Our highest Court (1) rightly affirmed that the taxpayer’s honest effort to keep his taxes as low as legally possible is not reprehensible. In other international precedents (2) it has been held that no one is obliged to manage his fortune and income in such a way as to provide the State with the maximum amount of tax collection or to question the legal right of a taxpayer to reduce the burden of his taxes.

Based on this criterion, we analyze some legal alternatives that would allow lowering the tax burden.

Characteristics of the tax and its taxable base

The personal property tax is an instantaneous tax, since the configuration of the respective tax liability is verified at a certain time of the year: December 31.

Therefore, the magnitude of the tax will depend on the types of assets that make up the patrimony and their amount at that date, regardless of the patrimonial situation that is externalized at any other time.

Unlike income tax and even various excise taxes, this tax is characterized by the fact that it is levied on an externalization of assets (in fact of goods) which, in general, does not undergo fluctuations of such magnitude that the asset base could be extinguished from one fiscal year to the next.

In income tax, it is entirely reasonable that, while there is a taxable gain in a given year, there may be a loss in the following year, and therefore it is fully justified that the income tax provides for the use of losses in future years in a very particular way. None of this occurs in estate taxes, for the simple reason that, in general and under non-exceptional conditions, people have to maintain their patrimony, and in many cases, increase it, with the purpose of constituting a future safeguard that guarantees an adequate standard of living for the taxpayer.

Progressivity of the tax and its impact on tax savings

Given the progressive nature of the tax through the application of the scale of rates (both for domestic and foreign assets), it should be noted that in the case of very high net worth levels, the tax savings could be significant, since the application of the highest rates would be deactivated.

1 Supreme Court of Justice of the Nation (CSJN) 1958, case “ICA-Industrias Comerciales Argentinas SRL” (Judgments: 241:210).
2 Superior Court of Prussia in 1906 and American case law “Superior Oil Co. v. Mississippi ex Rel. Knox” – 280 U.S. 390 – 1930, among other rulings.

Let us keep in mind that the 1.75% rate for domestic assets will be applied for taxable assets in the country above approximately $ 450 million (3) , and for assets abroad the 2.25% rate will be applied for levels (domestic and foreign) of approximately $ 27 million.

In addition, we emphasize that the scale of rates applicable to foreign goods (ranging from 0.7% to 2.25%) is designed to verify a behavior of abrupt jumps in the determination of the tax, when passing from one bracket to another. In the event of a change in the level of taxable goods, the corresponding tax rate according to the bracket is applied on a linear basis on all foreign goods, regardless of the previous levels (as it is respected in the progressive scale applicable to domestic goods). For example, if the upper level of the scale is considered to be up to $ 27 million (1.8% tax rate), the tax assessed on the foreign assets would amount to $ 486,000, and by the mere fact of increasing the value of such assets by $ 1, the tax assessed (by application of 2.25%) would be $ 607,500. In other words, the tax experiences an increase of $121,500 for the simple increase of $1 in the asset base. This aspect is a clear affectation of the principle of reasonableness, and we understand that it must be considered in any planning to be carried out.

Can the tax burden be lowered?

Then, how could the tax burden on personal property tax be lowered, if the net worth base will tend to remain the same, and even increase progressively.

In our opinion, we could summarize as legal grounds for mitigating the burden of this property tax, among others, the following: a) exemptions, b) liberalities, c) repatriation of capital, d) change of tax residence and e) special vehicles. All of them, combined or not, will make it possible to obtain a lower tax burden, and the pros and cons of each one must be evaluated in each case.

The following is a brief description of them.

Exemptions

First of all, we can highlight the following applicable exemptions (which are not the only ones contemplated by the law):

1) Rural real estate owned by individuals and undivided estates, regardless of their destination or use (at least for the time being, the exemption on this type of property is maintained). Furthermore, in our opinion, the exemption applies both to real estate located in the country and abroad.

2) Securities, bonds and other securities issued by the Nation, provinces, municipalities and the Autonomous City of Buenos Aires and rescheduled certificates of deposit (CEDROS).

3) Deposits in pesos and foreign currency made in Argentine financial institutions (Law No. 21,526), fixed-term deposits, savings accounts, special savings accounts or other forms of fund raising. Excluded from the exemption are balances in bank current accounts. Thus, the money held in Argentine financial institutions as of December 31 of each year is not subject to taxation.

4) Negotiable obligations issued in pesos (with the requirements of Article 36 of Law 23,576, as amended).

5) Instruments issued in pesos for the purpose of promoting productive investment, as established by the National Executive Power. To date, we are not aware of the issuance of these instruments.

