Tax consequences of the irrevocable capital contribution refund under loan agreements in dollars

Division D of the Argentine Tax Court (“Tribunal Fiscal de la Nación”) gave judgment in re: “Los Acollarados SA s/ recurso de apelación s/ impuesto a las ganancias”,[1] where the taxpayer and the Argentine Tax Authority (“Administración Federal de Ingresos Públicos”) discussed deducibility for income tax purposes, of the negative exchange differences caused by the capital contribution refund under loan agreements.

Pursuant to the facts stated in the Court’s judgment, in December, 2001 Los Acollarados S.A. (the “Company”) decided not to capitalize the shareholders’ capital contribution. On the same date, the Company and the shareholders performed the capital contribution refund under loan agreements in American dollars. Because of the economic crisis and the further devaluation of the Argentine peso, the loan agreements gave rise to a loss to the Company due to the exchange rate differences in the 2002 and 2003 fiscal years. 

The Argentine Tax Authority objected to the deduction of the loss caused by the exchange rate differences, on the grounds that it did not derived from the Company’s activity, but from a shareholders’ agreement aiming to reduce the existing company’s net worth. Further, the Tax Authority drew attention to certain inconsistencies in the loan agreements (including lack of certainty as to their date).

The Argentine Tax Court decided in favor of the Argentine Tax Authority, pointing out that the only exchange rate differences properly deductible are those arising from taxable transactions, and a capital contribution refund is not a taxable transaction. Likewise, the Tax Court considered that the parties converted into dollars a debt originally incurred in pesos. Thus, the deductibility of exchange rate differences, in the cited case, would infringe the law that forbids the deductibility of exchange rate differences arising from the conversion of a debt to a currency different from that which was originally agreed.

This precedent shows that, in the Tax Court’s opinion, the consequences of a capital contribution refund are not subject to Income Tax.