Project Financing between Argentina and the United Kingdom: an overview of key regulatory aspects and the role of Export Credit Agencies

Ian Borman, Partner, Banking & Finance, Winston & Strawn London LLP, Solicitor (England & Wales); Salvador Mele Mazza, Associate, Banking & Finance, Norton Rose Fulbright, Attorney-at-Law in Argentina / 10 December 2024 

1. Introduction

The trade relationship between the United Kingdom and Argentina is steeped in history, dating back to the early 19th century. The legacy of this trade partnership remains evident in the deep cultural and economic ties that continue to shape both nations today. According to the UK’s Department for Business and Trade, the total trade in goods and services (exports plus imports) between the UK and Argentina was £2 billion in the four quarters to the end of Q2 2024^[1].

Argentina has recently approved a regime to incentivise large investments (commonly known by its Spanish acronym “RIGI”, which stands for “Régimen de Incentivo a las Grandes Inversiones”). This regime evidences a political change that aims to simplify regulatory frameworks and attract foreign investments. Several industries are targeted for investment and development in Argentina. They include many key areas that investors consider crucial in sustainability and energy transition, such as agribusiness, renewable energy and sustainable finance.

Project financing plays an important role in attracting foreign investment, by offering a structured and risk-managed approach to financing large-scale, capital-intensive projects in all industries (including mining and renewable energies). This article provides a summary of the regulations relevant to the project finance space and an overview of the role of export credit agencies in supporting project financing.

2. Key definitions

Project Finance. Project finance is a financing structure where equity and, usually, debt are used to finance a specific project. The key feature is that the return on investment is linked only (or mainly) to the cash flows and earnings of the project as the source of funds from which a loan will be repaid and equity serviced. Typically the collateral for any loan will also be limited to the assets of the project.”^[2] 

Although this appears simple, project finance for many ventures involves a complex arrangement with equity investors, multiple lenders, and other stakeholders. A special purpose vehicle (SPV) is typically created specifically for the project to manage the funding and operations.  Often there will be third party developers and servicers involved in bringing the project to fruition. The project’s revenues will be the primary source of debt repayment, although the lenders may also require risk mitigation strategies, such as insurance, credit default swaps, and government guarantees.  Risk mitigation may be crucial for the viability of the project.

Export Credit Agencies. Export Credit Agencies (ECAs) are government-backed institutions that provide financing and insurance to support the export of goods and services from one country around the world.  They emerged from the need to mitigate the political and commercial risks associated with international trade and investment, and to allow business to trade with confidence with companies (including SPVs) in jurisdictions where otherwise they may be at risk of not being paid.

3. UK / Argentina cross-border legal framework

Tax planning is a critical component of project finance, since the need to pay tax may directly impact the overall financial viability of a project. The Double Taxation Treaty (DTT) signed on 3 January 1996 entered into force in the UK and Argentina in 1997 and offers tax relief mechanisms and fosters cross-border economic activity in various categories.

In addition to the DTT, the General Regime for the Promotion of Investments and Foreign Trade (RIGI – Régimen General de Inversiones y Comercio Exterior) was enacted by Argentina on 23 August 2024 and offers a set of benefits and incentives in key international project finance areas such as foreign exchange, customs regulations and applicable tax rates in the jurisdiction in which the project is developed.

A) DTT – key aspects for the Project Financing Space

The benefits granted by the double taxation treaty are several. Some of the key aspects that are relevant for the project financing space are the following:

1. Income derived from immovable property (Article 6). The treaty states that income derived from real estate will only be taxed where the property is located. This provision extends to income derived from certain accessory property that is closely linked to key natural resources in Argentina’s project finance space such as livestock and the agricultural and forestry sectors.
2. Business profits (Article 7). The treaty states that taxation will be raised in the state where the enterprise operates unless the business has a permanent establishment in the other state. When a business from one state operates in the other through a permanent establishment, the profits attributed to that establishment are calculated as if it were an independent entity, conducting similar activities under similar conditions and dealing at arm’s length with its parent enterprise.
3. Dividends (Article 10). The principle provided by the treaty is that dividends paid by a company which is a resident in one state to a resident of the other state may be taxed only in that other state.  However, dividends may be taxed in both states (including the state of origin) at capped rates of 10% or 15%.
4. Interest (Article 11). Similar to dividends, interest paid by a company which is a resident in one state to a resident of the other state may be taxed only in that other state. Where required by applicable law, interest may be taxed in both jurisdictions at a capped rate not exceeding 12%. Exemptions apply to this double taxation scenario, particularly in the cases of loans, guarantees, insurance(s), or any other debt claim or credit-created claim. We would expect this exemption to cover most of the project financing scenarios if the transaction is structured appropriately in order to benefit from the applicable exemptions (e.g., prioritising channelling funds into the project by way of loans or other forms of credit).
5. Royalties (Article 12). Royalties arising in one state and paid to a resident of the other state may be taxed in that other state. If required by law, taxation is permitted in both states at rates ranging from 3% to 15% depending on the source. This double taxation scenario will not apply if the beneficial owner of the royalties who is the resident of one of the states carries on business in the other state through a permanent establishment situated therein.

B) RIGI – key aspects for the project financing space

RIGI is designed to attract foreign investments in Argentina by offering a range of incentives, including favourable tax treatment, customs exemptions and access to favourable foreign exchange measures. This regime aims to promote large-scale projects, particularly in strategic sectors, enhancing Argentina’s appeal as an investment destination​.

• Transportation and storage: USD 300,000,000;
• Offshore exploration and production: USD 600,000,000
• Gas production intended for export:   USD 600,000,000

Incentives granted by RIGI

• Tax Incentives. RIGI includes a special tax regime where SPVs are subject to a reduced corporate income tax rate of 25%, which is lower than the standard rates enacted by Argentine law.
• Dividends and Profits. Dividends and profits derived from shares registered under RIGI will be taxed at a flat rate of 7%. However, the tax rate can be reduced to 0% if the dividends and profits are distributed more than three years after the fiscal year in which the profits were generated. This reduced 0% rate will only apply to profits from fiscal years that close at least four years after the date of registration under RIGI.
• Export and Import Rights. There will be no restrictions on the import and export of goods and services necessary for the construction, operation, and development of a project registered under RIGI. Specifically, there will be no direct prohibitions, quantitative restrictions, quotas, or qualitative economic restrictions imposed. Additionally, no official pricing or other official measures that alter the value of imported or exported goods can be applied, nor can there be prioritisation for domestic market supply.
• Exchange Incentives. Proceeds collected from the export of products would typically be subject to a legal obligation to exchange and liquidate those proceeds in the local foreign exchange market. Where such proceeds are obtained under a RIGI project, the following percentages of those proceeds will be exempted from that obligation:

Furthermore, SPVs will not be required to exchange and liquidate in the local foreign exchange market any foreign currency or equivalent funds related to the project, such as capital contributions, loans or services.

SPVs registered under RIGI are free to obtain local and external financing in foreign currency. These funds can be freely used domestically or abroad for any purpose. Additionally, SPVs under RIGI are not subject to foreign exchange regulations limiting the holding of liquid or non-liquid external assets.

Notwithstanding RIGI, holding liquid or non-liquid external assets may result in SPVs being restricted from accessing foreign exchange markets in accordance with applicable regulations. Such applicable regulations may mean that SPVs can only complete payments of external commercial indebtedness, distribute dividends and/or repatriate investments to non-residents using external assets as a priority.

SPVs under RIGI are exempt from foreign exchange regulations requiring restrictions or prior authorisations for accessing the foreign exchange market to pay dividends, profits, or interest to non-residents. This exemption applies when these payments arise from capital contributions, direct investments, or external financing liquidated in the foreign exchange market after the SPV’s RIGI registration, with no limits on the amount.

• Stability. According to RIGI, the tax, customs, and foreign exchange incentives granted under the scheme cannot be negatively impacted by the repeal of the law enacting RIGI or the enactment of less convenient regulations. This stability is guaranteed for 30 years from the SPV’s date of adhesion to RIGI. After this period, the normal regime for tax, customs, and foreign exchange will apply.

