A new investment protection regime in Argentina and its impact on the development of megaprojects in the technology sector

Agustin Siboli

O’Farrell, Buenos Aires

siboldia@eof.com.ar

When the legal pre-feasibility regarding a project to install a ‘training’ data centre is analysed, the process starts by considering that from an operational point of view such centres can have consumptions of the order of one gigawatt (GW) of energy, requiring the development of electric power generation, preferably so-called ‘clean’ ones.

Provided such consumption generates an impact on the National Interconnected System, it is also necessary to structure the incorporation of new capacity for electric power generation through an alternative source, of similar power, with the purpose of not altering its current operation.

This supposes a long-term megaproject with the creation of one or more SPVs (Special Purpose Vehicle) for both the generation of electricity and the operation of the data centre, and the signing of the respective power purchase agreements (PPA) among other relevant contracts. All of this would be under a legal scheme for the protection of foreign direct investment (FDI) which reduces the risks inherent to invest in Argentina and grants guarantees to protect the rights to develop the project.

Argentina has a new legal and regulatory framework which makes it possible to advance the implementation of this type of project. The Law of Bases and Starting Points for the Freedom of Argentines 27,742 has introduced in its Chapter VII the Incentive Regime for Large Investments (the RIGI).[1] Beyond the benefits enshrined in favour of the adhering investor, this new regime aims to establish a change in the treatment of FDI in the Argentine Republic based on the lessons learned from previous promotion regimes and in light of the behaviour of the different levels and powers of the state.

In this sense, the objective of this article is to highlight this very important aspect of this new regulatory body which has a direct impact on investment decisions in large projects such as those related to new technologies specifically included in this new regime.[2]

Law of Bases overview

A new political coalition came to office in December 2023. As part of its economic reform agenda, the Executive Branch promoted the sanction of laws aimed at improving the business climate, an ambitious deregulation agenda and a better framework for receiving FDI so as to reverse years of crisis which had affected national development.

The Argentine Republic has been suffering a constant and systematic fall in FDI reception, which is explained not only by the aforementioned macroeconomic imbalance but also by the normative and regulatory risk of the local legal framework.

The Law of Bases has come to propose a paradigm shift in the attention of these risks through permanent regulations such as the modification of laws on administrative procedures and other specific and temporary laws, such as the RIGI.

The RIGI and the need to reverse the sources of legal uncertainty and risks

The RIGI has been established as part of the Law of Bases, its objectives are the promotion of economic growth, job creation and increased exports. These are to be brought about creating conditions of predictability, stability and legal certainty, all to stimulate investment. In this sense that the RIGI is not merely an incentive regime, of which several are already in force in Argentina. Instead, by taking into account the restrictions and non-compliance of past regimes, it aims to provide a complete mechanism for investment protection in accordance with international standards, making larger projects viable and financeable.

Below is a summary of the main restrictions and risks and the measures implemented by the RIGI to counter them.

Foreign exchange restrictions

In recent years, the Argentine Republic has experienced severe imbalances which have led governments to impose various foreign exchange restrictions and a significant increase in regulations which affected free access by individuals to the exchange market.

In response to this risk, the RIGI establishes access to the foreign exchange market to enable the fulfilment of financial obligations abroad and the increasing right to retain foreign currency from exports abroad.[3]

Higher tax burden

As a way of aligning with a reasonable tax rate at an international level, and in line with the rates in force in the region, the RIGI establishes special a 25 per cent income tax rate,[4] as compared with the normal rate of 35 per cent. In addition, the RIGI contemplates fiscal, exchange and regulatory stability, to ensure a given economic equation over time.[5]

Similarly, the RIGI establishes tools to overcome past non-compliance with tax benefits. That is, the VAT refund considered in previous regimes is now replaced by the issuance of a certificate which directly avoids the payment of the tax.[6]

Disregard of acquired rights

As noted above, Argentina has not fully complied with its commitments under previous promotion regimes. To give one example, Law No 24,196 contains a series of benefits aimed at promoting mining projects which were not respected and/or poorly fulfilled by different levels of administration.

Taking such experiences into consideration, the RIGI explicitly establishes that rights acquired under the different regimes are incorporated into the terms of the interested party.[7] This is a highly relevant provision as it provides a safeguard for investors in the event of disputes arising from changes in the law.

Restrictions on large investments projects financing – rigidities in the regulations applicable to private activities

One of the RIGI’s objectives is to improve the financing profile for the investment in large projects giving maximum assurance that the project will not be affected in its capacity to generate repayment of debt.

