ARGENTINA

Argentine Government increases controls on foreign domestic investment

New guidelines issued that require resident and non-resident investors to disclose their investments is an attempt by the Argentine Government to control the flow of foreign currency in the country. Agustin Marra asks will it have any effect?

On 10 November, 2004, the Central Bank of the Republic of Argentina issued Communication ‘A’ 4237, which introduced basic guidelines for the implementation of a system of regulation for direct and real estate investments conducted in Argentina by non-resident investors, and abroad by Argentine residents. This mechanism can be included within a vast set of monetary measures aimed at overseeing the inflow and outflow of foreign currency. But unlike previous regulations, this one does not appear to restrict foreign direct investment (FDI).

The communication provides for a mandatory report to be submitted to the Central Bank by non-residents holding participations of more than 10% in the capital stock of a local company (direct investment) or with an investment in real estate property without commercial purposes (real estate investment). It also extends the same disclosure duty to local residents undertaking similar activities abroad. According to the terms of the communication, a participation of at least 10% in a company’s capital stock is considered as indicative of a direct investment. The term ‘real estate investment’ refers to an investment in real estate without a commercial purpose, provided that the property does not belong to a company. If the real estate belongs to a company, the investment shall be reported as a direct investment in a company. The communication sets as examples vacation residences and other real estate property for personal use or to be rented by third parties.

Any resident business, whether incorporated as a company or not, in which a direct investor resident in another economy holds at least 10% of the ordinary shares or voting rights (in the case of a corporation) or its equivalent (when the business or enterprise is not incorporated as a company) is considered a resident company of FDI.

Any resident company in Argentina that holds at least 10% of the total capital stock of a non-resident company is considered a resident company with direct participation in a non-resident company. The same criterion is applicable to resident individuals with direct participations in non-resident companies.

The communication sets forth that those companies in which non-residents hold an interest and the administrators of real estate owned by non-residents must report those interests during the reporting period. In this case, the reporting period comprises six months prior to the reference date, indicated as the last day of each calendar semester. Such a report is also mandatory for the property of individuals and companies that is held at the beginning of the reporting period and that have been liquidated up to six months prior to the reference date. In any case, the report will be considered as an affidavit and will be filed through a financial entity within 90 days from the reference date.

The report will be optional whenever the property of non-residents as of the reference date does not exceed a certain value of the company’s net worth and/or of the fiscal value of the real estate in the charge of the resident administrator. The communication establishes an identical regime for those Argentine residents with direct investments abroad, either in companies or real estate.

The disclosure obligation applicable to foreign investors includes information regarding the resident company — such as net asset value, contributions and withdrawals during the reported period, issuances of shares — and the direct investor and his participation in the capital stock of the company — such as type of investor, country of residence, percentages of holdings, transfers of shares, and so on. According to the communication, all resident individuals and companies holding direct and real estate investments abroad are subject to similar information requirements.

Although the information will be initially required for the period finishing on 31 December, 2004, as of today no complementary regulation setting out the specifics of the information regime has been issued by the Central Bank. This circumstance and the lack of applicative forms currently prevent companies from making any such filings. We estimate that this new regulation will not considerably affect foreign companies doing business in Argentina, since the same information is being provided by the companies to other non-monetary state agencies. But it is clear that the Government is even more concerned with supporting an exportation model by controlling currency flow and keeping a competitive exchange rate than in promoting growth by means of FDI.

Agustin Marra is a corporate lawyer and member of Alfaro Abogados in Buenos Aires.