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Business Opportunities in Argentina: the Technology Industry

Argentina is a favorable jurisdiction for those seeking to do business in the technology industry.

The new government that took power in late 2015 has shown a proactive attitude towards fostering technology in general for the public and private sectors. For example, the administration has pushed to implement digital signatures within the public sector; has worked closely with the Supreme Court towards a complete digitalization of court proceedings, including digital notifications, an extremely novel concept in the country. At the same time, the administration has sponsored two bills (one of which has recently passed into law) which are intended to have signification impact on startups and small and medium sized companies, providing for a more dynamic legal framework and shorter registration terms, as well as tax benefits. At the same time, the sector has a specific industry promotion law.

Although there are different technology industry sectors which present favorable opportunities, we discuss below the specifics of the software industry, one of the most dynamic and competitive fields in our country.

1. The software industry in Argentina

What does the software industry market look like in Argentina according to recent stats?

Based on a report prepared by the Argentine Software Chamber, from 2003 to 2013 Argentina grew from 1852 software and informatics services related companies, to 4288.

 

number of ssi companies in argentina

Number of ssi companies in argentina

 

From those 4288, 75% are micro companies (less than 9 employees), 20% are small (between 10 and 49 employees), 4% are medium sized companies (50 to 200 employees) and 1% is large (more than 200 employees).

 

Distribution of SSI companies according to size

Distribution of SSI companies according to size

 

Moreover, during that same 10-year term sales in this market have also grown exponentially. While in 2003 the sector had sales for USD 916 million (170 million corresponding to exports), in 2013 they raised up to USD 3447 million (891 also corresponding to exports).

 

Internannual sales evolution (in USD millions), foreign income (in USD millions) and employment (in thousands of employees) of the SSI sector – 2003 – 2014 Series

Internannual sales evolution foreign income and employment of the SSI sector – 2003 – 2014 Series

At the same time, from those USD 3500 million in sales, 47.1% is specifically related to software development, and 52% of clients acquiring software products and services are multinational companies.

Not surprisingly, more than 50% of software exportations end up in the United States which is still the most attractive market for exports.

 

Share of the different activities in total average sales 2012 – 2014

Share of the different activities in total average sales 2012 – 2014

 

Far from reaching a standstill point, market analysists estimate that this growth will continue in  coming years bringing ever more business opportunities to those in the software industry or those deciding to have a fresh start.

Argentina can count on highly educated and qualified software developers who during the last 15+ years have been trained in the business of developing high end software products which are sold domestically and exported to sophisticated markets.

A good example of this is Globant, an Argentine born company,  which today has offices in more than 8 countries and 5000+ employees) and is listed on the NYSE.

The software industry in Argentina is an industry that continues to grow at a healthy rate. .

Moreover, there is no restriction or limitation for foreign companies to participate in the software business nor any restriction in terms of copyright protection for software developed for foreign companies or under their instructions.

2. What makes Argentina a favorable venue for the software industry?

Argentina is a favorable venue for a number of reasons: relevant legal protection, qualified human resources, incentives and promotional regimes for those companies developing software in the country, and a new government that is extremely interested in fostering the technology industry and bringing Argentina into the eyes of the world. .

In terms of legal protection, like most other countries, Argentina has decided to protect software with copyright.

In 1998, the Argentina Copyright Law No. 11,723 (“Copyright Law”) was amended so that its protection would extend to software. Copyrights over software, therefore, are subject to similar protections and limitations of those afforded to artistic or literary works. They exist during the lifetime of the author and for an additional 70 years, and imply both moral and economic rights

According to  Copyright Law, the author of the work has both economic and moral rights over it. However,  Copyright Law and Argentine labor law take into account an exception to this general rule, since economic rights over works created by an employee hired for that end are considered the property of the employer. This exception only refers to software developed by employees, so in principle it would not be applicable to software developed by contractors.

Moral rights over the work, nevertheless,  belong to the employee.

The courts where software cases are heard are familiar with and have a long tradition of understanding the importance of software protection for  business growth.

Yet another driver of the activity is the existence of highly prepared and qualified software developers. As an example, from 2006 to 2015, with projections of even a faster rate of growth towards 2020, the sector grew from 8,000 information technology human resources up to 17,000 in 2015 with a projection of 24,000+ for 2020.