6) Quota shares of open-end mutual funds (article 1 of Law 24,083), and certificates of participation and securities representing fiduciary debt of financial trusts, placed by public offering, and whose main underlying asset is composed of at least 75% of the deposits and assets mentioned in points 2) to 5) above.

(3) To date, the new scales applicable for fiscal year 2022 have not yet been published.

Exemption and incentives for new private works

Through Law No. 27,613 (B.O. 12/3/2021), certain tax incentives were established to promote the development and investment in real estate projects, understood as new private works started as from the effective date of the law or with a degree of progress of less than 50%).

The aforementioned incentives in relation to the ISBP consist of:

a) personal property tax exemption in respect of the amounts invested in the new works mentioned (this benefit may not apply to more than two fiscal years), and
b) a payment on account of personal property tax equivalent to 1% of the value of the investments in such works, which may be computed (depending on the case) during fiscal years 2020 to 2022 inclusive.

Liberalities

In many cases and in the face of certain asset levels, individuals may decide to divest themselves of part of their assets and irrevocably contribute them to a trust to manage them and finally transfer them to the settlors that they designate. Direct donations in favor of successors or third parties, who could be taxpayers or non-taxpayers at the same time, could also be instrumented). In all cases there is a real detachment of assets and therefore the ownership of the assets by the taxpayer is lost, and the possible impact on the new owner must be analyzed, since in some cases the assets could be outside the taxation (in the case of assets located abroad contributed to a trust).

Repatriation

The goods located abroad are, in principle, subject to a progressive tax rate ranging from 0.70% to 2.25% in a scale designed with sections involving sharp balances. However, the law itself contemplates the possibility for taxpayers to be exempted from the differential tax rate and, therefore, to tax all of their assets at the rates established for assets in the country (from 0.50% to 1.75%), to the extent that they have repatriated financial assets.

Repatriation is understood as the entry into the country, up to and including March 31 of each year, of at least 5% of the total value of the foreign assets: (i) foreign currency holdings abroad and, (ii) amounts generated as a result of the realization of financial assets belonging to individuals domiciled in the country and undivided estates domiciled in the country. This means that, in order to enjoy the benefit of not applying the differential scale for fiscal year 2022, individuals have time to repatriate until 3/31/2022. The benefit is maintained to the extent that such funds remain deposited in an account opened in the name of the holder (savings bank, checking account, fixed term or others), in entities included in the regime of Law No. 21,526, up to December 31, inclusive, of the calendar year in which the repatriation has been verified or, once the repatriation has been completed and the aforementioned deposit has been made, such funds are partially or totally allocated to certain destinations.

For high levels of taxable income (approximately over $ 455 million), repatriation would mean a saving of 0.5% (2.25% foreign tax rate versus 1.75% domestic tax rate).

Tax residence

From a strictly technical point of view, we can affirm that the principle of taxation on the universe of assets is only applicable for subjects that have their tax residence in our country (according to the income tax rules). In other words, non-residents are only subject to the tax for those assets located in our country.
For this reason, and without prejudice to the other aspects to be considered in this respect, individuals who have significant assets located abroad, seriously consider the possibility of changing their tax residence status.
Of course, the decision to change the residence has other non-tax aspects that, in our opinion, must be taken into account when evaluating the whole situation.

Special vehicles

This alternative consists of placing part of the taxed assets as underlying assets of other vehicles (corporate, trusts) in order to lower their taxation to the proportional rate of 0.5% (instead of the progressive rate) through the substitute liability regime. In these cases, the vehicles will be the owners of the assets and not the human person, who will only have an interest in said vehicles.

Of course, this option requires a detailed analysis of the consequences that could arise in income tax, since all these assets are included in subjects whose income is considered to be of the third category, where in principle any type of income is considered to be income for tax purposes.

Variations in net worth and evasion

The regulatory decree of the tax establishes that when the variations operated during the calendar year in the goods subject to the tax, made presuming a tax evasion purpose, the tax agency may provide that, for the purposes of determining the tax, the variations are provided based on the time elapsed since they are made and until December 31 of each year.

For example, in a case in which a taxpayer invests or transfers in the last days of December all or part of its assets in other assets considered exempt (depositing the money in financial entities, buying government securities, etc.) and then in the first days of January reestablishes the original composition of its assets, for the sole purpose of enjoying the exemption benefit, the tax authority could make the adjustment proportionally considering that the facts are made in periods very close to the time of verification of the taxable event.

Therefore, when investing in exempt assets, it is advisable that there is a certain permanence in such investments in order to disarticulate the aforementioned presumption.