Asset Reallocations from Taxable to Exempt Assets

The Attorney General for Tax Matters, in the case “LUTZ, JUAN JACOBO C/ DIRECCION GENERAL IMPOSITIVA s/ recurso directo de organismo externo,” opined that the judgment of the Federal Court of Appeals in Administrative Matters should be overturned. The Court of Appeals had upheld the decision of the Argentine Tax Court which, in turn, had upheld the tax assessment of the taxpayer’s Personal Assets Tax liability for fiscal years 2007 and 2008.

In the facts of the case, the taxpayer had acquired Austrian government bonds—assets that were exempt under the then applicable Treaty for the Avoidance of Double Taxation with Austria, which was later terminated—on dates close to December 31 of those years. The transactions “were basically as follows: during 2007 and 2008, the taxpayer made short-term investments in a bank fund. These investments were subject to Personal Assets Tax if they remained in his portfolio as of December 31. However, between November and December of each year, Lutz used the proceeds from the fund to purchase bonds issued by the Austrian government that matured in January of the following year. Consequently, as of December 31, 2007, and December 31, 2008, he reported the Austrian securities as assets exempt from Personal Assets Tax. Then, in January of the following year, he collected the proceeds from the securities and reinvested the funds in various taxable investments.”^[1]

Article 30 of the Regulatory Decree of the Personal Assets Tax provides that, when changes in taxable assets occurring during the calendar year give rise to a presumption of an intent to evade the tax, the Tax Authority may, for purposes of assessing the tax, require such changes to be prorated based on the time elapsed between the occurrence of those events and December 31 of each year. The Tax Authority thus challenged the application of the Personal Assets Tax exemption on the basis of article 30 of the Decree. Both the Argentine Tax Court and the Court of Appeals upheld the Tax Authority’s position.

In light of this, the taxpayer filed a Federal Extraordinary Appeal. The Attorney General for Tax Matters analyzed article 30 of the Decree and the principle of economic reality set forth in articles 1 and 2 of the Tax Procedure Law (Law 11683).

The Attorney General for Tax Matters emphasized the point-in-time nature of the tax, whose taxable event occurs on December 31 of each year, and noted that the law does not establish a minimum holding period for exempt or non-taxable assets to qualify for such treatment. In this regard, she concluded that the taxpayer’s conduct was consistent with the manner in which the tax had been structured and that a contrary interpretation “would amount to assuming that, as December 31 of each year approaches, taxpayers may only hold taxable assets or, alternatively, that there is a minimum holding period for exempt assets to qualify for the exemption,” even though no such requirement arises from the applicable rules.

The Attorney General for Tax Matters further considered that the change in the composition of the taxpayer’s assets, as had occurred in the specific circumstances of the case, was not sufficient to conclude that the taxpayer had resorted to manifestly inappropriate legal forms to reflect the economic substance of the transactions.

She also emphasized that the tax benefit denied to the taxpayer was protected by the then-applicable Treaty with Austria, which ranked above domestic legislation.