Introduction

The technology sector in Argentina is very vibrant, especially in the software, fintech, agtech, biotech, blockchain and primary services verticals. In the past few years, Argentina has seen remarkable growth in the private capital (venture capital, private capital and corporate venture) sector, with a total amount invested hovering around USD760 million in 2022. Most of this private capital investment went to technology companies.

Twelve Argentine technology companies have reached the stage of unicorn (MercadoLibre, Despegar, Globant, OLX and Auth0, Auth0, Aleph, Mural, Tiendanube, Bitfarms, Technisys, Ualá and Vercel), while there are many Argentine technology companies on the verge of achieving the same status.

On account of Argentina having sophisticated human resources dedicated to the technology sector, many multinational companies choose Argentina as a development hub for their economic group.

During the past years, Argentina has been suffering high inflation rates and economic hardship. This has given rise to tensions in technology companies where talent retention requires paying all or a relevant part of the salaries in foreign currency or, alternatively, frequent adjustments of the salaries to keep up with the inflation.

As Argentina’s capital market is very small, technology companies do not usually pursue initial public offerings. The three Argentine unicorns that went public (MercadoLibre, Despegar and Globant) conducted their initial public offering in New York rather than on the Buenos Aires Exchange. Hence, the most common exit available to Argentine technology companies is an M&A transaction where a local business is acquired by larger global technology companies. The most recent and prominent examples are the acquisition of Auth0 by Okta in May 2021 and of Technysis by SoFi Technologies in 2022.

Deal Activity

The main trend in the deal flow during 2022 and 2023 has been acqui-hires, with global companies acquiring Argentine companies with the main target of retaining the talent of the acquired companies and setting up development hubs.

This type of deal usually involves some sweeteners in the consideration to ensure that the founders and key talent continue working in the target company, including a mix of shares (or stock options) and cash for the founders, while investors of the target cash out. It is also very common for the consideration to include an earn-out component for founders and executives.

If the target company already has a stock option plan in place, the rollover to the stock option plan of the buyer company can involve addressing some tax and labour challenges, which are addressed below.

Venture capital deals have remained strong during this period. This are typically conducted at the level of an offshore holding company of the Argentine technology company.

Foreign Exchange Regulations

During the past decades Argentina has enacted an increasingly complex set of foreign exchange regulations governing the inflow and outflow of funds. These regulations can pose significant challenges to the operation of technology companies and require a careful analysis when designing the structure of an M&A deal in Argentina.

The existence of these regulations has resulted in different exchange rates depending on the underlying economic transaction. However, these can be summarised in an official exchange rate with very limited access, and a street exchange rate which can be 100% higher.

Foreign exchange regulations may impact:

• the transaction itself (Argentine residents will likely want to receive the consideration abroad from Argentina);
• the type of transaction (the sale of certain assets currently obliges the seller to convert the cash price into pesos at the official exchange rate);
• the due diligence and the representations and warranties included in the transaction documents (as breaches to the regulations can result in criminal procedures involving the company and its directors);
• the conduct of business after closing (for example, exports of goods and services to non-residents require the consideration to be converted into pesos at the official exchange rate; payments of dividends, intercompany loans and intercompany services to foreign residents are very restricted; access to foreign currency for treasury purposes is banned to local companies); and
• the way in which the company is funded (for arbitrage purposes, companies undertake securities transactions which allow them to receive pesos in Argentina at exchange rates significantly higher than the official exchange rate).

Given the complex nature of foreign exchange regulations, a detailed analysis of the transaction and the business is advised prior to moving forward with a deal.

Labour Matters

Different labour aspects must be taken into consideration in technology M&A deals in Argentina, as Argentina has extensive regulation of the employment relationship with a significant pro-employee bent. Labour litigation is quite frequent in Argentina, although in the tech market this is, for the time being at least, more limited.

The most usual employment agreement is employment for an undetermined period of time, which can be terminated at will by any of the parties; but in the case of termination without cause by the employer, the payment of severance is required. As the severance is based on the salary paid to an employee, discussions frequently arise with regards to the inclusion in the salary of different benefits paid to employees such as stock options (discussed further below), bonuses, use of company phones and cars, and other similar benefits.

Argentine law requires the registration of employees with the tax authorities, detailing the gross salary paid to each employee and the date of commencement of the employment. However, because of high social security taxes, the provision of services by individuals who could be classified as employees but are not registered accordingly with the tax authorities is a widespread issue. This can give rise to significant liabilities, which, depending on the timing of a claim made by an individual, can amount to 25% of all the amounts paid to the individual, or a significant increase of the applicable severance payment.

The granting of stock options to key employees is a relevant issue in technology companies. Depending on the specifics of a structure and its terms and conditions, stock options can give rise to negative employment, social security and income tax consequences for the Argentine company; thus, it is advisable to analyse the structure of stock options and potential consequences. Nevertheless, stocks options remain a normal feature of employment in technology companies.

As per Argentine copyright law, ownership rights over software developed by employees hired for such purpose correspond to the employer. Further, pursuant to patent law, inventions developed by an employee during the employment relationship that totally or partially relate to their job description are owned by the employer. If the contributions made by the employee to the development of an invention exceed their job description, the employee is entitled to a supplementary consideration. If one of the conditions listed above is missing, but the employee has used knowledge or assets of the employer, the employer can claim ownership of the invention or reserve the right to exploit it; in this case, the employee has the right to fair compensation and up to 50% of the royalties derived from the invention.

