The recently enacted Decree 627/96 has provided a new set of rules in connection with leasing transactions. The Decree applies to leases governed by Argentine Law 24,441, in which the lessor is:
- a local financial entity under Law 21,526 (the Argentine Financial Entities Law);
- a corporation having the exclusive corporate purpose of performing leasing transactions; or
- a manufacturer or importer of goods or equipment used by a lessee exclusively in its business activity.
The Decree applies only to Argentine income tax and value-added tax (VAT), and has been basically designed to cover domestic leases. Accordingly, it does not contain specific provisions on cross-border leasing or lease-back agreements.
According to the nature of the lessor, the terms and conditions of the lease agreement and the amount and characteristics of the purchase option, a leasing agreement may be regarded as a financing structure, a rent (plus a sale, should the purchase option be exercised) or an instalment sale for income tax purposes. The tax consequences are different for each, the main issues being who gets depreciation allowances, how the taxable gain should be calculated by the lessor and what level of deduction the lessee is allowed.
For example, under a rent structure, the lessor is the one allowed to take depreciation allowances until the option is exercised by the lessee. In contrast, under an instalment sale structure, the lessee starts depreciating the asset -- once the lease agreement has been executed -- but, if the option is not exercised by the lessee (or if the asset is substituted), the lessee should account, for tax purposes, recapture of depreciation and deduction of leasing payments.
In connection with VAT, the Decree provides a new set of rules aimed at clarifying when the taxable event is triggered. For example, in the case of the leasing of goods, it provides that the output tax must be charged by lessor to a VAT-registered lessee at the earlier of accrual of rent payments or payments. Such tax treatment differs from that applicable to sales, in which the whole output tax becomes chargeable from the outset under the VAT law.
The Decree further provides a mechanism for accelerating the VAT output tax charged to a lessee, through an agreement of the parties involved. Under such agreements, the parties must identify the initial instalments during which an increase in output tax will apply (the Increased Instalments) and the final instalments where the output tax will be decreased (the Decreased Instalments), with no intervals between the Increased Instalments and the Decreased Instalments. All amounts of accelerated output taxes must be divided on a pro-rata basis among the Increased Instalments and the consequent reduction in output taxes allocated equally to the Decreased Instalments.
Cristian E Rosso Alba