The Argentine Supreme Court of Justice Dismissed a Legal Opinion by the Attorney General’s Agency which Considered Acts by which the Tax Authority Rejected Tax-Free Corporate Reorganizations to be Null

Sections 77 and 78 of the Income Tax Law (ITL) grant a special tax-free reorganization regime for companies that meet certain conditions. The regime states that results which may arise from said reorganization will not be taxed and that fiscal benefits may be transferred from old companies to newly reorganized ones.

Grupo Posadas S.A. informed the Federal Tax Authority (AFIP) of the reorganization carried out, the AFIP rejected, arguing that it could not be framed under the concepts of merger or divisions in the ITL or the Regulatory Decree.

The company filed a claim to have the rejection revoked, obtaining a favorable judgment in the first instance but a negative one in the Court of Appeals. Next, the company appealed in the Argentine Supreme Court of Justice (ASCJ).

Prior to the ASCJ’s ruling, the Attorney General’s Agency issued a legal opinion, [i] pointing out that Income Tax is paid by taxpayers according to the tax returns they themselves file, which are the only ones subject to be challenged by the AFIP within the boundaries of an assessment as established by sections 16, 17 and complementary regulations of the Tax Proceeding Law.

Therefore, the rejection issued by the AFIP and their later administrative confirmations, according to the Attorney General’s Agency, did not produce –nor were able to produce – any legal effect in order to challenge the tax returns filed by taxpayers.

The Attorney General’s Agency concluded on the annulment of the resolution which rejected the request to perform a tax-free reorganization. Such conclusion was based on the consideration that it was issued by an agent with no competence and had also defects in violation of the procedure established to issue the rejections.

However, the ASCJ’s judgement[ii] dismissed the approach set forth by the Attorney General’s Agency. The ASCJ made two points: that the taxpayer’s right of defense had not been affected nor was it possible for the AFIP to only provide an assessment in response to the tax-payer informing them of   a tax-free reorganization. In addition, the ASCJ stated that the criterion used by the Attorney General’s Agency would trigger an indefinite postponement of the decision whether the corporate reorganization adjusts to the terms of Section 77 of ITL or not.

The solution proposed by the Attorney General’s Agency seems to pursue the avoidance of duplication of cases by suggesting that the AFIP should abstain from issuing acts of rejection, and to directly promote the assessment of the corresponding taxes -if that was their intention- which would result as a consequence of the reorganization. The ASCJ, on the other hand, did not follow such criterion. Thus, taxpayers will still have to file a complaint before the administrative contentious judicial courts to challenge the reorganization’s rejection and before the Argentine Tax Court to challenge possible tax assessments that the AFIP may issue as a consequence of such rejection.

[i] “Grupo Posadas S.A. c/ AFIP-DGI s/ Demanda contenciosa”, legal opinion dated May 29, 2015.

[ii] “Grupo Posadas S.A. c/ AFIP-DGI s/ Demanda contenciosa”, ruling dated April 12, 2016.