Argentine Supreme Court Rules on the Taxation of Trusts

SUMMARY

On March 5, 2024, in “Fideicomiso Edificio La Favorita de Rosario v. Dirección General Impositiva,” Argentina’s Supreme Court ruled on how a trust with settlor-beneficiaries residing both in Argentina and abroad is subject to Income Tax. The Court rejected the tax authority’s position, which sought to apply the 35% rate to the trust’s total income, and upheld proportional taxation. As a result, the trust pays tax only on the share of income attributable to foreign beneficiaries, while income corresponding to Argentine residents is attributed to them directly.




On March 5, 2024, in the case "Fideicomiso Edificio La Favorita de Rosario c/ Dirección General Impositiva s/ recurso directo de organismo externo," the Argentine Supreme Court analyzed how trusts composed simultaneously by settlors-beneficiaries residing in Argentina and abroad are taxed.

Article 49 of the Income Tax Law in force at the time of the facts (as amended in 1997) established that the income from trusts in which the settlor was also the beneficiary—except financial trusts—or when the settlor-beneficiary was a foreign resident (current section 53 subsection c, as amended in 2019) were third-category income.

If the settlors-beneficiaries were Argentine residents, the income from the trust was attributed, in the applicable proportion, to the settlors-beneficiaries, who paid the corresponding tax. If this condition was not met, if the trust was a financial one, or if the settlors-beneficiaries were foreign residents, the trust itself had to pay the tax. It was unclear how the tax was to be paid in cases where Argentine residents and foreign residents settlors-beneficiaries coexisted. 

The trust in the case had paid income tax on the income corresponding to the settlors-beneficiaries who were residents abroad and, instead, had allocated the corresponding profit to the settlors-beneficiaries who were residents in Argentina. From 2009 to 2011, the trust was composed of thirty-five settlors-beneficiaries residing in Argentina and four residing abroad. For those fiscal years, the trust filed income tax returns computing the total income obtained and deducting from the taxable income—through of a tax adjustment reducing the accounting profit—the amount attributable to the beneficiaries residing in Argentina. Based on this, the trust calculated and paid the tax considering a 35% tax rate on the income corresponding to the foreign resident beneficiaries.

The Federal Tax Authority issued a debt determination and held that the trust should apply the 35% tax rate on the total income obtained, since the regulations had not provided for the possibility of proportional liquidations. Therefore, if Argentine resident settlors-beneficiaries coexist with other non-residents, the taxpayer is the trust.

On March 11, 2019, the Federal Tax Court revoked the debt determination. Later, on June 18, 2020, the Federal Court of Appeals on Administrative Matters confirmed this decision. The Federal Tax Authority then filed a Federal Extraordinary Appeal before the Argentine Supreme Court, which was partially admitted regarding the intelligence of federal regulations.

The Court ruled that the regulations applicable to the case did not imply that the tax liquidation mechanism regarding settlors-beneficiaries residing in Argentina is conditioned to the fact that all the members of the trust reside in Argentina. Therefore, the proportional taxation of the trust was admitted.


 

Frequently Asked Questions

How is a trust with Argentine and foreign settlor-beneficiaries taxed?
According to the Supreme Court, proportionally. Income corresponding to settlor-beneficiaries residing in Argentina is attributed to them, and they pay the tax. The trust, by contrast, pays tax only on the share attributable to foreign beneficiaries.

What was the tax authority’s position in this case?
The tax authority (AFIP) argued that, since the rules did not provide for proportional assessments, the trust itself is the taxpayer whenever resident and non-resident beneficiaries coexist. It therefore sought to apply the 35% rate to the trust’s entire income.

Why did the Court accept proportional taxation?
Because it found that the applicable law did not require all members of the trust to be Argentine residents for income to be attributed to the Argentine settlor-beneficiaries. The ruling upheld the decisions of the National Tax Court and the Federal Court of Appeals on Administrative Matters.