Argentina: An Argentine Company Does Not Have To Pay Personal Assets Tax Corresponding To A Shareholder Resident Of Uruguay

Last Updated: 14 March 2012
Article by Walter C. Keiniger and Carolina R. DeCicco

In a case where the parties discussed the application of Personal Assets Tax to the Uruguayan shareholders of an Argentine company, the Federal Tax Court decided in favor of the application of the most favored nation clause to taxation and dismissed the application of the tax in that case.

1. General Rules of Personal Assets Tax

Personal Assts 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. Besides, in the case of shares and other equity interest in Argentine companies held by foreign entities, the law presumes that they are held by individuals domiciled abroad and, therefore, the Tax also applies in such cases.

Law No. 25,585 included an important amendment to the Tax 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 a so-called "most favored nation clause" according to which the assets from the countries 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 countries.

The application of the most favored nation clause of the Treaty of Montevideo generated several inquiries related to the Tax and to Argentine companies acting as substitute obligors. Taxpayers alleged that the residents of the ALADI members should not be subject to the Tax when Spanish and Swiss residents were out of the Tax's scope by virtue of the application of the respective double taxation treaties. In other words, if a Spanish or Swiss resident could not be taxed for the shares or other equity interest they held in Argentine companies, 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 shareholders residents of Brazil, in the understanding that tax matters were not included the Treaty of Montevideo's scope, which only aim was to create a Latin-American common market through the promotion and protection of investments (see "The Tax on Personal Assets is applicable to residents of countries who are members of the ALADI" published in Marval News # 55 of October 31, 2006), i.e. it was understood that the most favored nation clause was not applicable to tax matters.

However, the Federal Taxation Office had issued Memorandum No. 1000/2002 stating that the Tax should not be applicable to residents of Brazil or Uruguay because it was not applicable to Spanish or Swiss residents. Thus, Argentine companies were not obliged to act as substitute obligors of the Tax when their shares or equity were held by residents of Brazil or Uruguay.

3. The "Losa Ladrillos" case

Within that framework, the Federal Tax Court analyzed the case of Losa Ladrillos S.A., an Argentine company. One of the shareholders of that company was TEI&C S.A., a company incorporated in Uruguay. Losa Ladrillos S.A. interpreted that the Treaty of Montevideo prevented the application of the Tax and, therefore, did not act as substitute obligor. The Tax Authorities assessed the applicable Tax and claimed its payment to the company that appealed the decision before the Federal Tax Court.

In its decision of August 8th, 2011, the Court pointed out that the signature of the Treaty of Montevideo did not have the purpose of tax harmonization among its signing members because the ALADI was a free commerce association with the only aim of free circulation of goods and services. The Court stated that the Treaty of Montevideo should be interpreted under the Vienna Convention on the Law of Treaties. Pursuant to article 31 of that convention, treaties must be interpreted taking into account their objects and aims. Therefore, if the Treaty of Montevideo did not exclude tax matters, the Court understood that they should be considered under the most favored nation clause scope. The Court adopts the opinion of the Federal Taxation Office, and rejects the General Attorney's and the Tax Authorities'.

Although the decision refers to the 2005 fiscal period and a particular case, the same conclusions could apply to other fiscal periods and other cases of holders of shares or other equity interest in Argentine companies, residents of other members of the ALADI, as long as there are not specific agreements that set aside the application of the Treaty of Montevideo.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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