In recent years, consultations have been held on the advisability of converting a Sole proprietorship of an agricultural business in a company such as an SRL or SA. This analysis is essential for those who want to optimize their company’s tax and administrative structure. When comparing the most common alternatives, relevant differences become apparent:
• Companies pay taxes Income tax with a tax rate scale of 25% to 35%while sole proprietorships apply rates ranging from 8% to 35%. However, the hurdle to achieving the maximum rate is significantly lower for sole proprietorships. For example, with a profit of 1,500 million pesos, the sole proprietorship would pay an effective tax rate of 34.6%, while the corporation would pay 31.3%, resulting in a saving of approximately 50 million. Despite it, If the company’s profits are distributed in full, this benefit is no longer due to the dividend tax (7%).. Therefore, it is more convenient for the company if a significant part of the profit is reinvested.
• Companies do not enjoy Income Exemptions of temporary investment of current capital, but may adjust this income to inflation and must pay to the extent that it exceeds it. On the other hand, sole proprietorship owners can withdraw funds to make financial investments and provide access exemptions to people without paying taxes.
• In societies the Director or Manager Compensation (and participating family members) regardless of whether the receipt of fees or compensation is deductible. Although this would represent a profit for the persons mentioned, the Income Tax Act provides for special deductions for this type of income, so savings could be achieved using these figures. For a sole proprietorship, withdrawals for personal consumption or investments are not deductible.
• Sole proprietorships can operate with Savings bank accounts exempt while businesses must use taxable checking accounts. However, for micro and small businesses, this tax is 100% creditable against income tax provided that the annual income does not exceed 2,436 million pesos.
• He rural property in a company is taxed at 0.5%while it is tax-exempt in sole proprietorships. The relevance of this tax depends on the valuation of the property in the company.
• Another problem to observe is the eventuality Sale of rural property or the company as a whole, which may also include other assets, buildings and inventories. Assuming that the ultimate decision is to sell the property or business, the tax options could be as follows:
-15% on the result from the sale of shares or quota shares (including all assets of the company).
-35% on the result of the individual sale of goods by the company.
-35% if the property is sold by the sole proprietorship in operation.
-0% if a person sells a property purchased before 2017 and two years have passed since its use ceased (if it has been rented out since then).
-15% if the property was purchased after 2017 and two years have passed without use.
• If the rural properties are located in the In the province of Buenos Aires or if the person is a resident of that province, it is necessary to assess the possible impact of the inheritance tax applicable in that province. (Tax on the gratuitous transfer of assets) in the event of a restructuring of the company, taking into account the fact that heirs may or will have an interest in this company.
• In addition to the specific tax topics mentioned, these should be evaluated Legal implications of using companiesfrom limiting liability, complying with new tax and regulatory requests, to designating authorities. In the event that the companies are used to carry out the exploitation and the land remains in the hands of their current owners, the use of current agricultural contracts must be analyzed in order to link both subjects (owners and companies) and their tax treatment in order not to charge additional costs for a possible restructuring.
The decision between operating as a sole proprietorship or as a partnership requires a comprehensive analysis the tax, administrative and legal differences, taking into account the profile and objectives of the company.
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The author is a Partner at Taxes & Legal and Head of Agriculture at KPMG Argentina
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