Written by Ian Cardenas, Paralegal
Under the tax exemptions law n°21.420, published in February 2022, it is stipulated that from January 2023, VAT will be levied on all professional services, with the exception of Health, Education, Transport and all taxpayers who issue fee receipts.
Article 2 n°2 of the VAT law defines a new concept of service, i.e. “(2) “Service” means an action or service which a person performs for another person and for which he receives an interest, premium, commission or any other form of remuneration”.
The amendment of this law means it will be sufficient that there is a prestation of services or action and that subsequently remuneration is received for this. In other words, as a general rule all services will attract VAT, with only limited exceptions (such as health services).
This represents a major change, given that currently only limited services are subject to VAT. From the enforcement of the new amendment in January 2023, services such as professional services and technical consultancy, will be subject to VAT.
What will happen to contracts in force before 2023?
Any provision of services that becomes taxable must be documented if it corresponds to a service provided after 1 January 2023, regardless of whether or not they are invoiced in advance.
In practice, this means that a service contract in force until the last day of 2022 is not subject to VAT. However, from 1 January 2023 VAT will be charged on the services rendered from this date moving forward. VAT should for services previously rendered during 2022, even if these payments are charged and received from 1 January 2023.
Companies providing professional services and their clients should review their contracts that will remain in force after 31 December 2022 and analyse whether modifications are necessary to take into account this new tax.
Who will assume the cost of taxes affecting a contract in force at the change of taxation in 2023?
If there is a contract in force, and the service continues beyond 2022, it is the beneficiary of the service who will have to bear the cost of the VAT that will be applied from 1 January 2023. That is, the cost should be borne by the service contractor.
In the case of a new contract, it should state whether or not the service will be subject to VAT from 1 January 2023. This must be made clear at the time of signing the contract.
Can a professional partnership taxed under the Second Category of the Income Tax Law change to the First Category and continue to issue fee slips?
Yes, it may, as long as the documents issued by the taxpayer continue to be fee receipts, adding a phrase indicating “Professional partnership subject to the rules of the First Category, in accordance with paragraph 3 of No. 2 of Article 42 of the Income Tax Act” (Circular No. 21 of 1991).
Will a commercial SpA that also provides professional services be able to continue to invoice these services exempt from 1 January 2023?
No, it will not be able to do so. This is because if an SpA is to be engaged in commercial activities such as the provision of professional services and consultancy, it does not meet the requirement of exclusively providing professional services, and therefore does not qualify as a professional company for VAT exemption purposes (oficio n°1.424, of 28/04/2022).
Finally, Law 21.420 generates an exemption that will allow professional partnerships under Article 42 n°2 of the Income Tax Law to operate without applying VAT to their services. For this, a series of requirements must be met depending on the services provided, in terms of tax documents issued, partners, corporate structure, corporate purpose that must be observed by the companies that want to achieve the exemption, in addition to reporting it to the Tax Office (Servicio de Impuestos Internos). In other words, some professional partnerships will be able to do so, while others will not.
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