An Argentine Company Has to Pay Personal Assets Tax Corresponding to a Shareholder Resident in Uruguay

1. General Rules of Personal Assets Tax

Personal Assets Tax Law No. 23,966 creates a tax that applies to assets situated in Argentina and abroad belonging to individuals domiciled in Argentina (the “Tax”).

The Tax also applies to assets situated in Argentina belonging to individuals domiciled abroad. In the case of shares and other equity interest in Argentine companies held by foreign entities, the law presumes –and no proof to the contrary shall be admitted– that they are held by individuals domiciled abroad; therefore, the Tax also applies in such cases.

Law No. 25,585 included an important amendment to the Tax Law in 2002. From that year Argentine companies were obliged to pay the Tax acting as substitute obligors of the individuals domiciled abroad and/or companies and/or any other legal entity, domiciled abroad, that held shares or other equity interest in those companies. The law established an effective collection mechanism, especially for the case of shares or other equity interest in Argentine companies held by foreign individuals or companies.

2. Double taxation treaties and the Treaty of Montevideo

At the time of the amendment of the Tax in 2002, Argentina had two double taxation treaties in force with Spain and Switzerland. Both of them provided that the assets of any person resident in one of the signing countries could only be subject to tax in the country of residency. Therefore, Argentina could not tax shares or other equity interest held by a Spanish or Swiss resident.

The Treaty of Montevideo signed in 1980 by the country members of the Latin-American Integration Association (“Asociación Latinoamericana de Integración” or “ALADI”) contains, in Section No. 48, a so-called “most favored nation clause” according to which the assets from the country members of the treaty shall not enjoy a less favorable treatment in the territory of the other signatory members than the one granted to assets from third-party countries.

In consequence, Argentine companies acting as substitute obligors claimed that if Spanish or Swiss residents were beyond the Tax’s scope by virtue of the application of the respective double taxation treaties, residents of the members of the ALADI should enjoy the same treatment.

The General Attorney issued Ruling No. 170/2006 stating that the most favored nation clause should not be applied to tax matters.

However, the Federal Taxation Office (“Dirección Nacional de Impuestos”) had an opposing point of view and issued Memorandum No. 1000/2002 stating that the most favored nation clause should be applied and that the Tax should not be applicable to residents of the members of the ALADI, in this case Brazil or Uruguay, because it was not applicable to Spanish or Swiss residents.

3. The “Losa Ladrillos” case. The decisions of the Federal Tax Court and the Court

Losa Ladrillos S.A. (the “Company), is a company incorporated in Argentina. One of its shareholders was TEI&C S.A., a company incorporated in Uruguay. The Company interpreted that the Treaty of Montevideo prevented the application of the Tax; therefore, did not act as substitute obligor, in agreement with the point of view of the Federal Taxation Office. The Tax Authorities assessed the applicable Tax and claimed for payment to the Company that then appealed the decision before the Federal Tax Court.

In a decision on August 8, 2011, the Court stated that if the Treaty of Montevideo did not exclude tax matters, the most favored nation clause must be applied and, as a result, the tax should not be paid.

The Tax Authorities appealed the decision before the Federal Court of Appeals in Administrative Matters and claimed that by means of the amendment of the Law No. 25.585, the legislative tried to prevent that, with the incorporation of companies abroad, abroad residents avoid the payment of the Tax for their assets and capitals in Argentine companies.

The Court considered that Section No. 48 of the Treaty of Montevideo only contains a generic reference to the assets from member countries, which do not imply that the purpose of the article is to mechanically extend clauses relating to privileges or tax breaks resulting from bilateral negotiations later, to countries that did not form part of that specific agreement.

According to the Court, the circumstance that the tax issues were not expressly excluded from the provisions of Section No. 48 of the Treaty of Montevideo, does not justify, by itself alone, their being under the scope of that clause.

Finally, the Court stated that an opposing interpretation would imply that the country would not be able to carry out a sovereign foreign investment policy or legislate in double taxation international matters, since that would mechanically bind privileges to other country members of the ALADI in disregard of the tax cost estimation of those privileges and the verification of the existence of concrete cases of double taxation with those countries.

Therefore, the Court decided in favor of the appeal made by the Tax Authority and revoked the appealed decision.