value added tax: VAT is applied to the delivered cost of the product or service at each change of hands, with a credit given for taxes paid at earlier stages of production. Imports are subject to tax at the same rates that apply to similar domestic items.

The general rate for VAT is 21%, but some services and utilities such as mobile phones, electricity, gas and water supply have a VAT rate of 27%.

3) Import duties: The tariffs range between 0% and 35%. As a result of the Customs Union, effective on January 1 1995, among members of Mercosur (Argentina, Brazil, Paraguay, Uruguay and Venezuela), most of the goods that form the tariff universe of the Mercosur are subject to the common external tariff. Import duties in commerce among the members of Mercosur have been practically removed.

Imports in Argentina are levied by statistical tax and the rate is 0.5% calculated on the cost, insurance and freight (CIF) value and the payment of VAT (the rate ranges between 21% and 10.5%) and income tax. A payment of a rate, usually 3%, shall be required to be made as a tax advance.

4) Tax on assets: A tax is levied on worldwide assets of Argentine companies. The tax rate is 1% and the payment of this tax and of the income tax may be mutually compensated during a 10-year consecutive fiscal term.

5) Excise tax: This tax is levied on specific consumer goods and at different rates, including cigarettes, alcoholic beverages, fuels and lubricants, wine, luxury articles and furs. The first consumer or importer pays excise tax.

6) Tax on personal assets: Individuals with personal assets valued at more than AR$305,000 are subject to an annual tax on personal assets ranging from 0.5 to 1.25% depending on the individual's declared wealth. Certain types of investment, like stocks traded on any Argentine exchange held for one year or more, and certificates of deposit with local banks, are exempt from this tax.

7) Tax on transfer of real estate: Real estate transactions of properties located in Argentina, owned by individual residents or non-residents, are subject to a tax of 1.5%, only if this transaction is not subject to income tax.

Provincial and municipal taxes

1) Turnover tax: This tax is levied on each commercial transaction. No credit is given for tax paid at previous stages. Tax rates vary between 1% and 4% depending on the type of activity and the law of each province.

2) Stamp duty: Stamp tax is levied on public or private instruments upon formal execution. The rate varies between 0.8% and 1.5%. Some jurisdictions have eliminated this tax for certain transactions.

3) Tax on real estate: Provinces and municipalities tax real estate located in their respective jurisdiction. This tax varies on each jurisdiction.

Double taxation treaties and other tax agreements

Argentina and China have not yet entered into a treaty for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. However, Argentina is a party to double taxation treaties in force with 15 countries, namely Australia, Belgium, Bolivia, Brazil, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland and the UK.

Chinese companies and businesses investing in Argentina through a corporate vehicle domiciled in any of these jurisdictions may benefit from the lower tax rates applicable under the relevant double taxation treaty (such as income tax withholding rates reduced from 31.5% to 10% or 12%) provided the investment scenario is properly structured.

In 2011, a tax information exchange agreement came into force between Argentina and China. More recently, in March 2013, a customs information exchange agreement was signed, which is pending ratification by both countries.

Investment incentives

Argentina has various incentive programmes in place, designed to promote and facilitate foreign investment in the country. These programmes are implemented by the national, provincial and municipal authorities and include horizontal and sector incentives, as well as relocation, innovation, technological development, employment, investment financing and export promotion incentives.

Investment incentives for capital goods and infrastructure include:

• Accelerated depreciation for income tax purposes and early refund of VAT (Law 26360).

• Reduction of import duties on capital goods from non-Mercosur countries (Decree 1026/2012).

• Tax credit of 14% of the value of goods produced, to encourage investment in, and production of, capital goods, information technology, telecommunications and agricultural machinery (Decrees 379/2001, 917/2010, 362/2011).

• VAT reduction of 50% in the purchase and import of finished capital goods and IT and telecommunications products and parts (Decrees 493/2001, 496/2001, 615/2001, 733/2001, 959/2001).

• Reduction to zero of tariffs on imported capital goods that make up a complete and independent production line (Resolution 256/2000).

• Temporary import of capital goods without being subject to import duties, for a period of up to three years (Law 22415, Decree 1001/1982; Customs Office Resolution 34/1998, Decree 142/2010).

Alejandro Candioti

Partner

Alejandro Candioti is an international transaction lawyer based in Buenos Aires and a partner at Candioti Gatto Bicain & Ocantos. He handles the full range of corporate work, principally mergers and acquisitions and contracts. He also advises on joint ventures, privatisations, reorganisations, divestments, private equity and other commercial arrangements and associated regulatory issues. Also, a significant part of his practice has involved assisting clients in public offerings and private placements of equity and debt securities.

While he covers the full range of business markets, much of Alejandro's work is concentrated in the information technology, oil and gas, and pharmaceutical industries. In addition to representing clients on their acquisitions, disposals and restructurings he also has wide expertise of advising on shareholder disputes.

His varied professional practice has given him the ability to advise clients across a broad range of commercial and financing issues, providing experienced counsel and executive judgment when needed.

Alejandro is a mentor at Endeavor, a non-profit organisation headquartered in New York that transforms emerging markets by establishing high-impact entrepreneurship as the leading force for economic development.

He is a member of the Advisory Board of the Argentine-Chinese Chamber of Commerce and is actively involved in the business and trade development activities of the Chamber.

He also writes frequently on business law issues affecting China's inbound and outbound investment, and operates www.leychina.com, a source of China legal and business information in Spanish for his clients and anyone interested in China.

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