Foreign exchange controls in Argentina

Author: | Published: 25 Sep 2012
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In December 2001, and after more than 10 ten years of economic deregulation, the Central Bank of the Republic of Argentina imposed very tight exchange controls. From the end of 2002 until October 2011 the Central Bank gradually loosened some restrictions, before starting to strengthen them again as a consequence of the global economic crisis and the depletion of its foreign exchange reserves.

Foreign exchange restrictions are not only imposed by the Central Bank but, in practice, also by the Argentine Tax Authority, through tax regulations. Foreign exchange and tax-related regulations are very detailed and specific and are frequently being modified.

Notwithstanding the regulatory foreign exchange and tax, in addition, since October 2011, foreign exchange transactions have been generally subject to de facto restrictions, preventing local financial entities or exchange houses from processing operations of their clients that would otherwise be authorised pursuant to regulations.

Foreign exchange restrictions

Under the rules in force, Argentine exporters, service providers and loan borrowers have the obligation to transfer to Argentina foreign currency proceeds of such transactions with non-Argentine residents, or funds disbursed abroad and to sell them in the Argentine exchange market. Through these obligations, the government is trying to ensure the supply of foreign currency in the foreign exchange market.

Argentine residents are only allowed to buy foreign currency and to transfer it abroad if they are part of a cross-border transaction. The regulations contain a list of items regarded by the Central Bank as falling within the scope of cross-border transactions and establish specific requirements for each item. In general, cross-border transactions include transactions performed between Argentine and non-Argentine residents (such as import of goods or services, or payment of dividends to foreign shareholders). Moreover, Argentine residents are rarely allowed to buy foreign currency to keep it outside Argentina or within the country with accumulation or saving purposes. Finally, non-Argentine residents are allowed to buy foreign currency in order to repatriate their investments subject to the prior compliance of a number of requirements. In this way, the government is intending to curtail the demand of foreign currency in the foreign exchange market.

The exchange rate in the foreign exchange market is determined for the supply and the demand of foreign exchange currency. This notwithstanding, the Central Bank not only intervenes in the market by establishing the obligation to sell the foreign currency and curtailing the ability to buy it, but also by selling and purchasing foreign currency by its own account.

The main requirements applicable to the inflows and outflows of the foreign exchange market are explained below.

Inflows of funds

Argentine exporters are obliged to bring into Argentina and exchange for Argentine pesos the export proceeds within a certain timeframe which varies depending on the exported merchandise (in general between 30 and 365 days), since each tariff position in the nomenclature schedule has a different term. An extension of the term can be requested by the exporter and granted by the authorities in special cases.

In principle, the terms and their eventual extensions are only applicable to exports made as a consequence of sales made between independent parties, since in the case of sales made between related companies exporters are obliged to bring and exchange the export proceeds within 30 business days.

Oil, gas and mining importers which have formerly been granted with partial or total exceptions are obliged to repatriate all their export proceeds.

Argentine residents that provide services to non-Argentine residents are also obliged to bring into Argentina and sell in the foreign exchange market the amount in foreign currency collected for consideration of the services.

Argentine borrowers that receive loans or any other financial indebtedness from foreign lenders are required to bring into Argentina the funds received and sell them for Argentine pesos within 30 days. Moreover, a financial loan with non-resident parties (including inter-company loans) should have a minimum tenor of 365 days as from the date the loan proceeds are transferred into Argentina. Finally, at the time the borrower transfers the proceeds of the loan into Argentina, unless subject to one of the applicable exceptions, a compulsory non-transferable US dollar-denominated deposit must ordinarily be made in an Argentine bank for at least 30% of the amount of such loan proceeds. This mandatory deposit will not earn interest, will have a minimum term of 365 days, and cannot be used as collateral for any transaction. Subject to compliance with certain regulatory requirements, the following transactions are exempted from constituting mandatory deposit before referred: (i) foreign loans to finance Argentine imports and exports (foreign trade financing); (ii) loans to the Argentine residents and local entities (excluding banks and other financial entities) with an average duration of at least two years (calculating principal and interests payments) to the extent funds are used exclusively for investments in non-financial assets; (iii) loans granted by multilateral and sovereign credit agencies; iv) financing obtained to repay foreign financial debts, when the proceeds of the loan entering into Argentina are used simultaneously to repay such foreign debt; (v) financing obtained for investments in long-term foreign assets, when the proceeds of the loan entering into Argentina are used simultaneously for such investment; and (vi) financing obtained for initial public offering of debt securities in local stock markets.

