Attorney General for Tax Matters Issues Favorable Opinion on Molinos Rio de la Plata S.A.

Background

According to the Tax Matters’ Attorney General’s opinion, in 2003, Molinos Río de La Plata S.A. ("Molinos Argentina") incorporated Molinos de Chile and Rio de la Plata Holding S.A. ("Molinos Chile") controlling 99.99% of its shares. During 2004 and2009 Molinos Chile paid Molinos Argentina dividends that arose essentially from the dividends collected from Molinos Uruguay and Molinos Peru.

The notice of deficiency issued by the Argentine Tax Authority was based on the following arguments:

1. Molinos Argentina should be taxed on the dividends received from Molinos de Chile, since it operated in fact as a mere conduit between Molinos Argentina and the other companies of the Latin America group
2. The application of the Convention to Avoid Double Taxation between Chile and Argentina ("DTT") resulted in a case of double non-taxation. According to the Argentine Tax Authority, section 2 of the Tax Procedure Law (" LPT "), i.e. the economic reality principle, does not allow for an interpretation of a statute or treaty that would result in double non-taxation.

The double non-taxation resulted from: (i) In Chile, from Law No 19,840 passed  in 2002, which established that foreign source income obtained by “investment platform companies" were exempted from taxation in Chile, thus avoiding the taxing of the profits that had already been taxed in their respective countries of origin. (ii) In Argentina, section 11 of the DTT in force at that time, stated that dividends will only be taxable by the Contracting State where the company that distributes them is located. Therefore, Argentina resigned its tributary power in favor of the country of the source, in this case Chile. Consequently, said dividends were not subject to tax in either of the two countries.

Molinos Argentina appealed the rulings from the Tax Court and the Federal Court of Appeals before the  Argentine Supreme Court ("CSJN") which had confirmed the notice of deficiency.
 

The Attorney General’s Opinion

According to the Tax Matters’ Attorney General, the DTT did not contain an "anti-abuse" clause that required transactions to have a commercial purpose or minimum substance. Therefore, the allegation that Molinos Chile was a conduit company does not per se means that the DTT was abused.

Additionally, Ms. Monti rejected the invocation of Argentine anti-abuse rules not expressly included in the DTT. In the hierarchy of rules, DTTs are above Argentine law. In that sense, even though the Tax Authority claims that the taxpayer effectively benefitted from the DTT in a way that resulted in double non-taxation, the letter of deficiency cannot be based on Argentine anti-abuse rules.

The Opinion highlights that Argentine and Chile negotiated the DTT under the source state model, thus limiting the taxing powers of each state to taxable events taking place within the territory of each state. When Chile introduced the concept of investment platform companies, Argentina´s only anti-abuse mechanism was to terminate the DTT; and eventually negotiate a new DTT. To that end, Argentina and Chile signed a new DTT in 2015 (passed by Law 27,274).

It is worth noting that the Tax Matters’ Attorney General underscored that “the honest effort on behalf of taxpayers to minimize their tax burdens is not per se illegal; that is, legal tax savings are not questionable”.

Finally, the Opinion states that due to legal certainty and the constitutional requirements that only Congress can pass substantial tax regulations, the application of new DTT is limited to future taxable events. Therefore, the dividends remitted by Molinos Chile to Molinos Argentina prior to the validity of the new DTT – fiscal years 2006 through 2009 - are not subject to the new DTT´s anti-abuse rules.