VAT over interest on the balance amount due for a sale of shares

The sale of shares of an Argentine company by an Argentine shareholder is exempt from VAT. Now, the issue of whether interest is subject to VAT arises in those events where part of the price is agreed in cash and the balance in installments plus interest.

Section 10 of the VAT Law provides that interest, whether received or accrued, either for deferred or overdue periods include the net price subject to tax and is taxable –even if invoiced or agreed separately– and even if not subject to tax when considered independently.

The Law adopts a criterion whereby the transaction is analyzed as a whole (comprehensive criterion) and deems financing of sales, leases and rendering of services a sole accessory of the taxable event. If the principal transaction is subject to tax, interest to be paid on the balance amount due shall also be subject to tax. On the contrary, if the principal transaction is exempt from or not subject to tax, interest shall not be subject to tax.

As the sale of shares is exempt from V.A.T, interest on the balance amount due shall also be exempt.

However, Section 10 of the VAT Regulatory Decree provides that “interest arising from either financing or deferred or overdue payments of the price concerning on sales, works, leases or rendering of services are subject to VAT even if the transactions such interests accrue on are exempt from or not subject to tax”.

This rule disregards the “comprehensive” principle provided by the Law. In turn, it taxes interest regardless of whether they arise from taxable transactions or not. Pursuant to this rule, interest on the balance amount due for a sale of shares is subject to VAT.

The Tax Authority analyzed the foregoing issue in Opinion (DAT) 86/98, in a case where the purchaser was a foreign resident. There, even if the regulation were considered valid, the Court dealt with the issue of whether financing could be deemed to be carried out and used for economic purposes in Argentina. The transaction was deemed subject to tax on the grounds that financing was an independent operation of the sale of shares and that financing was carried out and used for economic purposes in Argentina because the financial activity was considered to have been carried out in the place where the lender is domiciled, as the same undertakes the risk of the transaction. Therefore, financing may not be deemed exploited or used for economic purposes overseas because financing derives from the balance amount due for a sale of shares of companies that develop their activities in Argentina, thus, transactions are used in this country.

Nevertheless, in re “Chryse S.A.” (CNCont. Adm. Fed. Sala III, 15/10/2002) the Court of Appeals ruled that Section 10 violated the principle of legality included in Section 17 of the Federal Constitution. This principle provides that the essential elements required to tax must be set by a law: objective requirements, individuals subject to the tax, method to determine the taxable event and the time period in which it applies. Furthermore, the Regulatory Decree adversely affected the prohibition set forth by Section 99, Subsection 2 of the Federal Constitution, that states that the Federal Government may not alter the spirit of the law with regulatory exceptions.

In accordance with this precedent, when interest arises from the financing of a transaction which is exempt from or not subject to VAT, it is not subject to VAT.