Pursuant to Argentine law, employees have a non-competition obligation towards their employer during the term of the employment. To be enforceable, non-competition obligations extending after the end of an employment require an express agreement that they be limited to a certain territory, business and term, as well as the payment of a consideration that must be proportionate to the obligation undertaken by the employee.

Finally, in the technology sector the demand for payment of salaries (all or a relevant portion) in foreign currency has become widespread. Making these payments has certain challenges for the local companies.

• Under Argentine regulations, payments in kind (such as payments in foreign currency) cannot exceed 20% of the total salary.
• Salaries must be paid into bank accounts.
• As noted above, companies cannot acquire foreign currency for treasury purposes and are obliged to convert proceeds from exports of services into pesos at the official exchange rate (with very limited exceptions).

Despite the above challenges, the majority of the tech market has moved towards implementing the payment of salaries in foreign currency, by way of implementing funding structures that allow the company to maintain the currency without converting into pesos and in the understanding that the payment in foreign currency does not go against the law-maker’s intention when fixing the 20% payment-in-kind restriction.

Tax Aspects

As a general rule, the sale of shares of Argentine private companies is subject to capital gains tax levied on the seller, regardless of its status (resident or non-resident), and whether the sale occurs directly or indirectly (ie, a sale of shares in a foreign holding company). The applicable tax rate for a foreign seller is either 15% on the net value of the sale or 13.5% of the total sales price, at the seller’s option. If a seller is based in a non-cooperative jurisdiction (or the funds paid to the seller come from such a jurisdiction), the rates will be 35% of the net transaction value or 31.5% of the gross price.

Indirect sales of equity participations acquired after 1 January 2018 are subject to capital gains tax provided that (i) at the time of sale or during the 12 preceding months, at least 30% of the market value of the shares being sold derives from shares, assets or rights located in Argentina; and (ii) the shares being sold represent at least 10% of the equity of the foreign company. Indirect transfers of shares within economic groups are exempt from this tax if certain conditions are met.

Argentina is a party to several double taxation treaties, which usually provide that a sale of shares can be taxed in the country in which the target company is incorporated according to its internal rules. In certain cases, a limit of 15% is established, unless the resident of the other country has a direct 25% interest in the capital of the company being sold, in which case the taxable limit is usually 10%.

Argentine tax rules provide for tax-free corporate reorganisations subject to certain conditions.

Other Relevant Matters

There are other relevant aspects that should be taken into account when conducting an M&A deal in the technology sector in Argentina.

Antitrust regulations

Pursuant to Argentine antitrust law’s new legislation, authorisation must be sought from the National Antitrust Authority for any transaction concerning an economic concentration where two or more previously independent businesses become dependent on a unified decision and direction centre; or entering into agreements tending to the total or partial integration or combination of their business or assets through a merger, transfer of ongoing concern, acquisition of ownership or other rights over shares or equity holdings, or which allow significant influence over the decisions of a business, or any other agreement or transaction with a legal or de facto transfer of assets of a company or that grants a significant influence over the ordinary or extraordinary management decisions of a business.

There are some exceptions to the prior authorisation requirement, namely:

• if the aggregate sales volume in Argentina of the purchaser’s group and of the target company does not exceed 100 million mobile units (this currently equals ARS16.255 billion);
• if the purchaser group already owned more than 50% of the equity of the target, provided this does not change the manner in which control was exerted over the target;
• the acquisition of a single business by a foreign business that did not previously own assets or equity holdings in Argentina and whose exports to Argentina during the prior 36 months were not significant or frequent (first landing exception); or
• when neither the price of the transaction nor the value of the assets in Argentina involved in the transaction exceeds 20 million mobile units (this currently equals ARS3.251 billion), and provided that no transactions exceeding that amount took place in the relevant market during the prior 12 months nor exceeding 60 million mobile units (ARS9.753 billion) during the prior 36 months.

Data protection

Argentina’s Data Protection Law provides that individuals and companies have the right to control the use and access to their personal information. The Data Protection Law requires that all databases be registered with the Agency of Access to Information, and that the consent of the owners of the personal data be procured for purposes of gathering, assigning and transferring personal data. The owners of private data have the right to access to their data, provided their requests to access the relevant database are made with a frequency of at least six months. Any request must be answered within 10 days of being made. Additionally, an owner of private data has the right to request that the data be rectified, updated, erased or kept confidential by the database. Requests of this nature must be complied with within five business days of being made. Although the Data Protection Law does not prevent sharing information with potential buyers, it is strongly advised that confidentiality agreements be signed to protect said information.

IP protection

Argentina protects different types of industrial and IP rights, including without limitation patents, trade marks, industrial designs, copyright, utility models, geographical denominations, trade secrets and web domains. Argentina is a party to the Paris Convention, the Berne Convention and the Trade-Related Aspects of Intellectual Property Rights provisions of the General Agreement on Trade and Tariffs. Special criteria apply for pharmaceutical, biotechnological and software patents.

Fintech regulation

Even though there is no general fintech regulation in Argentina, depending on the activities conducted by the target company, the regulations of the Central Bank of Argentina (Banco Central de la República Argentina), the Argentine Securities Exchange Commission (Comisión Nacional de Valores) and of the Argentine Anti-Money Laundering Authority (Unidad de Información Financiera) might be applicable. This will impact the due diligence and representations and warranties vis-à-vis compliance, as well as require certain pre- or post-closing notices with the relevant authorities.