The “Eurnekian” case and the trusts set up abroad

On August 6, 2003, the Argentine Court of Appeals in Criminal and Economic Matters confirmed, by two votes to one, the prosecution and attachment against Eduardo Eurnekian in the case where he is being investigated for tax evasion. According to the decision, Eurnekian sold stock of several Argentine corporations for an aggregate amount exceeding Argentine Pesos 715,000,0000, and transferred the funds to two trusts set up abroad, one of them in the Cayman Islands and the other in the Bahamas. According to the accused, those funds were donated to the trusts, and that is why he did not include them in his subsequent tax returns of the Tax on Personal Assets.

The court analyzed the contracts by which such trusts were set up and emphasized that while Eduardo Eurnekian was alive the trustees were only able to administer the funds according to the instructions of a committee of individuals selected by Eduardo Eurnekian himself, who was entitled to designate or remove them at any time and at his sole judgement. The only entrusted donation would take place at Eduardo Eurnekian’s death. Therefore, one of the members of the court who voted for the confirmation of the prosecution and attachment against Eurnekian, Dr. Hendler, stated that “the accused never gave away the assets that he allegedly donated”, and the judge also established that “the trustor, himself, is the one that keeps the authority to manage, invest or dispose of the funds without any restriction except for the mediation of a committee that he designates and removes at his own will”. Dr. Repetto also proposed the confirmation of the prosecution and attachment against Eurnekian stating that “it can not be understood that such amounts had actually been transferred from the patrimony of the accused because he would keep the power to dispose of same until the last day of his life”.

Setting up trusts abroad with assets located also abroad can involve advantages. Regarding Income Tax, the income derived from the transferred assets is not taxed for the beneficiary if there is no distribution in Argentina. Moreover, it is sometimes held that once the assets are transferred to the trust, there is no mechanism provided for the payment of the Tax on Personal Assets to the extent the trustee is a person located abroad. It seems that the reason for this deferral is the lack of control that the trustor and the beneficiary have over the transferred assets.

But there is no clear guidance to know under which circumstances a trust will be respected or disregarded by the tax authority, or if it will be accepted that the trustor and the beneficiary have no control over the transferred assets. It is not clear for example if in Eurnekian’s case, the prosecution and attachment were confirmed because the trust was disregarded or because although the trust was respected, the assets were still considered to be Eurnekian’s property. Although the reasoning of the court seems to be the latter, Dr. Repetto states that “the misleading procedure took place mainly through a simulation of the trusts”.

In summary, cases should be analyzed on a case-by-case basis taking into account the specific characteristics of the trust in order to determine whether it will be respected or not. Although the decision in Eurnekian’s case gives some guidelines, there are still some issues that need to be clarified.