Estudio Garrido

MORE M&A ACTIVITY EXPECTED IN THE SOFTWARE INDUSTRY

By Gustavo Garrido and María Marta Cancio

Introduction

The Argentine software industry is ripe for consolidation and further penetration in today's globalised world. A combination of factors - including highly qualified and competitive human resources worldwide, communications infrastructure, competitive costs and tax benefits - gives this sector the potential to expand its international presence (both in Latin America and in the United States and Europe). However, this is likely to necessitate consolidation of the existing 1,600 software companies.

A number of companies stand out as relevant players in their specific fields - for example:

• Sia Interactive, Axoft, Neoris, Neuralsoft, Sistran and T-Systems, among others, are becoming increasingly important for business applications;

• GlobalLogic (formerly Cubika) is one of the leading suppliers of research and development in software products in Latin America; and

• Consist and Neoris are prominent in e-learning and security applications.

A significant number of companies are devoted to software creation and tailored solutions. Small and medium-sized domestic companies are expanding their activities and entering new markets with specifically designed solutions. Furthermore, an internationalisation process is already underway - almost 100 companies have offices abroad and 15,000 workers serve offshore markets. In addition, 6.7% of domestic companies have at least one branch abroad, with this percentage growing steadily(1) - for example, Mercado Libre opened an office in Silicon Valley.

Sales growth

According to the Ministry of Industry, sales have experienced a compound annual growth rate of 278% over the past six years and exports have experienced a 329% rise. Exports currently represent 25% of the sector's total production. Most exports are to Latin American countries, but products are also exported to the United States, Canada, Italy and Spain. This extraordinary performance has also caused employment in the sector to grow at an accumulated annual rate of 240% since 2005. Most software companies are small and medium-sized domestic companies; 50% have fewer than 100 employees and 23% have fewer than 300 employees.

Role of the government

The Argentine government has stimulated the software and IT services industry, playing a crucial role. The recently enacted Law 26,692 introduced important amendments to the Software Law 25,922.(2) The main benefits are as follows:

• Fiscal stability has been guaranteed up to December 31 2019,(3) although the tax benefits will be applicable to each beneficiary as from the date of registration and will not cover import and export refunds and export repayments. This stability includes national direct taxes, duties and special contributions, and implies that the aggregate national tax liability cannot be increased as of the date of registration.

• Beneficiaries will have three years following registration to comply with a recognised industry standard for quality control of software products in order to maintain the tax benefits.

• Beneficiaries may convert into a non-transferable fiscal credit bond up to 70% of the social security contributions effectively paid. These bonds can be used to pay national taxes and their advance payments originating in the software industry, except income tax.

• The total amount of income tax on revenues from Argentine and foreign sources corresponding to the promoted activities may be reduced by 60% in each fiscal year (available only on proof of investigation and development costs).

• Beneficiaries will not be subject to VAT withholdings.

• The import of products necessary for the development of software by the beneficiaries (eg, hardware and other informatics components) is free from any present or future restrictions applicable to the remittance of currency abroad.

At local levels, the provinces have also granted tax benefits and location opportunities to the softwareindustry. Argentina is endowed with several technological hubs and operates clusters in a number of cities. At present, 49% of all software companies are concentrated in Buenos Aires. In particular, the 'Polo IT Buenos Aires' area is home to more than 80 domestic companies.

Comment

Considering that there are 1,600 Argentine software companies, and that they are expected to continue growing locally and internationally, the probable next step is the consolidation of the industry via acquisitions and mergers, which can be effected without triggering any tax effects, subject to a two-year ownership transfer restriction.

For further information on this topic please contact Gustavo Enrique Garrido or Maria Marta Cancio at Estudio Garrido Abogados by telephone (+54 11 4850 4000), fax (+54 11 4850 4001) or email (geg@garridolawfirm.com or mmc@garridolawfirm.com).

Endnotes

(1) According to the information provided by Prosperar in its paper "Software & IT Services in Argentina".

(2) Beneficiaries already registered in accordance with the old regime have a 90-day term in order to exercise the option of registering in accordance with the new provisions; the new tax benefits and extension of exemption period will not apply.

(3) The former Software Law 25,922 provided tax benefits until 2014 only.