This Friday, April 29th, is the deadline for taxpayers of the First Category Tax, who maintain accumulated profits prior to the year 2017, to qualify for the payment of a Substitute Tax (ISFUT) with a rate of 30%.
About the Substitute Tax of the Final Taxes- ISFUT
The tax reform contained in Law No. 21,210, published in 2020, included in its transitory article 25 the possibility for taxpayers who still register amounts in the old Tax Utility Fund (“FUT”) to pay taxes on said accumulated tax profits with a preferential rate of 30%, using as a credit the first category tax paid for said utilities.
The analysis of the advisability of availing themselves of this transitory regime becomes relevant in view of the current marginal rate of the complementary global tax, which reaches 44.45%.
The tax reform established an optional regime that empowers certain taxpayers to avail themselves of a substitute tax for final taxes (IGC and IA) of 30%, on the balance of tax profits (FUT, today STUT) generated until December 31st, 2016 and that remain pending distribution in the FUT registry as of December 31st of the years 2019, 2020 and 2021.
B. Requirements to benefit from the ISFUT
1. Taxpayers eligible for ISFUT:
The following taxpayers who determine their effective income according to complete accounting and who at the end of the business years 2019, 2020 and 2021 maintain taxable profits pending taxation generated until 12.31.2016 will be eligible:
a) 14 A: General Scheme (Taxpayers covered by the old article 14 A and 14 B LIR).
b) 14DN°3:ProPyme Regime
2. Income eligible for ISFUT – Type of Income:
That at the end of the business year of the years 2019, 2020 and 2021 there is accumulated income or income pending taxation in the STUT registry: generated as of 12.31.2016 by the taxpayer himself, assigned after reorganizations or from the companies in which he participates. In the latter case, it is equally appropriate if the profits originate from withdrawals of taxable profits made before or after 01.01.2017, provided that it is proven that such income has been effectively generated until 12.31.2016 and that as of the date of exercise the option are pending distribution or withdrawal to taxpayers who must pay final taxes.
3. Exercise of the option: Distinguish according to the date of maintenance of the utilities of the FUT Registry: (Seba ojo con esta tabla, que en la versión español quedó rara, please corregir)
Utilities held until The option may be exercised until
4. How to exercise option:
It may be exercised for all or part of the accumulated balance, through one or more ISFUT declaration and payment forms that the IRS will establish by resolution.
C. Tax Base
The procedure for determining the tax base varies depending on whether the option is exercised in 2020 or in 2021 and until April 2022. Given the current date, it is appropriate to focus on the procedure applicable to these last two years.
Exercise of the option during 2021 and until April 2022: The tax base will be the lower amount between the RAI (tax profits accumulated by the company) as of 12.31.2020 or 2021, as applicable, and the STUT (tax profits accumulated until 31.12.2016).
Once the lower amounts have been determined, it will be necessary to make discounts for allocations that occurred between the end of the previous year and the date on which the option is exercised, such as withdrawals and dividends, movements due to business reorganizations, income that has already received the ISFUT, among others, together with adjustments that the IRS determines through a resolution. Additionally, said amount must be increased by the credit that will be used against the ISFUT.
30% on the tax base.
E. IDPC Credit Determination
Once the tax base has been determined in accordance with the rules of point C above and the ISFUT rate of 30% has been applied, the IDPC credit will be deducted (articles 56 No. 3 and 63 LIR). In accordance with the provisions of Circular No43 of 2020, the determination of the credit will depend on the opportunity in which the option is exercised. In general terms, said credit is obtained by applying the TEF rate to the tax base.
With this formula, the purpose of the rule is that those taxpayers who can receive the entire STUT (accumulated as of 12.31.2016 by the company) to the ISFUT, can use the entire IDPC credit accumulated as of 12.31.2016 by the company and registered in the SAC registry. Otherwise, if the amount of the RAI is less than the accumulated STUT, and consequently an amount less than that contained in the STUT is received, it will happen that the accumulated credit as of 12.31.2016 cannot be fully used on that occasion, losing the difference. It is not appropriate to deduct from the ISFUT the credit for taxes paid abroad.
F. Effects of declaration and payment of ISFUT
The profits that benefit from the ISFUT, although they will not be considered withdrawn, distributed, or remitted by the taxpayers subject to final taxes, will be understood to have fully complied with the LIR taxes. For this reason, they are deducted from the RAI registry and incorporated into the REX registry, and they may be withdrawn, remitted, or distributed in preference to any other sum, not applying LIR imputation rules or tax withholding (art 74 No. 4 LIR).
G. Tax treatment of amounts paid for ISFUT
Both the ISFUT and the financial expenses and other expenses directly related to the payment of the tax will not constitute expenses for purposes of the LIR. Said amounts must be deducted from the sums that have been affected with the ISFUT, proceeding their incorporation to the REX registry, only for the amount that results once the discount of such sums has been made.
In the case of companies in letter A) of article 14 LIR, the ISFUT payment must be charged to the REX registry at the end of the year, which will be readjusted as of its disbursement.
H. Other considerations
The profits registered in the FUR registry (reinvested profits fund) that are subject to final taxes may benefit from the ISFUT. However, the profits controlled in the FUR cannot be withdrawn like those of the STUT, so if they are accepted, the effect is that they will not be taxed in the future when the assumptions that require taxing by said FUR occur.