Application of interest presumption on cash and asset transfers - International Law Office

Introduction
Application of Article 73
Supreme Court rulings
Comment

Introduction

Article 73 of the Income Tax Law states that transfers of cash or assets to third parties that are not performed in the company's interest are subject to an interest presumption at a fixed rate determined by statute. In order to apply the abovementioned presumption, the following requirements must be met:

• A transfer of cash or assets must exist;
• The transfer must be made in favour of a third party; and
• The transfer must not be performed in the company's interest.

Transfer
The statute does not give guidelines on how the term 'transfer' must be construed. However, the regulations provide that a 'cash transfer' is deemed to occur whenever funds are transferred as loans that are not made in the company's ordinary course of business or deemed to be taxable income-generating transactions.

Third parties
Neither the statute nor the regulations define the scope of the term 'third parties' and how this term must be construed in the context of an economic group. The interpretation of this term has given rise to contradictory case law.

Company's interests
For the presumption to apply, the transfer must not derive from "transactions performed in the company's interest". However, there are no guidelines in the statute as to what the term 'company's interest' means. The regulations state only that the transfer of funds may not be in the company's ordinary course of business or be a taxable income-generating transaction.

Application of Article 73

Given the lack of a precise definition, the scope of the requirements under which Article 73 applies has been highly debated, mainly with respect to the terms 'third party' and 'company's interest'. In particular, it has been discussed whether the interest presumption applies when the beneficiary is a company within the same economic group, under the assumption that (according to the economic reality principle) the transfer benefits the economic group instead of an outside party.(1)

Case law has been inconsistent, with contradictory decisions being issued by the Tax Court and the Federal Court of Appeals. Some precedents adopt the principle of legal independence, under which all entities are third parties with respect to each other, even if they belong to the same economic group. Others adopt an approach under which the term 'third parties' refers to entities that are separate and independent from an economic rather than from a legal point of view.(2)

Supreme Court rulings

Two decisions of the Supreme Court of Justice recently shed light on this matter. In Fiat Concord SA(3) and BJ Service SRL(4) the court appears to have resolved the longstanding debate, discarding the application of the economic reality principle and the economic group approach.

The court concluded that a transfer of cash or assets between economically related companies can be considered to be made in favour of a third party, as these entities - even where they belong to the same economic group - are separate taxable entities.

In the opinion of the court, the Argentine legal system does not provide economic groups with an independent taxable status. Furthermore, the court held that the relationship of subordination neither precludes a controlled company's separate corporate existence (with respect to its parent company) nor eliminates its legal capacity as a taxpayer.

In addition, the court held that when Article 73 of the Income Tax Law refers to transactions performed in the 'company's interest', it refers not to the economic group's interest, but exclusively to the interest of the entity to which the rule applies (ie, the company making the cash or asset transfer).

The court further considered that within economic groups there may be specific commercial features that should be evaluated on a case-by-case basis by thoroughly assessing the origin of the cash or asset transfer, as well as the consideration paid by the beneficiary. This can make the interest presumption inapplicable.

The court concluded that the existence of an economic group does not itself preclude the application of the presumption set forth under Article 73, as entities within the same economic group are separate taxable entities and must be deemed third parties for the purposes of this rule. In addition, to evaluate whether the transfer is performed in the company's interest, the interest of the company making the transfer (rather than the group to which it belongs) must be considered.

Comment

The Supreme Court clearly considers that the interest presumption in Article 73 applies to cash and asset transfers between companies of the same economic group.

However, some issues were not dealt with by the court. One relates to an argument highlighted in the opinion of the attorney general that precedes the Fiat Concord holding. This argument states that the interest presumption applies to cash or asset transfers that qualify as 'loans'. In other words, in the attorney general's opinion, transfers made on a different basis (eg, a unified system of payments, such as the one operated by Fiat Concord) are not subject to the rule. Although the court did not expressly analyse this argument and did not explain why the rule should apply to transfers other than those made as loans, it implicitly discarded the attorney general's argument.

In relation to the 'company's interest' requirement, the court clearly considered that this could not be construed as the interest of the economic group, but rather of the entity making the transfer. Nonetheless, the court left room for analysis on a case-by-case basis of some specific features of related-party transactions, particularly those connected with the reason for the transfer and the correlative compensation from the beneficiary.

In this regard, loans that have an interest rate lower than that for which Article 73 provides - or that can be demonstrated to give rise to an economic benefit to the transferor, even if not generating interest - cannot be subject to the application of the presumption under Article 73. However, this question is still open and should be clarified by the court in future.

The Supreme Court has finally closed a longstanding debate regarding the application of the interest presumption to economically related companies. However, there are many issues, particularly those related to the construction of the term 'company's interest' in specific circumstances, that still need a further definition from the court. It is hoped that answers will be provided soon.

For further information on this topic please contact Guillermo O Teijeiro or Ana Lucía Ferreyra at Negri & Teijeiro Abogados by telephone (+54 11 5556 8000), fax (+54 11 4328 5628) or email (guillermo_teijeiro@negri.com.ar or ana_ferreyra@negri.com.ar).

Endnotes

(1) Neither the Income Tax Law nor the regulations define the term 'economic group'. Furthermore, there is no tax consolidation among members of the same group. Nonetheless, the regulations refer to the expression 'economic group' when dealing with tax-free corporate reorganisations and provide that an economic group exists whenever 80% or more of an entity's capital stock is held by a common shareholder or owner.

(2) Precedents that found that companies belonging to the same economic group are not 'third parties' under certain conditions include: Akapol SA, Lavadero Virasoro SA and Dragados y Obras Portuarias SA. One precedent adopting the opposite position is the Court of Appeal ruling in Fiat Concord SA.

(3) Fiat Concord SA, Supreme Court of Justice (March 6 2012).

(4) BJ Service SRL, Supreme Court of Justice (March 6 2012).