Argentine residents receiving direct investments from non-Argentine residents are, in principle, not obliged to transfer the foreign currency to Argentina, but should do so to ensure their ability to repatriate those investments abroad. At the time that the investment is brought into Argentina, a compulsory non-transferable US dollar-denominated deposit must be in principle made in an Argentine bank for at least 30% of the amount of the investment proceeds. This mandatory deposit has the same characteristics of the one described in the paragraph above. Its aim is to discourage short-term investments.

Foreign investment can be classified as either direct investments or portfolio investments. Direct investments comprise real estate investments and participations in local companies of at least 10% of the ordinary shares or voting rights, while portfolio investments are participations below this cap, debt securities of Argentine issuers, holdings in Argentine pesos and deposits in Argentine banks. Direct investments are in general exempted from the compulsory deposit requirement subject to compliance with formal regulatory requirements (for example, the company receiving a capital contribution must file its registration with the local office of corporations before executing the foreign exchange transaction and must prove the effective registration within a specific timeframe). Both direct investments and portfolio investments should exceed 365 days in order to be repatriated, unless a specific exception applies.

Outflows of funds

Argentine residents may pay imports abroad through the Foreign Exchange Market subject to compliance with formal requirements which include the holding of the special authorisation granted by the Argentine Tax Authorities (described in detail below). At the time of clearing customs, importers are obliged to appoint a local bank which will be the entity in charge of controlling the payment of such import.

Argentine residents are allowed to purchase foreign currency and transfer it abroad for paying services rendered by non-Argentine residents subject to compliance with formal requirements and provided that the suppliers are not related parties or companies located in low-tax jurisdictions. In the latter cases, the prior approval of the Central Bank is needed unless the amount to be wired does not exceed $100,000 per year. Approval is rarely obtained. The formal requirements related to the payment of services to unrelated foreign parties not located in low-tax jurisdictions consist in the submission before the bank intervening in the wiring of the funds of a legalised copy of the underlying contracts, a certification of the registration of the contracts in the applicable registries (transfer of technology registry, for example) and an external auditor's report certifying the actual rendering of the service, the existence of the foreign debt and the reasonability of the price.

Argentine residents are allowed to remit profits and dividends to foreign equity holders when resulting from annual financial statements certified by external auditors. To the extent that profits or dividends are declared in annual financial statements certified by an external auditor, Central Bank regulations do not differentiate between dividends paid as a result of retained earnings of previous fiscal years or from the net income of the last fiscal year approved.

Argentine residents are allowed to make payments of financings granted from abroad subject to compliance with the requirements referred to above.

Non-Argentine residents are allowed to repatriate investments (either by the sale of the shares of the investment vehicle, sale of the property located in Argentina, liquidation or capital reduction of the local investment vehicle) made in Argentina subject to compliance with the requirements referred to above. Further to such requirements, portfolio investments are also subject to a monthly cap of $500,000 and are required not to be located in a low-tax jurisdiction. When the case does not comply with these requirements, the repatriation is subject to the prior authorisation of the Central Bank, which is rarely granted

Argentine residents, including individuals and legal entities incorporated or registered in Argentina, are prevented from buying foreign currency in order to make direct or portfolio investments abroad and also to keep in the country for saving purposes. These transactions are subject to the prior authorisation of the Central Bank, which is rarely granted.

Argentine residents are not allowed to enter into and to buy foreign currency to make payments abroad under derivative transactions with non-Argentine residents without the prior authorisation of the Central Bank, unless an exemption applies. Among the exemptions are one available for derivatives governed by Argentine law and that provide for settlements exclusively in Argentine pesos in Argentina, and derivatives that serve to hedge certain features of external debt or international trade transactions of Argentine residents.

Reporting obligations

Argentine residents are allowed to purchase foreign currency and transfer it abroad for paying indebtedness in general (imports, services, dividends voted and not distributed, financial debt, and so on), provided the debt has been duly informed to the Central Bank pursuant to a special reporting regime. This regime establishes the obligation to inform to the Central Bank their indebtedness (debt outstanding for more than three months) in relation to non-Argentine residents on a quarterly basis.

