Negative duties and VAT

On August 24, 2006, Room II of the Federal Court of Appeals in Contentious and Administrative Matters ruled in “Picasso, Alberto” that non-compete agreements are not subject to VAT.

The taxpayer was the director of a company whose shares were bought by Group Danone. At his resigning he entered into a consultancy agreement and a non-compete agreement with the new shareholders. When he assessed his VAT obligation he considered that the consultancy agreement was subject to VAT and the non-compete agreement was not subject to this tax. This criterion was challenged by the Argentine Tax Authority who considered that both agreements were taxable.

The taxpayer appealed the Tax Authority criterion before the Federal Tax Court, whose majority held in September, 2003 that non compete agreements –that were considered as negative duties – are subject to VAT. Provided that point 21 of subsection e) of Section 3 of the VAT Law provides that “other works” are subject to VAT, the Federal Tax Court understood that negative duties were included.

The decision of the Federal Tax Court was appealed before the Federal Court of Appeals in Contentious and Administrative Matters who revoked its decision. The decision of the Federal Court of Appeals was based on the following facts:

(a)   Section 1 of the VAT Law provides that only “rendering services” are subject to VAT and “rendering services”, as defined in the Argentine Civil Code, does not include negative duties;

(b) Section 3, subsection e), point 21 of the VAT Law does not broaden the taxable event mentioned in Section 1 –“rendering services”– when it refers to “other works”;

(c) Section 8 of the regulatory decree of the VAT Law provides that negative duties are taxable when they imply a financial service or an exploitation of an industrial or commercial concession, circumstances that are not met in the non compete agreement executed among the parties.

The Federal Court of Appeals rejected also the argument of the Federal Tax Court that sustained that the non-compete agreement is taxable because it is ancillary to the consultancy agreement. Section 3 of the VAT Law provides that “services connected or related” to taxable leases or works are also taxable, therefore, a duty to act is taxable and negative duties are excluded from the scope of the tax.  

This precedent is relevant because it specifies that VAT is applicable only on duties to turnover or on duties to act, excluding negative duties except when the circumstances established in Section 8 of the regulatory decree are met.

The resolution of the Federal Court of Appeals was appealed, and the decision of the Argentine Supreme Court is still pending.