3. Can investors benefit from the tax protection under the DTT and also from the incentives granted by the RIGI?

The DTT has been in force since 1997. The UK and Argentina are expected to maintain the necessary mechanisms to avoid double taxation, where such protection is afforded under the DTT.RIGI, on the other hand, is a recently enacted regime, and as of the date of this article, no UK-based company has been granted adherence to RIGI.

According to Article 45 of RIGI, participating in RIGI does not preclude participation in other promotional frameworks, provided the benefits or incentives from such frameworks and RIGI do not overlap or duplicate. Therefore, it is reasonable to expect that UK-based companies promoting project financing in Argentina could benefit from both the protections against double taxation afforded by the DTT and the incentives provided by the RIGI.

4. Role of ECAs to support projects

Besides the protection from double taxation under the DTT and the incentives granted by RIGI, project finance transactions may also benefit from the coverage of an Export Credit Agency. This type of coverage plays a pivotal role in promoting project financing by providing financial support and risk mitigation solutions.

In the United Kingdom, UK Export Finance (UKEF) supports project financing by providing guarantees, loans, and insurance to facilitate the participation of UK businesses in international projects.

For project financing transactions to be eligible for UKEF support, the following eligibility conditions must be met:

1. UK Connection. The transaction must have a significant UK connection. This usually involves UK goods, services, or intellectual property contributing to the export contract or project;
2. Creditworthiness. UKEF assesses the creditworthiness of the buyer, borrower, or guarantor to ensure they can meet repayment obligations;
3. UK-Based Exporter or Investor. The applicant must be a UK-based exporter or an investor involved in international projects that require UK goods or services;
4. Sectoral Scope. UKEF supports businesses across various sectors, including energy, infrastructure, healthcare, and transportation. However, transactions must align with UKEF’s environmental, social, and governance (ESG) standards.

If the eligibility conditions are met, some of the products offered by UKEF are the following:

• Working Capital Solutions: UKEF offers financial support to UK exporters to help them fulfil new or larger contracts. This includes guarantees to banks, enabling businesses to access the working capital they need to take on international opportunities without straining their cash flow.
• Export Credit Insurance Solutions: UKEF provides insurance that protects UK exporters from the risk of non-payment by international buyers. This ensures that businesses are compensated for goods or services provided, even if buyers fail to pay due to commercial or political risks.
• Buyer Finance Solutions: UKEF facilitates financing for international buyers purchasing UK exports. By providing direct financing to overseas buyers to support the purchase of goods and loan guarantees to banks, they help overseas buyers access the funding needed to complete transactions, making UK goods and services more competitive in global markets.

5. Conclusion

The tax protection and incentives granted by the legal frameworks described above meet sophisticated international standards and provide an encouraging framework for project financing between the UK and Argentina. If granted, ECA support can add financing and risk mitigation elements that make project financing more appealing to investors and increase bankability.

Finally, at the time of considering which are the most appealing project investment opportunities in Argentina, the British Argentina Chamber of Commerce have recently released a White Paper with detailed descriptions of possible industries and sectors. Some interesting industry facts highlighted by this White Paper are as follows:

1. In the sustainable finance industry, local corporate and financial entities are aligning with global best practices, identifying over 700 sustainable investment opportunities worth more than US$ 2.2 billion in agriculture, construction, industrial and renewable energy sectors;

2. Argentina’s solar and wind energy production has skyrocketed from a combined 189 MW in 2012 to 4,413 MW in 2022 and is expected to continue growing; and

3. Argentina is located in the lithium triangle with 70% of the world’s lithium reserves. Lithium is a critical mineral resource for the clean energy revolution. It is estimated that 80% of Argentina’s mining potential is still unexplored.

---

[1] The UK Department for Business and Trade (UK DBT), Trade and Investment Factsheet, 22 November 2024: argentina-trade-and-investment-factsheet-2024-11-01.pdf

[2] CF de Nahlik, Chapter 1, An Overview of Project Financing, World Scientific Publishing page 1 https://www.worldscientific.com/doi/pdf/10.1142/9789811233173_0001?srsltid=AfmBOorWzdQX0S9eZxn6cuwxqta5asfBKpI436Vpp7Fdvi-4Tu2xAkzw