Argentina Broadened the Definition of “Permanent Establishment” and You Did Not Even Notice

As part of the tax reform package enacted by congress in December 2017,[1] legislators tinkered with the definition of “Permanent Establishment.”  While many, including WSC, reported on the various changes to the tax code, all but the most specialized commentary ignored a wider net cast on foreign persons having limited business activity in Argentina. This is important.  Foreign legal and natural persons doing business in Argentina from abroad must be careful not to form a permanent establishment and inadvertently create an income tax obligation locally.

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A finding of a permanent establishment means the foreign person must pay Argentine income taxes on the income sourced from Argentina and on any worldwide income obtained by permanent establishment.  Until recently, a “Permanent Establishment” was defined as:

Any commercial, industrial, agriculture and livestock, mining or other establishments of any type, organized as a stable enterprise, owned by associations, partnerships or enterprises of any kind, incorporated abroad or by individuals who were foreign residents.

As redefined, a “Permanent Establishment” now refers to:

A fixed place of business through which a foreign person conducts, in whole or in part, its business activity, including:

• a place of management,
• a branch,
• an office,
• a factory,
• a workshop, and
• a mine, an oil or gas well, a quarry or any other place of, exploration, exploitation or extraction of natural resources, including fishery.

Because “Permanent Establishment” now also includes:

• A construction site, installation project or the supervision of activities related to these, when carried out in Argentina for more than six months, or
• The services performed by a foreign resident, including consulting services, either directly or through personnel hired for the purpose, but only for services performed in Argentina for a period or series of periods, which, taken together, exceed six months within any twelve-month period.

A permanent establishment is also created when an individual performs acts in the Argentine territory, on behalf of a foreign legal or natural person and the individual:

• Repeatedly enters into contracts or is fundamental in the formation of contracts on behalf of a foreign person;
• Maintains a warehouse with inventory in Argentina to deliver goods from the warehouse on behalf of the foreign person;
• Assumes business risk on behalf of the foreign person;
• Performs acts at the instruction of the foreign person;
• Performs acts for the economic benefit of the foreign person and not to its own business activity; or
• Receives compensation from the foreign person without regard to the results of its activity.

The definition specifically excludes from the definition of “Permanent Establishment” the following services performed in a “preparatory or auxiliary” nature on behalf of a foreign person:  

• the use of facilities solely for the purpose of storage or display goods or merchandise belonging to the foreign person;
• the maintenance of a warehouse with inventory solely for the purpose of storage or display or for processing by another enterprise;
• the maintenance of a fixed place of business solely for the purpose of purchasing goods or of collecting information for the foreign person or, on the whole, of a “preparatory or auxiliary” nature.

A foreign person does not create a permanent establishment by conducting business in Argentina through brokers, agents working on commission, or other intermediary acting independently and in the ordinary course of their own business.  A relationship that is exclusive to (or largely dependent on) a foreign person changes the analysis and likely creates a permanent establishment.

Our tax team wanted to bring this issue to your attention and make sure it was not ignored among the various other (and more publicized) changes in effect since the beginning of the year.  As always, we are available to help inform your business decisions and to guide you toward the most appropriate solution.

[1] Law No. 27,430 published in the Official Gazette on December 29^th, 2017.