Certain transactions (such as direct investments received by Argentine residents from abroad, or repatriation of investments by non-Argentine residents) are also subject to prior compliance with another special reporting regime. This regime regulates the information to be provided to the Central Bank by non-Argentine residents with direct investments in Argentina, and by Argentine residents with direct investments abroad. The reporting requirements establish different limits to determine the degree of obligation (optional or compulsory) and frequency (annual or semi-annually). In general, it could be said that non-Argentine residents are obliged to inform direct investments in Argentina that are more than or equal to $500,000, while Argentine residents are obliged to inform the direct investments or real estate held abroad that are more than or equal to $1 million. Participation in local and foreign corporations is calculated at the book value of the net worth of each relevant corporation. The value of non-Argentine residents' or Argentine residents' real estate is calculated at their fiscal value.

Special software provided by the Central Bank will be made available through the financial institutions in order to comply with these reporting regimes.

In addition to the regulatory requirements set by the Central Bank regulations, the bank or foreign exchange office intervening in the foreign exchange transaction has discretionary powers to request further proofs to show the authenticity of the transaction including its nature and amount. The parties could, therefore, be required to submit further elements before the corresponding financial institution in order to execute the foreign exchange transaction. Failure to comply

Failure to comply with, or breach of, exchange regulations is punished under an escalating array of criminal sanctions, including fines rising up to 10 times the amount of the transaction. A prison sentence may also be applicable after the first repeat offence. The Foreign Exchange Criminal Law holds liable for infringements the company as well as the directors, legal representatives, managers and syndics that intervene in the commission of such infringements.

Cases under the Foreign Exchange Criminal Law are first filed and pursued by the Central Bank. Afterwards, upon a report of the Central Bank, the file is submitted to the federal criminal courts for resolution.

As an alternative to the foreign exchange purchase procedure, it should be mentioned here that the market has developed a securities exchange mechanism that enables to obtain an amount of foreign currency abroad with an amount in pesos held in Argentina. This is effected by purchasing in Argentina, with pesos, government securities or shares listed abroad (ADRs or CEDEARs), and later selling them against a dollar amount. The legality of this mechanism and the assessment of the resulting risks deserve a thorough analysis.

Tax restrictions

In some cases, and according to the Central Bank's regulations, the purchase of foreign currency requires the prior approval of the Argentine Tax Authority in addition to compliance with foreign exchange restrictions.

These tax restrictions basically apply to foreign exchange transactions involving payments of imports and services, and to the purchase of foreign currency by Argentine residents for travel and tourism purposes. There are certain restrictions related to import and services payments.

The restrictions consist of the obligation to file a special affidavit statement previous to all imports and services contracted from foreign residents (there is no definition of "services", but the regulations list a broad range of concepts covered by the system, including intellectual property licences). The obligations are locally known as DJAI, which stands for declaración jurada de autorización de importación (affidavit statement for import authorisation) and which is effective as from February 1 2012; and DJAS, which stands for declaración jurada de autorización de servicios (affidavit statement for services authorisation) and which is effective as from April 1 2012.

DJAIs must be filed in most cases, except for the following exceptions: re-imports of merchandise temporarily exported, imports made under the samples regime, imports made under the special customs regime for substituting defective materials, donations, diplomatic shipments, courier and postal shipments, and imports exempted from duties and taxes. Goods shipped to Argentina, goods related to turnkey projects and imports subject to an irrevocable letter of credit are exempted as long as they took place before February 1 2012. Imports in respect of which an anticipated payment was made are also exempted provided that the importer can submit evidence to prove that they qualify for the exceptions. Finally, importers can also apply for an exception in cases of urgently needed goods, although this possibility would be construed restrictively.

DJASs must be filed for each service agreement, provided that the agreement is for an amount of $100,000 or more per year, the instalments are for the amount of $10,000 or more per month, or the amount is not precise.

The filing of DJAIs and/or DJASs must be submitted before the Argentine Tax Authority before the issuance of any request, purchase order or similar document used for executing an international sale transaction, and must include detailed information on the imported good (for example description of the good, tariff classification code, value, currency, quantity, condition, country of origin or country of shipment) or contracted service (for example date of the agreement, place of performance of the service, term of the agreement, data of the service provider, price of the services or payment conditions). If there is no written agreement, the information should be obtained from the invoice or equivalent document issued by the goods' or services' providers. The taxing authority could request an electronic copy of the agreement or any other document it may consider relevant.

