Income Tax Law - Foreign Permanent Establishment or Foreign Stock Corporation?

1. Background
Through an administrative decision issued in 2005, the Argentina Tax Authority (the “AFIP”) challenged the Income Tax Law’s tax returns (the “Tax”) corresponding to the 2000 and 2001 fiscal years, which were filed by Malteria Pampa S.A. (the “Argentine Company” or the “Taxpayer”) and assessed the foreign-source taxed income of the Argentine Company. For this purpose, the AFIP considered that the Argentine Company cannot deduct the tax losses suffered by a subsidiary incorporated in Uruguay (the “Uruguayan Company”). On the other hand, the tax authority asserted that the Argentine Company should include the income obtained by the Uruguayan Company in its tax return.
In order to reach such conclusion, the AFIP held that the Uruguayan Company was a permanent establishment owned by the Argentine Company and thus, asserted that, in this case, Section No. 148 of the Income Tax Law (the “ITL”) was applicable, pursuant to which the Argentine Company should have include the taxed income of the Uruguayan Company in its tax returns, even when the latter has not paid dividends to the Argentine Company. In other words, AFIP understood that antideferral rules or transparency rules were applicable in this particular case.
It has to be borne in mind that Section No. 128 of the ITL defines that foreign permanent establishments are those which are structured as a stable company that carry on commercial, industrial, farming, mining or other kind of activities and cause to an Argentine resident corporate profits. For Argentine residents, such profits are considered as foreign-source income, unless the ITL sets forth that they have to be considered as Argentine-source income.
Moreover, the AFIP asserted that the notion of permanent establishment must be understood widely and is applicable to any activity structured as a business, regardless of the form of organization. Additionally, the tax authority stated that, in this particular case, the Argentine Company held the 100% of the Uruguayan Company’s shares, which revealed clearly and unambiguously the existence of a relationship of corporate control between both companies.
On the other hand, the Argentine Company argued that the Uruguayan Company should not be deemed as a foreign permanent establishment pursuant to ITL provisions, because it was a corporation recorded before the pertinent registry in Uruguay, with its own legal status and business activity in Uruguay.
For this reason, the Taxpayer considered that in this case the general principle provided by Section No. 18 of the ITL in relation to the allocation of gains and cost was applicable. Pursuant to this rule, the Argentine Company only had to include the Uruguayan Company’s profit in its tax return when the latter had paid dividends and such dividends are available for the Argentine Company. 
As a result, the matter to be decided in this case was, firstly, whether the Uruguayan Company should be considered as a permanent establishment pursuant to ITL provisions and, secondly, how the Argentine Company has to allocate gains and tax losses arising from its participation in the Uruguayan Company. 
2. Decisions of the National Tax Court and of the Federal Court of Appeals in Administrative Matters
The National Tax Court (the “Tax Court”) referred to Section No. 5, seventh paragraph, of the OECD Model Tax Convention on Income and on Capital, which sets forth: “The fact that a company which is resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (…) shall not of itself constitute either company a permanent establishment of the other”.
Pursuant to this rule, the Tax Court asserted that in order to determine that a company is a permanent establishment of another company, it must be proven that there is any connection or dependency with such other company but at a structural or organizational level.
Accordingly, the Tax Court stated that the AFIP was not able to prove that the Uruguayan Company was a foreign permanent establishment of the Argentine Company, especially if it is considered that the proofs provided by the Taxpayer demonstrate that although 100% of the Uruguayan Company’s share was owned by the Argentine Company, the former had its own by–laws, organization and legal status, independently of the latter.
As a result, the Tax Court dismissed the administrative decision issued by the tax authority. Hence, the AFIP appealed before the Federal Court of Appeals in Administrative Matters (the “Court of Appeals”).
Tribunal II of the Court of Appeals provided a brief overview of the grounds of the parties and of the decision issued by the Tax Court. In this regard, the Court of Appeals confirmed completely the Tax Court decision. For this purpose, the Court of Appeals held that by the plain reading of the laws involved, it was deduced that the applicable legal regime clearly distinguished among corporations organized under a specific legal status (i.e. stock corporations) and permanent establishments. Thus, in disagreement with the position held by the tax authority, the Court of Appeals stated that not all activities structured as a business is, at the same time, a permanent establishment. Against the sentence the AFIP filed an extraordinary appeal before the Argentine Supreme Court (the “Supreme Court”).

3. The Attorney General’s opinion
Pursuant to section No. 33, subsection a) of the Law No. 24,946, which provides the rules to be applied to the organization of the Argentine Public Prosecutor’s Office, the Attorney General, chief counsel of the Federal Government, must propose a resolution in relation to federal matters that may be followed by the Supreme Court in its final sentence.
Preliminarily, the Attorney General made clear that the ITL distinguishes stock corporations of permanent establishments. Moreover, she pointed out that such a distinction is maintained by the legislator for the purposes of the allocation of gains and costs that are experienced by Argentine   residents in the country in relation to the income arising from a foreign source.
As a result, foreign permanent establishments are under the scope of section No. 133, subsection a) and section No. 148 of the ITL, pursuant to which the Argentine resident must impute gains and tax losses arising from those permanent establishments at the moment in which such establishments finish their corporate fiscal year, even if dividends were not paid to the Argentine resident.  On the contrary, foreign stock corporations are under the scope of the Section No. 18 of the ITL, pursuant to which Argentine residents should only include gains arising from foreign stock corporations in their tax return when such corporations paid dividends and made them available.
However, the Attorney General pointed out an additional matter, pursuant to which she proposed the partial revocation of the decision of the Court of Appeals.  She explained that as well the Argentine residents should only include gains from foreign stock corporations when they paid dividends; tax losses experimented for them only can be deducted when the shares of the stock corporations are sold or such corporations are liquidated. Thus, in this particular case, the Argentine Company was not allowed to deduct the tax losses arising from its participation in the Uruguayan Company.
As a result, the General Attorney proposed the partial confirmation of the decision of the Court of Appeals as it stated that the Argentine Company did not have to include the profit arising from its participation in the Uruguayan Company in its tax return, but also proposed the partial dismissal of such decision as it stated that the tax losses may be deducted even when Uruguayan Company was not liquidated and its shares had not been sold. Thus, in the latter case the General Attorney proposed the confirmation of the assessment of the tax authority.
The current status of the case is pending until the Court confirms or dismisses the decision of the General Attorney.