The Federal Supreme Court declares the unconstitutionality of the tax on presumed minimum income

On June 15, 2010, the Argentine Supreme Court pronounced in the case “Hermitage S.A. c/ P.E.N. – Ministerio de Economía y Obras y Servicios Públicos -Título V- Ley 25.063 s/ proceso de conocimiento”, where a company had challenged the constitutionality of the tax on presumed minimum income, based on the serious damage its application caused to the company.

Article 6 of Law No. 25,063 provides a tax on presumed minimum income of 1% of the assets of companies incorporated in Argentina, among others entities, valued according to the rules set forth by the same regulation. It also states a compensation mechanism with federal income tax, due to both taxes complementary nature. 

In the “Hermitage” case, the company proved with an accounting expert’s report that during fiscal years 1995, 1996 and 1998, its commercial exploitation had losses, which prevented it from the ability to face the payment of the tax. 

At the first instance court the taxpayer’s request was denied on the grounds that the company had not proven that the application of the tax was confiscatory.

The taxpayer appealed, and Room V of the National Court of Appeals revoked the decision and declared the unconstitutionality of the tax, considering that the company had sufficiently proved the absence of ability to pay due to operative and tax losses.

Once the decision was appealed by the Argentine Tax Authority, the Supreme Court by a majority of votes, rejected the previous ruling of the Attorney General, first referring to the lack of clarity and inaccuracy of the legal wording of Law No. 25,063, and analyzed the legislative history for its interpretation.

The Supreme Court considered that the fact that the legislator intended to reach the taxpayer’s payment ability through a minimum income presumption is not reasonable and is unfair because with that mechanism a diverse range of activities and organizational forms are indiscriminately included, not taking into account their special characteristics and not allowing proof if the income presumed by the legislator was not obtained.  

Within this reasoning, the Supreme Court considered the existence of losses in the fiscal years in discussion to be proved and declared the unconstitutionality of the tax in regard to the company.

The two dissenting votes are interesting for analysis. The dissent pointed out that the ability to face tax payment that the legislator intended to tax was represented by the ownership of the assets destined to a commercial exploitation, and that the existence of income was not necessary. 

In this regard, the dissenting judges considered that the presumption used by the legislator was not unreasonable and stated that -on the other hand- it would be unreasonable to presume that an exploitation can survive with unproductive assets. They also considered that the company had not proven that the taxation was confiscatory, i.e. that it absorbed an essential part of the income or assets, considering the potential productive capacity according to the medium normal yield, parameter established by the Supreme Court in several precedents.

Even when the legal effects of the decision only apply in the case analysed, the Supreme Court makes certain generic statements related to the fact that it is inappropriate to apply the tax when there are accounting and tax losses. This could lead taxpayers to initiate many judicial discussions over the application of the tax to similar cases.