In this sense, through the RIGI, the holders of the investment are guaranteed full availability of their products, assets and investments and the right to the continued operation without interruptions. In addition, it guarantees the right to payment of profits, dividends and interest through unrestricted access to the exchange market and unrestricted access to justice and other legal remedies for the defence of their rights.[8]

Sub-jurisdictions (province and municipalities) regulatory risk affecting investments

Undoubtedly, the state is a central actor in any project involving FDI because it controls the legal and regulatory framework in which each project is carried out.

In the Argentine Republic, due to its federal organisation, the distribution of powers between the federal and state levels (provinces), which is especially significant in projects related to natural resources by virtue of the provisions of Article 124 of the National Constitution, which establishes that the provincial states hold the original domain of natural resources as an exclusive competence and the powers to grant permits, concessions or licences related to the use of said resources.

Accordingly, minimum rules for the adhesion of the provinces to the RIGI regime are established. It is provided that any rule or de facto action that limits, restricts, violates, hinders or distorts the provisions of the RIGI, whether by the Federal State, the provinces and their municipalities, which have adhered to the RIGI, shall be absolutely and irremediably null and void and the competent judge must immediately prevent its application.[9]

As regard to new taxes, it is established that the owners of investment projects cannot be subject to new provincial or municipal taxes.[10]

Legal framework provided under the RIGI for investment protection

As we have been analysing, the RIGI has come to fulfil the main objective of reversing the bad practices of the past and generating a climate of confidence for the reception of national and FDI.

In our opinion, the RIGI make up a set of investment protection mechanisms that is made up of the following main provisions:

• Vested rights (derechos adquiridos) as derived from the RIGI are incorporated to the patrimony of the interested party and may not be violated or affected by subsequent regulations and will have the stability provided for in the RIGI.[11]
• The affectation of those vested rights may give rise to the international responsibility of the State. [12]
• The investor will enjoy full availability of his assets and investments, which will not be subject to confiscatory or expropriatory acts, de facto or de jure, by any Argentine authority.[13]
• It will not be necessary for the SPV to present prior claims or administrative challenges of any kind, and the exhaustion of any administrative instance prior to arbitration.[14]
• The resources and/or alternative judicial and/or arbitration remedies filed by the SPV against sanctions imposed by the enforcement authority will suspend the execution and effects of the acts issued by that authority.[15]
• International arbitration is granted as a method of dispute resolution.
• The existence of an arbitration proceeding shall not suspend, delay or affect in any way the obligations of the Republic of Argentina or the rights of the SPV and its full use, enjoyment and exercise.[16]
• In the event of a violation of tax stability as a result of the creation or increase of a new tax or a legal or regulatory modification, the burden of proof that there has not been an increase in the tax burden falls on the Federal Public Revenue Administration and not on the investor.[17]

The approval of a RIGI project by competent authority has the scope of an investment agreement as defined by the specialists.[18] Indeed, rights and incentives obtained under the RIGI are considered protected investments in the sense provided for in the treaties of reciprocal promotion and protection of investments.[19]

Risk of denial of justice and dispute resolution

Another risk addressed by the RIGI is the lack of an independent jurisdictional body capable of resolving disputes in a timely and diligent manner. In the case of the RIGI, the SPV must state in writing its acceptance that disputes (including those with respect to rights, benefits and incentives obtained by its members, partners or shareholders) will be resolved through arbitration according to these rules:

• the arbitration tribunal must be made up of three arbitrators chosen in accordance with the applicable rules of procedure;
• none of the arbitrators may be nationals of Argentina or of the home state of the majority shareholder of the SPV;
• the seat of arbitration must be outside the Argentine Republic; and
• the arbitration will be in Spanish, except in cases of disputes under the International Chamber of Commerce (ICC) or the International Centre for Settlement of Investment Disputes (ICSID) rules, submitted to arbitration by foreign partners or shareholders.

The RIGI regulations enabled for the selection of the following rules:

• the Arbitration Rules of the Permanent Court of Arbitration of 2012;
• the Arbitration Rules of the International Chamber of Commerce, with the exception of the Rules of Expedited Procedure; and
• the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, of 18 March 1965 or, where applicable, the Arbitration Rules (Additional Facility) of the ICSID.

The investor’s choice of the most appropriate rules from the options given by the RIGI must consider that each of them has particular characteristics, which make them appropriate for some cases but inappropriate for others. [20]