Loss Absorption with Irrevocable Contributions

In the case "NORAUTO ARGENTINA SA (TF 35897-I) v/ DIRECCION GENERAL IMPOSITIVA s/RECURSO DIRECTO DE ORGANISMO EXTERNO," Chamber V of The Court of Appeals in Federal Administrative Matters confirmed the Tax Court ruling, which had held that the absorption of losses with irrevocable contributions is not subject to income tax.

The taxpayer filed an appeal before the Federal Tax Court against the tax authority's debt determination resolution for Income Tax. The resolution stated that the company had failed to declare, in the 2006 and 2007 fiscal years, as taxable the income obtained from the forgiveness of irrevocable contributions made by the controlling company, and which had been used to absorb losses from previous fiscal years. The tax authority argued that this operation constituted a gratuitous act by the forgiver for the benefit of Norauto Argentina SA, which is taxable under the terms of articles 1 and 2, section 2) of the Income Tax Law.

The Tax Authority also argued that irrevocable contributions should be treated as “gratuitous enrichment” under the scope of article 2, paragraph 2) of the Income Tax Law. The grounds for its position were that the company had received funds which, when used to absorb losses, represented a waiver of an obligation or income without compensation, thus generating a taxable income.

The taxpayer argued that the transaction was a capital movement and not a transaction that generated results (profits or losses). The original purpose of the irrevocable contributions, received since 1997, was “to invest in Argentina and to provide greater agility at the start of its commercial activity.”

According to the expert report, the Assembly had resolved to increase the share capital by ARS 6,985,814.30 by capitalizing the accounts Comprehensive Adjustment of Share Capital (ARS 2,074,696.54) and Irrevocable Contributions, after deducting unallocated negative results (ARS 12,080,476.70 – ARS 7,169,358.94 = ARS 4,911,117.76). The sum of both capitalized accounts (ARS 6,985,814.30) plus the existing share capital at that time (ARS 1,733,000) resulted in a new share capital that constituted the company's net worth of ARS 8,718,814.30, which coincides with that of the same company as of September 30, 2005. This allowed the expert to conclude that there was no increase in net worth, but rather a mere reclassification among its components.

The Court cited the precedent “Flint Ink Argentina S.A.” (Chamber ruling of August 20, 2019), which addressed a similar situation. That ruling established that irrevocable contributions intended to absorb losses do not constitute taxable income.

The Federal Tax Court, on September 12, 2023, decided to revoke the debt determination, since it was not proven that the enrichment was gratuitous because there was no remission of contributions or increase in net worth, in the case of the absorption of losses with irrevocable contributions of the shareholders.

The tax authority appealed the Federal Tax Court's ruling, arguing that the forgiveness of the irrevocable contribution made to absorb losses from previous fiscal years resulted in an increase in assets, due to its nature as gratuitous enrichment. And that that enrichment occurred by allowing the Company to offset losses from previous fiscal years, reducing its tax burden.

The Chamber cited the ruling "Flint Ink Argentina SRL which the Supreme Court made final, where the nature of irrevocable contributions was examined and it was concluded that the allocation of such contributions to the formation of a voluntary reserve to absorb losses "...did not imply a quantitative modification of net worth, since said contributions did not form part of the company's liabilities at any time, neither before nor after the constitution of the voluntary reserve."

The tax authority's position that a waiver by the contributing partner had been verified, which would imply a forgiveness of the aforementioned contributions, failed to take into account what was stated by the Federal Tax Court, that no forgiveness or waiver could be verified given that the expression of the will to maintain in the company's assets the irrevocable contributions made (vocation of permanence) subject to business risk are characteristic features of every irrevocable contribution.

The Chamber emphasized that it emerged from the assembly minutes and from the accounting expert evidence that it was a monetary contribution intended for business activity of a definitive nature, manifesting the controlling partner's intention that it was an irrevocable integration (until its actual capitalization for purposes of absorbing losses), so it could hardly receive—for tax purposes—the treatment of a loan (susceptible to being forgiven and, therefore, to generate an asset increase subject to Income Tax) (cf. Chamber II in case "Flint Ink Argentina SRL").

Likewise, the Chamber highlighted that the circumstance that a portion of the irrevocable contributions had been allocated to absorb losses did not imply a quantitative modification of the company's net worth, but rather a "...mere reclassification among its components."

On September 11, 2025, the Chamber dismissed the appeal filed by the tax authority and affirmed the first instance ruling. As the tax authority did not file a federal extraordinary appeal against the Chamber's ruling, the ruling is final.