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1. Tax Reform.

1.a. Income Tax

The Executive enforced on 29th December the so-called Tax Reform, enacted as Law 27,430. The Tax Reform amended income tax provisions, among other several taxes.

As breaking news, there is an amendment to income tax of category 4 regarding "separation packages."

Until present, this subject was ruled by the Supreme Court doctrine in re. "Negri, Fernando Horacio v. EN - AFIP - DGI" (7/15/14), whose criteria was thereafter confirmed by the Federal Tax Authority (AFIP) in its newsletter 4/16. According to this doctrine, sums paid as a consequence of employment separation were not taxable (even if the amount exceeded the equivalent to statutory severance for employment termination), given that the source which triggered the payment was not continuous or permanent.

The Tax Reform now provides that any sums exceeding the statutory severance for termination set forth by the employment law shall be taxed. This applies under any form of employment termination, including agreed separations (mutual separation agreement, agreed resignation, etc.).

This provision shall apply to employees who work as directors and executives, whose definition shall be established via Executive Order, not issued as yet.

Considering said Supreme Court doctrine, that the Tax Reform has not eliminated the typical features of income tax for taxation purposes (continuous and permanent income source) and potential discrimination claims by the taxpayers reached by the Reform, we envisage litigation will considerably arise in the short and medium run. Undoubtedly, each particular case should be subject to thorough analysis by employers.

1.b. Social Security.

Also, the Tax Reform amends Executive Order 814/01 (the Executive Order) which governed the regime of employers' and employees' social security contributions. These are the main features of the Reform:

a. Employers' contributions rate: The Employers' contributions set forth by the Executive Order at differentiated rates of 17% and 21%, applicable to employers with industrial and commercial/services activities, respectively, will be gradually eliminated, in a way that by 2022 there shall be only one rate of 19.5% for all employers.

During 2018 the applicable rates will be 17.5% for employers with industrial activities (among other few exceptions) and of 20.7% for the rest of the employers.

b. Exemption Limits: There will be an exemption limit to be applied to employers' contributions, which shall be updated periodically.

c. Tax credit for VAT purposes: The possibility to take the employers' contributions as tax credit for VAT purposes will be progressively eliminated until final conclusion in 2022.

d. Benefits for small businesses and employers with up to 80 employees: As of 2022, the special regime of employers' contributions for small businesses (with up to 5 employees) will be eliminated.

Also, the promotional regime of Law 26,940 for employers with up to 80 employees, which had reductions ranging from 100% to 25% of employers' contributions, will be gradually eliminated during the next 2 years.

Until then, the employer may opt between continue enrolled in the current benefit regime, and apply for the new exemption limits explained above. The operational details of this option shall be established via Executive Order, not issued as yet.

e. Tax Criminal Law: The thresholds which would trigger criminal actions for social security contributions evasion and undue withholding are respectively raised from ARS 80,000 to ARS 200,000, ARS 400,000 to ARS 1,000,000, and ARS 20,000 to ARS 100,000.

2. Social Security Reform - Amendments to Employment Contract Law

The Social Security Reform, enacted as Law 27,426, amended Law 24,241's Retirement Index and the Employment Contract Law's (ECL) sections 252 and 253.

a. Retirement Index. The new formula of retirement benefit replaces the former update system which used to be applied every semester (in March and September), by a new quarterly update system (in March, June, September and December). The new index is to be updated through a combination of the Consumers' Price Index (IPC) reported by the competent Governmental Agency (INDEC) and the Permanent Workers' Average Computable Remuneration (RIPTE).

b. ECL amendments. The age at which employers will be entitled to require employees to start their retirement process is extended to 70.

Also, the Reform amended section 253 of the ECL, which governs the severance formula for employees who continue working for the same employer after having obtained the retirement benefit, even when employment did not formally cease after such event.

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