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June, 2013
 
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  No More Chilean Bonds:
Argentine Investors Seek New Tax-Efficient Investment Alternative
 
     
  The 1976 agreement between Argentina and Chile to avoid double taxation on income and capital gains (ratified by law 23.228 at the end of 1985) was terminated on June 29, 2012. As a result, an interesting tax planning possibility that was widely used by Argentine taxpayers is no longer available.

Until recently there was no tax applicable in Argentina on investment income derived from investments in Chilean private and public bonds. According to the DTA, income and capital gains derived from such Chilean bonds were exempt from income tax in Argentina. Additionally, the agreement exempted the holder of Chilean bonds from Argentine personal asset tax.

Because of their excellent risk rating, these bonds provided a tremendous opportunity that was extremely popular with Argentine investors.

Unfortunately, this possibility was sometimes abused by Argentine investors who shifted most of their investments to Chilean bonds just before the end of the year to be able to declare the tax-free investments on their tax form, before they disinvested the bonds into more profitable investments at the beginning of the following year. This conduct was a major reason for the Argentine government’s decision to cancel the treaty.

Now that the agreement is no longer in force, as of January 1, 2013, Argentina has the right to charge 1.25% asset tax over the value of the bonds and 35% income tax on interest paid as well as on capital gains upon sale of such bonds.

Thus, many Argentine investors are now seeking new opportunities to invest in secure assets in a tax-efficient manner. One of the few possibilities remaining for Argentine individuals to invest outside the country with similar benefits is to place their assets in a foreign trust structure.

Typically, the investment vehicle would be a foreign partnership from a non-blacklisted jurisdiction, such as the Netherlands or the UK, which would hold the foreign assets, often bank accounts or real estate. As partnerships are taxed at the level of the partners, no tax would apply to the revenues earned at the partnership level. Alternatively, Singapore or UK limited companies are used.

The managing partner would usually hold a minimal part of the partnership interest and could be an individual or a legal entity, which would not be subject to tax (a Netherlands foundation would be suitable, for instance).

The majority interest in the partnership would be held by the trustee of a trust under the laws of a non-blacklisted jurisdiction. This could be a New Zealand, Singapore or UK trust.

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If structured correctly, revenues derived from the assets held in trust would not be subject to tax in the jurisdiction of the trustee. With the right structuring, the trustee can also be seen as the legal owner, which means that neither personal asset tax nor income tax will be levied on the settlor for such assets and their revenues. In this regard, the Eurnekian case has shown that the right trust set-up and management is crucial. The decision in that case is widely interpreted as confirmation that, in the view of the Argentine courts, the trust needs to be discretionary and irrevocable. This means that the settlor has to give up control and ownership of assets when handing them over to an independent trustee, and that the possibility of canceling the arrangement by revocation is interpreted as excessive control of the settlor.

Although many clients are worried about such a loss of direct control over their assets, the decision leaves no doubt that giving up direct control is necessary to ensure full legal protection of the structure in Argentina.

There are, however, various mechanisms that limit the wide powers of the trustee without jeopardizing the functionality of the structure, which can provide great comfort to clients. A protector or managing trustee can be appointed and trusted advisors such as bankers can be involved. Letters of wishes can also limit a trustee’s powers. Even though irrevocable, a trust can be terminated upon request of the beneficiaries, if the entire assets are to be distributed to them.

In case of dispute between the trustee and the beneficiaries (for instance, where a trustee is seen to be acting in breach of his fiduciary obligations), the highly developed legal systems and wealth of jurisprudence in countries such as the UK or New Zealand provide legal certainty.

Special care needs to be taken when choosing the legal entities incorporated into the structure, as it is crucial to avoid those jurisdictions that were blacklisted in Argentina (Decreto 1037/00). However, using entities from jurisdictions such as New Zealand, Singapore or the United Kingdom does not mean that asset protection, confidentiality and inheritance planning benefits or the tax efficiency of the structure would be lost. It is also possible to use a Dutch foundation (stichting administratiekantoor) instead of a trust, or a combination of both.

As a result, we see that with the right structuring and proper management of the structure, there are still possibilities to defer taxation on assets placed into a trust structure. Needless to say, once the assets (or parts thereof) are eventually received by the beneficiaries in Argentina, they would be subject to tax, but until then they can be invested without being subject to annual tax deductions. In effect this possibility is similar to the investment in Chilean bonds, but with higher flexibility for investment of the assets in the structure.

There are three important points for Argentine residents to consider when setting up a New Zealand trust:
  1. Argentine forced heirship rules: Under Argentine inheritance laws the testator can freely dispose of only 20% of his assets, while the rest must go to his family in designated shares. Where such shares were not respected, deprived legal heirs might be able to sue the beneficiaries of the trust in Argentine courts for their rightful share. However, assets held in a New Zealand or UK trust are regulated by local common law, which has no forced heirship provisions.
  2. Gift tax: an inheritance and gift tax between 4% and 17.92% was introduced for assets located in the province of Buenos Aires. This would have to be paid either upon death of the owner of the assets or upon transfer of the assets to the trust. The applicability of this tax was extended to assets of residents of the province. Argentine settlors should be aware of this development, especially as it might trigger governments of other provinces to introduce similar taxes. Where the assets are owned by a foreign trust structure before such a tax is introduced, it would not be applicable to the assets in question.
  3. Just recently the Argentine government reiterated that it will take an active role in pushing for ever more tax transparency and that it plans to continue to sign international agreements to exchange information and take part in a strategic government decision to crack down on fraud, tax evasion and tax avoidance (AFIP Communication No. 2622). This is in line with the approach of most other governments worldwide which are pushing international financial centers for more transparency, and which has resulted in the signature of several hundred international agreements to provide information exchange in the past few years.
In view of these current developments, Argentine settlors are well advised to consider their structuring needs sooner rather than later. When doing so they should keep in mind the Decreto 1037/00. The simple solutions based on blacklisted entities previously used by some Argentine families normally never provide a suitable tax planning tool. Failure to declare assets can constitute an offence with serious criminal consequences.

Therefore, today most clients prefer to structure their affairs in a sophisticated manner that is up to date with current developments and avoids tax haven entities. While many jurisdictions offering foundations with tax benefits are found on the blacklists, there are non-blacklisted trust jurisdictions that provide clients with tools for solid asset protection as well as flexible inheritance planning and certain tax benefits. Such sophisticated wealth planning structures will protect clients and their families in this changing environment without exposing them to unnecessary personal legal risks.
 
     
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  If you would like more information on this subject or on any other Amicorp product, please don’t hesitate to get in touch with us.
  Marcelo Telleria
Sales Manager

Amicorp Argentina (Buenos Aires)
Email-ID: M.Telleria@amicorp.com
     
     
 
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This document is prepared for general information purposes only. Amicorp Group does not provide tax or legal advice to its clients. Any opinions contained herein should not be construed or interpreted as advice provided by Amicorp Group.