As we published a few months ago in the note “VAT on professional services: Real scope of the tax reform”, the tax reform of 2022 (Law No. 21,420) established that, as of January 1st, 2023, all services provided or used within the national territory will be subject to the Sales and Services Tax (“VAT”), except those expressly exempt.
In this line, together with the modification indicated, Law No. 21,420 incorporated a new exemption: from January 1st, 2023, the income of professional partnerships will be exempt from VAT, even when they have chosen to declare their income according to the norms of the first category.
Thus, it is important to determine which are the “professional companies” that will have VAT exemption from 2023. Although the Internal Revenue Service (“SII”) had previously regulated this matter (Circular No. 21 of 1991), through the recent Circular No. 50 (the “Circular”), published on October 27th, came to outline and clarify the requirements for a company to qualify as “professional” for the purposes of accessing the aforementioned exemption, to know:
a. Type of company: must be of persons, such as a limited liability company or general partnerships. Therefore, corporations (“S.A.”) and joint stock companies (“SpA”) are excluded, as are entities that do not meet the requirement of being corporations, such as individual limited liability companies (“EIRL”) and sole proprietorships (“ISO”).
b. Purpose: both the economic activities reported to the SII and those that it actually develops must consist exclusively of the provision of professional services or consultancies, not being an obstacle that the statute indicates additional ones.
→Notwithstanding the foregoing, the Circular clarifies that the exclusive line of business is not distorted because the company makes occasional investments to preserve cash flows (for example, taking time deposits, mutual funds or other short-term instruments), or acquires fixed assets for the development of its object, provided that in said development work prevails over capital.
c. Partners: All (whether natural persons or other professional partnerships) must practice their professions for the company, and it is not acceptable that one or more only contribute capital. In this sense, professional services must be provided through partners, with the eventual collaboration of dependents who contribute to the provision of the professional service.
→ The professions of the partners must be identical, similar, related, or complementary.
→ Professions include a professional title and non-professional titles, but they must be granted by an entity that qualifies them to develop a profession, technique, or trade.
d. Beginning of activities: professional partnerships are naturally second-class taxpayers, so in principle they must be taxed as such. Notwithstanding the foregoing, they may choose to pay taxes as a first category taxpayer, an option that they must exercise within the two months following the start of activities or within the first three months of the business year in which they wish to pay taxes as such.
Thus, as a general rule, if a company starts activities directly as a first category taxpayer, without exercising the right of option, it is understood that it is not a professional company (Official No. 1443/2022).
Can I restructure my society to be considered a “professional society”?
As noted, as a general rule, taxpayers who did not start activities as professional partnershipss cannot pay taxes as such.
However, the Circular allows, in an extraordinary way and for an only time, companies to restructure to meet the previously indicated requirements and exercise their option to pay taxes as professional companies in accordance with first category regulations, being exempt from VAT for their services.
According to the Circular, the aforementioned restructuring by itself does not constitute an elusive act, without prejudice to the fact that the SII will also review the specific circumstances of the case to determine that there is no abuse or simulation.
Thus, it is possible to restructure a company to pay taxes as a professional society. For this, it might be necessary:
(a) Reorganize the company in order to meet the requirements to qualify as a professional society. In this sense, the reorganization processes could include, among others, the transformation of the company to a partnership in the case that it is not, the modification of the corporate purpose or, structuring the departure of one or more partners who are not meet the requirements above.
(b) Once the company is restructured, the option to pay taxes as a professional company must be exercised in accordance with the first category regulations. The way to exercise this extraordinary option will be determined by the SII through a resolution, which should be issued in the upcoming days.
Notwithstanding the foregoing, based on the provisions of Circular No. 21/1991, it is probable that the option must be exercised within the first three months of the business year in which they intend to start declaring under said modality (in this case, 2023). Said option will operate retroactively, taxing the company as “professionals” as of January 1st, so the company must comply with the corporate requirements indicated as of December 31st of this year.
If you have any questions about it, you can contact our team.