A New Judicial Precedent on Tax–Free Reorganizations

1. Background
Through an administrative decision issued in 2007, the Argentine Tax Authority (hereinafter, the “AFIP”) dismissed the administrative appeal filed by Banco Francés S.A. (“Banco Francés”) and confirmed the decision pursuant to which it had stated the inadmissibility of a tax–free reorganization in a case in which Corp Banca S.A. (“Corp Banca”) had completely transferred its assets and liabilities to Banco Francés (both companies belonged to the same economic group), because the payment of the transfer was made in cash.
It has to be borne in mind that the Income Tax Law (“ITL”) establishes a tax–free reorganization regime under which any gain resulting from mergers, spin-offs, and transfer of assets between entities belonging to the same economic group is not subject to income tax (“Tax”) to the extent certain requirements are met.
In order to support the dismissal, the AFIP stated that payments in cash are not in line with tax–free reorganizations, as alleged by the Banco Francés (1), because they disrupt the fiscal neutrality standard. In this regard, the AFIP pointed out that the transfer of the assets and liabilities from one entity to another should not alter the patrimonial situation of the seller nor the tax results (as gains and tax losses) at the level of the economic group. The tax authority explained that a different stance would allow the usage of the tax-free reorganizations to obtain tax benefits exclusively.
Moreover, the AFIP upheld the dismissal on the grounds that the Banco Francés had not recorded the reorganization agreement before the Public Registry of Commerce (“PRC”), as the ITL’s regulatory decree provides.
On the other hand, the Banco Francés’s position was based on the grounds that an economic group as well a lawful economic purpose effectively existed and that Section No. 77 of the ITL refers to “sales and transfers” which implies the payment of a price which can be made in cash, equity or other assets. Accordingly, the Banco Francés alleged that there was no legal regulation providing that the payment should have been made in stock of the involved companies.
Against the dismissal, the Banco Francés filed a lawsuit before the First Instance Federal Court (the “Lower Court”)

2. The decision of the Lower Court
The Lower Court summarized the facts of the case, decided to dismiss the claim and confirmed that the tax–free reorganization alleged by the Banco Francés was not admissible.
The judge said that companies are reorganized in order to improve their vertical and horizontal integration or their position in the market and that, in such cases transferred rights and assets could be subject to Tax.
Moreover, the Lower Court explained that, by the application of the ITL rules, the tax–free reorganizations should not disrupt tax neutrality and their usage is not provided to obtain economic benefits. Thus, and given that through payment in cash the patrimonial situation of the seller and the tax results of the companies involved were altered, the judge stated that the reorganization is exempted only in those cases in which the payment is made in equity.
Despite the dismissal of the claim filed by the Banco Francés, the Lower Court held that the requirement of recording before the PRC was not enforceable because the Argentine Central Bank had authorized the reorganization, irrespective of the formalities established by the Bulk Transfer Law, which led to the PRC not to record the operation. In addition, the judged explained that it was not appropriate to highlight breaches of secondary normative range rules as this position would lead to an excessively strict formal interpretation.
The Banco Francés challenged the decision before the Federal Court of Appeals in Administrative Matters ("Court of Appeals").

3. The decision of the Court of Appeals
By a decision issued in May, 2014 the judges of Tribunal No. 5 of the Court of Appeals reviewed the administrative case laws that the AFIP invoked as grounds supporting its decision and then criticized the position held by the tax authority.
In this understanding, the Court of Appeals agreed with the Banco Francés’s position and asserted that the requirement that the payment should be made in equity was not established by the ITL Thus, if the tax authority required the meeting of this condition for the allowance of the reorganization, there would be a breach of the Rule of Law provided by the Argentine Constitution.
Afterwards, the Court of Appeals asserted that while tax–free reorganizations required lawful business and economic purposes and should not imply an artifice to avoid the payment of the Tax, it was not possible to mechanically state that whenever an asset transfer is paid in cash, it is directly excluded from the benefits provided by the ITL for this kind of reorganizations.
The judges pointed out that the AFIP’s position was based on the premise that tax–free reorganizations established by the ITL may lead to tax avoidance and so, as a result, it construed the figure in the most restrictive way, allowing its application only to cases in which the tax consequences are neutral from a formal and accounting standpoint.
In opposition to such a stance, the Court of Appeals explained that in order to establish whether there was a lawful tax–free reorganization as provided by the ITL, the reasons stated by the parties involved in the transaction should be analyzed on a case–by–case basis.
Based on these premises, the Court of Appeals considered that, in this case, the Banco Francés was the owner of 99.99 per cent of the shares of Corp Banca, and that both companies had the same object and activity, which continued after the transfer during the period provided by the ITL. In other words, the requirements established by the applicable legislation were met.
Finally, the Court of Appeals explained that the final result of the transfer of all the assets and liabilities of Corp Banca, appeared as equivalent of a merger by absorption made by the Banco Francés, controlling company of Corp Banca, as the latter was acquired and subsequently liquidated.
For all of these reasons, the Court of Appeals conceded the appeal filed by the Banco Francés, dismissed the decision of the Lower Court and declared the administrative decision to be invalid.
 
 


1. The position held by the AFIP was supported by several case–law of the National Tax Court in re “Banco Sudameris S.A.  (12/13/1999, Room No. A), La Nación (04/22/1986, Room No. D) and Castelo, Soledad I. Carro de. (02/28/1986, Room No. C).