 

Annually generated resources 2006-2015 and projection up to 2020

Annually generated resources 2006-2015 and projection up to 2020

 

Although it is expected that the sector will continue to increase its demand for resources, there is a benchmark of qualified developers that will allow a new player in the market to to find suitable key employees to run a business.

There are  certain regulations that are aimed at providing for a more dynamic legal framework and shorter registration terms for small and medium sized companies, as well as providing certain tax benefits that will work as an incentive for the software sector specifically.

The earliest one was the Software Industry Promotion Law No. 25,922,  which was approved in 2004 and regulated by Decree No. 1594/2004. It sought to promote the software industry by establishing a 10-year benefit system.

More recently, in 2011, Law No. 26,692 amended the Software Industry Promotion Law and extended the contemplated benefits until December 31, 2019.

The Software Industry Promotion Law as amended and regulatory Decree No. 1315/2013 jointly establish the software promotion framework. Beneficiaries are entities that are mainly engaged in software-related activities in Argentina. These include the creation, design, development, production and implementation and conditioning of software systems and any activity that, in general terms, leads to the progress of the software industry. However, it specifically excludes software development made by subjects for their own use, or the use of related corporations.

In order to access the benefits granted by the law, entities must demonstrate at least two of the following: (i) spending in activities relates to software research and investigation; (ii) compliance with a recognized applicable quality standard, or activities tending to achieve such compliance; and (iii) exporting software.

In addition, entities must sign up to a special register. They must also comply, as of the third year of the applicability of the law, with any known quality standard applicable to the software industry,  to continue enjoying the benefits of the regime.

Under the regime, beneficiaries :

  • Enjoy fiscal stability. Said stability includes national taxes, including direct taxes, duties and special contributions. Their aggregate national tax liability cannot be increased as of the date they are incorporated to the regime.
  • Are able to turn up to 70% of the social security contributions effectively paid into a nontransferable fiscal credit bond.  The bond can be used to cancel national taxes and their advance payments originated in the software industry, subject to certain limitations.
  • Have a 60% reduction in income tax for activities in relation to fiscal periods beginning after the filing in the registry. This benefit will be applicable to both Argentine source income and foreign source; with the exception of foreign source profits for regular establishments of Argentine resident holders.
  • Are able to import products necessary for the production of software free from restrictions applicable to the remittance of currency abroad.

On the other hand, in September 2016, the President´s Marci administration submitted to Congress an Entrepreneurial Activity Bill (more information here and here) which intends to promote entrepreneurship in Argentina and which is envisioned to have a very positive impact, among others, in the software sector. Specifically, the Bill seeks to (i) promote entrepreneurial activity and capital development; (ii) regulate crowdfunding; and (iii) make available a new and dynamic type of corporation. To that end, it proposes the following:

  • Tax benefits

The Bill aims to support existing entrepreneurial activity and generate entrepreneurial capital within the country. It would establish a series of tax benefits which entrepreneurial capital investors and entrepreneurial capital institutions could access upon registration in the Registry of Entrepreneurial Capital Institutions. These benefits include deductions to income tax based on venture capital contributions. The total investment must be maintained for a period of 2 years starting from the first fiscal year in which the investment was made.

  • Crowdfunding

The Bill creates a system for crowdfunding, by means of which entrepreneurs can file crowdfunding projects on a special platform authorized by the Argentine Securities Commission and receive funding to develop certain goods or services from investors. Fundraising for charity, donations, direct sale of goods or services or loans which are not convertible to shares of a Corporation or Simplified Corporation are excluded from the crowdfunding system.

  • Fiduciary Fund for the Entrepreneurial Capital Development

The Bill proposes the creation of a fund which may grant loans, non-reimbursable or capital contributions to endeavors and entrepreneurial capital institutions to support entrepreneurial projects.

  • Simplified Corporation

The Bill proposes the creation of a new type of corporation, known as the Simplified Corporation (“S.A.S”). Under the terms of the Bill, the S.A.S. would be primarily ruled by the new law and complemented by the General Companies Law. The new type of corporation would be subject to a more dynamic legal framework and shorter registration term. If the incorporation documents are executed following the templates which will be approved by the Public Registry, the registration will be fulfilled within a 24-hour period.

3. Conclusion

As we have described, Argentina is a favorable venue for software business opportunities because on the one hand there is a supportive legal framework which (promotes this activity with different incentives and protects software as such, and on the other there are  qualified human resources experienced in the field of developing high end software products.

Diego Fernández

Associate

C.V.

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