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Tax Payable by individuals versus corporations:
From a professional point of view we are often asked as to which is the best way to start a commercial enterprise from a legal point of view. Basically, people want to know the risk involved in the entire asset equation as well as reducing tax burdens as much as possible.
In this study we will analyze tax treatment for the two most common types of companies that involve capital in our country: they are “Sociedades Anonimas” and “Sociedades de Responsabilidad Limitada” as defined by law 19.550. We will establish a general comparison with individuals ( Sociedades de Hecho or Factual Associations ) as well as with the Fideicommissum contemplated by law 24441. The capital partnerships described above limit asset liability to the amount invested by the partners. However there are exceptions because Penal responsabilities on the part of the directors be it for tax or other reasons can allow the judicial branch to impound their personal capital. The Fideicommissum on the other hand limits the capital to the fiduciary who as such can be held co-responsible but in principle the fiduciary is completely exempt from this legal framework. It is important to state that to be a manager or director it is not necessary to be a partner and those partners who are not part of the management team are not held responsible for infringements of the penal income tax law, for example. In other words one can be a partner without being held responsible personally from a penal or asset standpoint in the same way that one can be responsible in both spheres of activity without being a partner.
We will proceed with the tax framework to stress the differences between companies and individuals.
With regard to INCOME TAX the main difference is that for individuals the tax rate is progressive and increases at regular intervals so that at each echelon one pays a higher rate. Not on the total but every echelon pays its own rate. To this one must add that individuals are awarded a non-taxable minimum and family allowance deductions for their direct family members in given circumstances. Furthermore in some cases an additional deduction is added, according to the different categories involved. Specifically so as to be able to compare individuals with companies whose income falls within the third category we must state that individuals are allowed this special additional deduction if they work personally in their firms.
The tax rate is always 35% on net profit for companies whereas for individuals once minimum non taxable income has been deducted the tax is calculated according to the aforementioned scale. Example: for a net profit of Pesos $120.000 a company will pay Pesos $42.000 in tax and an individual Pesos, $28.500. As can be appreciated the difference is substancial and one must add to this the fact that one can deduct beforehand the non-taxable minimums that have just been increased for 2006.
An important aspect to be borne in mind is that of the fees that companies pay their directors or managers. There are legal limits to be considered and this is not simple. Each director or manager can be assigned Pesos $12.500 per annum and the company deducts this as an expense and therefore does not pay the 35 % tax on this sum whereas the director does have to declare it in his personal tax return which is subject to a progressive rate. Furthermore 25 % of AUDITED PROFITS can be assigned to the directors or managers and distributed as seen fit.
Individuals can choose which road to take from a tax standpoint. With regard to the tax on minimum presumed income the tax is 1% on the assets affected to that particular business regardless of the current liabilities. This tax is on account of income tax and is applied both to companies and to individuals who are in business. In both cases the assets to be considered are appraised according to the tax law. Here there is a minimum Pesos $200.000 in all cases. That is to say that those who do not reach that figure with their assets are excluded from the tax but those who surpass it pay based on the total. Therefore it is not a minimum figure that will never be taxed but rather when the stipulated minimum is reached all of the assets will be taxed. As mentioned the two taxes described above can be compensated over the next ten years but under no circumstance can other taxes be considered in the equation.
With regard to tax on personal assets this is calculated on the assets of individuals also without considering liabilities except when these are generated by the family home. There is a non taxable minimum of Pesos $102.300. The rate is 0,5 % if the sum does not exceed Pesos $200.000 and if it does exceed that amount, the individual has to pay 0,75 % of the total sum even though the non taxable minimum is always exempt.
An individual engaged in business activity will also pay this tax on the capital invested in that business ( and not only on assets). This tax has also has to be payed on shareholdings or partnerships in companies. An important detail to bear in mind is that if the company is an individual or a factual association, the appraisal to be considered is the tax one whereas in the case of companies it is the auditing one. This can give rise to important differences seeing that, for example, a company had to adjust its assets according to inflation after the devaluation in 2002 whereas from a tax point of view this has not happened.
With regard to factual associations each member is a contributor to the different taxes in proportion to his share in the company and for personal assets there is a legal figure loosely translated as a responsible substitute unless it is a non-business factual association. With regard to the Fideicommissum it is liable to capital gains tax and to minimum presumed tax providing the fiduciary and the beneficiary are not the same person.
In that case it receives similar treatment to that of shareholding companies and in the case that it is not a contributor due to the above mentioned reason the beneficiary will declare the profits obtained in his tax retun as an individual.
HÉCTOR BLAS TRILLO
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