Objections should be raised within 72 hours following the filing of the statement. This term can be extended up to 10 calendar days. However, the Domestic Trade Agency (DTA) has established a special term of 15 business days to provide its comments – note the different clashing terms. If objections are raised, the importers must appear before the corresponding governmental agency in order to normalise the situation.

As a matter of fact, the DTA is raising objections in most cases without providing any explanation, and is requiring the importer of goods or services to provide additional information, such as price lists (current and for previous years), together with a 12-month programme describing how the company would intend to balance the amount of its outflows and inflows. The balance between outflows and inflows is more of a de facto requirement than a legal one, and is part of the government's so-called import substitution plan. If there is an imbalance in the company's trade figures, as a result of which the company's imports of goods or services would be greater than its exports, the DTA would favourably look at the company's commitment to increase its exports, to substitute its imports by developing plan with local providers, to enter into strategic alliances with local exporters, to not distribute dividends and/or make investments or capital contributions. The foregoing is not regulated but was conveyed by the head of the DTA to several importers through a number of meetings held recently between them.

Once the affidavit is authorised, the approval is included in a special database that must be consulted by the Argentine Customs Authority before clearing customs and by the banks or financial institutions before selling foreign exchange currency to wire funds abroad in consideration of imports or services. Therefore, the filing of the affidavit implies, in practice, a request for authorisation to clear customs and to pay imports and services abroad, where the authorities have a broad discretional power to decide, and which may subject transactions to delays and/or blockages.

The legality of the DJAI and DJAS system seems to be debatable taking into account the WTO rules, a matter which deserves a thorough analysis. In fact, several countries or groups – including the US and the EU – have appeared before that organisation in order to voice their complaints. This notwithstanding, the possibility of challenging its validity does not appear to be a practical solution that will enable the importers to continue operating normally in the short term.

Fernanda López Abramovich

Allende & Brea

Fernanda López Abramovich was born in the city of Salta where she obtained a bachelor degree with the highest honours from the Modern Humanist College of Salta. She has a law degree from Catholic University of Argentina in Buenos Aires, graduating with honours in 2001 and with academic awards for excellence granted by the university, the Bar Association of the City of Buenos Aires and the editing law firm El Derecho. Between 1999 and 2004 she worked at the law firm Marval O'Farrell & Mairal. In 2004 she joined Allende & Brea, where she is the head of the fiscal department.

Since the beginning of her career, she has concentrated her practice in the areas of tax, customs, trade and foreign exchange law. Her experience includes: comprehensive legal counselling on domestic, regional and international regulations (including conventions for avoiding the double taxation entered into by Argentina and Mercosur, ALADI and WTO treaties); tax and trade planning for the creation of efficient structures for domestic and international transactions; representation of clients in litigation matters brought before the Argentine Tax and Customs Authority, the National Tax Court, the Argentine Central Bank, the federal courts and the local courts; and legal due diligence, in-house compliance audits and training sessions to employees.

Abramovich has been a member of the Argentine Institute for Customs Studies since April 2001 and a member of the Argentine Association for Tax Studies since November 2003. She has regularly participated in seminars and conferences as presenter or attendee and published relevant articles in her field of expertise.

Jorge I Mayora

Allende & Brea

Jorge I Mayora joined Allende & Brea in 1997 while still a student. He obtained his law degree from the Universidad Católica Argentina in 1999 and an LLM from Northwestern University in 2003 where he studied general corporate and securities law at the law school and finance at the Kellogg School of Management.

During 2007 and 2008 he worked as an international associate at the New York office of Simpson Thatcher & Bartlett. He was part of the Latin-American practice group whereby he participated in several securities offerings and financing transactions.

In 2008, Mayora returned to Allende & Brea's banking and financial practice group. He is a specialist in banking and financial law in general and has advised a variety of financial institutions on all aspects of lending, including short-, medium- and long-term loans, derivative transactions, structured and other commercial lending transactions and other various collateral structures. He has represented issuers in local and international offerings involving registration with multiple securities regulators. He has also advised local and foreign banks on regulatory and foreign exchange issues with the Argentine Central Bank.

Mayora is a member of the Banking Lawyers Committee of Argentina and Lawyers Association of the City of Buenos Aires. In 2010, he was distinguished among relevant specialists in his area of practice by Chambers & Partners.

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