Providencia

Acquiring Business Operations in Argentina
 
 
Cristian E. Rosso Alba
Professor da Universidad Austral (Buenos Aires)
ITP/LL.M’94 (HLS)
 
I. Introductory Remarks
 
One of the most important lessons learned from advising US companies doing business in Argentina is that tax planning is efficient if, and only if, it is comprehensive. This means designed so as to address, at the same time,worldwide tax planing goals while minimizing overall exposure to Argentine Federal taxes on one side, and Argentine provincial taxes on the other. Foreign tax savings may be offset by US tax costs if planning is not integrated. In addition, an efficient tax planning should also minimize overall tax exposure to Federal and Provincial taxes in a way consistent at both levels. For example, the issueas to what kind of local tax presence in Argentina constitutes a permanent establishment is not only a Federal Income tax concern. It is also an issue at the provincial level, since the local Gross Turnover Tax is exclusively collected - in most provinces - from foreign companies which do have local tax presence. This is due to the lack of withholding mechanisms at the source. Tax planning foracquisitions is the first and probably the most important stage in such an overall tax design, aimed at optimizing deduction of costs, avoid expiration of favorable tax attributes and produce actual tax savings.
 
This paper provides an overview of some of the Argentine-tax issues encountered by a multinational or an institutional investor upon the acquisition of an Argentine target. The analysis isdone taking into account the tax reform passed on December 1998 (Law 25.063, published in the Official Gazette on December 30, 1998, hereinafter "Tax Reform"), as well as the implementing rules published up to early February, 1999. The Tax Reform provides major changes to the Argentine tax system that not only impact typical acquisition structures used in the past but would also affect existingstructures used for previous acquisitions.
 
Investment in one company may take many forms, ranging from a portfolio investment in stock and bonds of the target, to a full purchase of assets (e.g. an acquisition of a complete on-going concern). This article identifies the critical tax issues to the success of any acquisition that should be addressed at an early stage, as well as the taxconsequences involved in an exit scenario. Following this introduction, Part II of this article provides a background analysis of the basic acquisition strategies: stock deals vs. asset deals. Part III describes the key corporate tax issues that should be taken into account to frame any acquisition structure. It includes the analysis of entity-election issues that usually concern US investors doingbusiness in Argentina. Part IV discusses the use of tax-free reorganization structures for planning acquisitions, as well as the news from the Tax Reform in this particular field. Part V evaluates the tax aspects of goodwill and covenants not to compete, namely minimizing disadvantages while planning for purchases. Finally, part VI evaluates planning alternatives in connection with transactional taxes. 
Part II: Asset Deals vs. Stock Deals: Dealing with the Parties' Expectations
 
Most tax-efficient acquisition strategies are usually conditioned upon the result of due diligence. If significant contingencies are found, with the consequent potential for high penalties and interests, then the main concern of purchaser would be to design a structure that would better insulate him from hidden taxliabilities. In these cases, the choice is usually an asset deal. On the other hand, whenever contingencies can be reasonable estimated and addressed contractually, the focus is usually turn to working out tax-efficient acquisition structures aimed at reducing the overall tax burden so as to a lower purchase price. For the sole purpose of reducing tax exposure, stock deals and/or a variety of...