Amortization and expenses related to real estate shared by several companies. Income and Value Added Tax consequences

The Federal Tax Court (Tribunal Fiscal de la Nación) ruled in the case “Management Consulting S.A.”, where it had to decide if the taxpayer could fully deduct the expenses and amortization of real estate that was shared with another company. The Federal Tax Court also analyzed if the VAT credit arising from those expenses could be fully set off against the VAT debit.

As per the facts and circumstances described in the sentence, the taxpayer had leased a real state –on which it made improvement works– and a central office (central telefónica). Both assets were used by the taxpayer and another company –we do not know if they were related parties–. For income tax purposes, the tax payer deducted the full amount of the amortization of the improvements and the leases accrued during the fiscal year. Regarding VAT, it computed the whole tax credit related to the construction and the leases. 

The National Tax Authority challenged the full deduction of the expenses arguing that the assets were shared with another company; consequently, allowed only 50% of the deduction. A same criteria was applied regarding the VAT credit, where the National Tax Authority challenged it by the 50%.The taxpayer sustained that it itself had engaged in the construction and agreed with the suppliers. This was evidenced by the fact that Management Consulting S.A. made all the payments and all the invoices had been issued to.

The Federal Tax Court ruled in favor of the Tax Authority on both, Income Tax and VAT issues. Regarding the Income Tax, the Court argued that the amortization and lease expenses were not fully related to the tax payer’s generation of taxable income and therefore that the deduction should be proportionally reduced. Regarding the VAT credits, it considered that they were generated by transactions and services not fully in favor of the taxpayer. It also noted that the tax payer’s position challenged the VAT law, which aimed to prevent different tax payers, belonging or not to the same economic group, from mingling tax effects to reduce their tax burden.

Under this case law, if a tax payer shares the services rendered to it and certain goods with another tax payer, but assumes all the costs, said tax payer will not be allowed to take a full deduction of the expenses for income tax purposes, nor the full VAT tax credit arising out of them.