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5.5. Source Rules with Respect to Income Derived by Non-Residents

Pursuant to the Income Tax Law, foreign beneficiaries are subject to income tax only on their income from Argentine sources. Source rules are found in the Income Tax Law, its implementing regulations and case law. Specific source rules may be grouped into two categories depending on whether income arises from (i) capital, assets, or rights situated, placed or exploited in Argentina; or (ii) the performance of an activity or other facts occurring in the Argentine territory. In every case, the determination of the source does not depend on the nationality, domicile, or residence of the parties to the transaction or the place where the agreement is executed.

The Income Tax Law holds, as a general rule, that income from capital, assets, or a right situated, placed, or exploited in Argentina is deemed to be sourced from Argentina. Article 9 of the Income Tax Law implementing regulations further provides that income is sourced in Argentine if it derives from: (i) real estate located in the territory as well as rights on real estate such as use, habitation, usufruct, or servitude connected with the property; (ii) personal property situated or economically utilized in the country; or (iii) capital or rights placed or economically used in the country.

In the case of dividends, it is specifically stated that they constitute Argentine-source income to the extent that the issuer of the shares on which such dividends are paid is an Argentine entity. In other words, shares, stock, or similar equity participations issued by Argentine entities regardless of the place where physical evidence of the participation is found or the entity’s assets are situated are treated as assets located in the country because the capital that those assets represent is deemed placed therein.

Similarly, from Article 9 (b), Income Tax Law implementing regulations, coupled with Article 7, Income Tax Law, it is clear that interest is deemed to be sourced in Argentina where said interest arises from: (i) deposits with an Argentine financial institutions; (ii) bonds and debt certificates issued by the Federal, Provincial or Municipal governments, (iii) debentures issued by Argentine entities regardless of the place where the property securing the paper is situated or the country where the issuance is made.

As a final catch-all rule, Article 9 (b) of the implementing regulations states that Argentine source income is any other income having a similar character which arises from capital, assets, or right situated, placed or economically used in the country.

Because of this broad residual category, the definition of source lacks clarity and precision in the case of interest paid to a foreign beneficiary under a loan agreement or any other debt instrument not expressly contemplated by the same Article 7, Income Tax Law and Article 9 (b), Income Tax Law  implementing regulations (i.e., deposits, governmental bonds, debentures). In this particular case it is still discussed whether the source of interest should be determined by reference to the place where the capital is used (i.e., economic source) or by reference to the debtor’s domicile (i.e., financial source).

With regard to personal services, although, as a general rule, they are sourced to the place where the activities are actually performed, a significant exception applies to technical or similar advice. According to Income Tax Law, fees or other compensation paid for technical, financial, or similar advice rendered from abroad is deemed to be Argentine-source income.

Income Tax Law sets forth the principle that income from derivative contracts or instruments is deemed Argentine source income as long as the undertaken risk is situated in Argentina. A risk is considered situated in Argentina whenever the party to the transaction obtaining the income is a resident in Argentina or a domestic PE of a foreign company. The same rule establishes that, if the different components of a derivative instrument or a series of related instruments or contracts do not express the actual economic intention of the parties, the source of the income derived therefrom would be determined on the basis of the economic reality of the transaction, and in accordance with the source principles applicable to the real nature of the income obtained.

Finally, special rules apply to determine the source of income derived from certain activities rendered partially within and partially outside Argentina, including but not limited to international transportation carried out by foreign companies, rentals of foreign-made cinematographic films, and activities carried out by international news agencies (Income Tax Law, Articles 9, 13 and 10, respectively). In all these cases, a portion of gross income is deemed to be net income from Argentine sources. In addition, income accruing to foreign exporters on the mere imports of goods into Argentina is deemed to have a foreign source and, hence, is not taxable in Argentina. Conversely, income accruing to residents on exports of goods produced, manufactured, or acquired in Argentina, is deemed Argentine source income in its entirety (Income Tax Law, Articles 8).