Interest on Exempt or Non-Taxable Transactions

SUMMARY

On September 28, 2010, Argentina’s Supreme Court ruled in “Angulo, José Pedro et al. v. DGI” that interest from financing an exempt or non-taxable transaction, such as a sale of shares, is not subject to VAT either. It reversed the Court of Appeals’ decision and, for the first time, set its doctrine on the merits of the issue.

On September 28, 2010 the Argentine Supreme Court ruled in the “Angulo José Pedro (TF 21.995-I) y otros c/ DGI” case. This particular case involved the issue of whether interest on the balance amount due for a sale of shares, which is exempt from the tax, shall be subject to VAT.

Section 10 of the VAT Law provides that interest, whether received or accrued, either for deferred or overdue periods, constitutes the net price subject to tax –even if invoiced or agreed separately– and even when considered independently it is not subject to tax.

Thus, the Law adopts a criterion whereby the transaction is analyzed as a whole (i.e. comprehensive criterion) and deems financing of taxed sales, leases and rendering of services as a sole accessory of the taxable event.

However, Section 10 of the VAT Regulatory Decree disregards the “comprehensive” principle provided by the Law. In fact, it taxes interest regardless they arise from taxable transactions or not.

In this matter, the most relevant precedent was “Chryse S.A.”. On October 15, 2010, Tribunal III of the Court of Appeals ruled that interests accrued in connection to transactions that are exempt from or not subject to VAT are not subject to VAT either. In fact, the Court of Appeals held that Section 10 violated the principle of legality included in Section 17 of the Federal Constitution and that infringed the prohibition imposed by Section 99, Subsection 2 of the Federal Constitution that states that the Federal Government may not alter the spirit of the law with regulatory exceptions. 

In the “Chryse S.A.” case the Argentine Supreme Court did not establish its criterion; the appeal of the Administration was rejected on the basis of lack of arguments. Nevertheless, the dissenting judges, Lorenzetti and Highton de Nolasco, had confirmed the criterion of the Court of Appeals.

In re “Angulo José Pedro” the Court of Appeals ruled to the contrary, expressing that interest on the balance amount due for a sale of shares is subject to VAT.

The significance of this ruling lies in the fact that the Argentine Supreme Court has revoked the ruling and sets its doctrine stating that interest is not subject to VAT when it arises from the financing of a transaction, which is exempt from or not subject to VAT.

Frequently Asked Questions

What did the Supreme Court decide?
Interest from financing exempt or non-taxable transactions is not subject to VAT.

What does the VAT Law provide on interest?
Interest on deferred payments is part of the price of the main transaction, under the “unity” principle.

Why is the ruling relevant?
Because the Court ruled on the merits for the first time, which it had not done in the “Chryse” case.