| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 1 | The Funds Law makes general provisions for funds of various types, in some of which PV/VE funds can operate, though this is far from ideal or complete. Most funds are currently incorporated abroad. By some accounts, Regulations 7/05 and 12/05, both coming into force in February 2006, ease the compliance costs and difficulties for foreign entities to demonstrate annually (per Regulation 07/03 of 2003) to Argentine authorities that their primary business is foreign and that they thus should not be treated as domestic entities. However, it remains difficult to demonstrate to authorities that a fund is in fact a non-Argentine entity and this still entails demonstrating that the shareholders are foreign nationals and that the participating entities are registered abroad (January 2007 and October 2005 interviews; World Trade Executive Country Briefing 2006). |
| Tax treatment of VC/PE funds & investments | 1 | There is a 0.6% tax on all financial transactions on current account, one-third of which is credited as an advanced tax payment. Under 2004 incentives law, some investments are eligible for incentives. One type of fund instrument, fondo abierto de fin variado, is pass through. Closed funds and specific-purpose open funds are not (October 2005 interview; EIU Country Finance 2006). Capital gains are subject to normal tax rates; no corporate tax on dividends is charged unless they exceed net income from previous year (then they are assessed at normal corporate rate); corporate tax incentives are applicable to software and R&D, but generally tax incentives for VC/PE are weak (EIU Country Finance 2006, January 2007 interview). |
| Protection of minority shareholder rights | 2 | The Capital Market Reform of 2001 provides for mandatory tender offers once 35% of shares are acquired by single purchaser, rights to fair price in de-listings and squeeze-outs, and independent audit committees (OECD, Latin America Corporate Governance Roundtable 2005). But the law governs only publicly traded firms and firms have de-listed to avoid it (October 2005 interview). In debt restructurings taking place under a 2002 law there was a trend downward in minority rights over debt restructuring (EIU, Country Finance 2006). Argentina scores above the regional average on disclosure requirements and shareholder ability to sue but below on director liability for self-dealing and investor protection in the World Bank's Doing Business 2006 survey. Shareholder law does allow for negotiation of shareholder agreements and arbitration clauses, which can be set up by offshore funds to use foreign legal jurisdictions for disputes. |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 1 | There are few instruments by which pension funds and insurance companies can undertake investment, and a prohibition on investments in unlisted firms and VC/PE funds not rated by registered ratings agencies remains in place (EIU Country Finance 2006; World Trade Executive Country Briefing, April 2006; November 2005 and January 2007 interviews). |
| Protection of intellectual property rights | 2 | EIU Risk Briefing score. Argentina's weak protection of IPR is reflected in its placement on the US Trade Representative's "Priority Watch List" since 1996. The USTR's latest report noted particular difficulties in the areas of copyrights and trademarks, as well as in the enforcement of rights to intellectual property. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 2 | Bankruptcy has become easier procedurally. The 2002 Ley de Quiebras allows firms to restructure debts through an extra-judicial procedure without the unanimous shareholder approval previously required (and with approval of only 2/3 of creditors); just a simple board majority suffices. Terms of restructuring are applied equally to all debtors and all shareholders are bound by them. The country scores very low in 2005 IDB creditor rights international survey. Since 2003 (Regulation 7/03), each shareholder must own at least 5% in its Argentine subsidiary (ie, the holding company under which it holds equity in local firms) in order to qualify for limited liability. Bankruptcy concerns are not a major obstacle to VC/PE investing if provisions are spelled out in advance in shareholder agreements and arbitration clauses (EIU, Country Finance 2006; World Trade Executive Country Briefing 2006; October 2005 interview). |
| Capital markets development and feasibility of exits (ie, local IPOs) | 2 | Average of three EIU Risk Briefing scores. Following the collapse of 2001-02, much of the financial system is still recovering. Most firms will remain reliant on self-finance in the outlook period although the capital market revived in 2004 and could become a growing source of funds for SMEs over the medium term. Bank lending has grown at double digit rates in 2005-06, although the stock of credit to the private sector is far below its pre-crisis level at a mere 11% of GDP. Foreign companies will find it difficult to borrow and will be reliant on overseas sources of credit to finance operations. There are, however, prospects for improvement as activity on the local exchanges begins to pick up and with a potential initiative now taking shape to create a special panel on the exchange for small and medium-sized enterprises. |
| Registration/reserve requirements on inward investments | 2 | Complex registration requirements remain in place. For incoming financial flows, investors must set aside 30% of inflows in an interest-free US dollar account for one year unless they can demonstrate that the flows constitute a capital increase in an existing undertaking or are able otherwise to structure investments with great care. No reserve requirements exist per se (EIU Country Finance 2006; January 2007 interview). |
| Corporate governance requirements | 2 | Standards exist under 2001 capital markets reforms (charters, information to shareholders, voting rights and minority rights). But only for traded firms, and enforcement through the judicial system remains lengthy and cumbersome (October 2005 interview; EIU, Country Finance 2006, OECD Roundtable). However, the shareholder law does allow for the negotiation of shareholder agreements and arbitration clauses, which can be set up by offshore funds so as to use foreign legal jurisdictions for disputes. (January 2007 interview) |
| Strength of the judicial system | 1 | EIU Risk Briefing score. A reform passed in February 2006 to the Consejo de la Magistratura, the body overseeing judicial appointments, has increased the influence of the government over the judges at the expense of the legal profession and the congressional opposition, undermining judicial independence. Investors seeking to defend their interests in any dispute with the government should be aware that the judiciary can be susceptible to political pressure, and should enlist the services of an experienced local lawyer. |
| Perceived corruption | 1 | EIU Risk Briefing score. One by-product of Argentina's strong presidential system, reinforced by the dominance of the Peronist party, is weak Congressional oversight of the executive. There is a long history of political interference with the Supreme Court, and the judiciary has issued contradictory rulings in key areas. The low quality of the bureaucracy, which will persist until long-awaited public-sector reform is carried out, will hinder implementation of government policies. Increases in investment spending may have been poorly targeted. Political considerations will influence the design of social spending programs, reducing their effectiveness. |
| Quality of local accounting industry/use of international standards | 4 | Norms are in line with international standards and international auditors are present and reliable (November 2005 and January 2007 interviews, IASPLUS international survey). |