Personal Assets Tax treatment on Argentine shares or equity held by residents of an ALADI member state

On March 12, 2008, Tribunal B of the Federal Tax Court ruled in re “KCK Tissue S.A.”, a case related to the application of a fine due to an alleged lack of payment of the so called “corporate personal assets tax” .The article “Personal Assets Tax / ALADI” published in Marval News# 75 of August 29, 2008 contains an explanation of the main characteristics of the personal assets tax.

According to the statement of facts, the Federal Tax Authority considered that the Argentine corporation should have paid the Personal Assets Tax for the equity participation held by its Brazilian shareholder.

Even though the taxpayer amended its tax return as the Tax Authority claimed, it sustained that no tax was due because of the applicability of section 48 of the Treaty of Montevideo, which established in 1980 the Latin-American Integration Association or ALADI (Law No 22,354) . This section contains the “most- favored-nation” clause, which provides that investments of a resident of any of the ALADI members will not be given a less favorable treatment than investments of a resident from any other non-member country. Due to the Treaty to Avoid Double Taxation between Argentina and Spain, in principle this tax does not apply when the shareholders of the Argentine company are residents of Spain; the application of the most favored nation clause would imply that the tax would not be applicable in the case of Brazilian shareholders. 

The Federal Tax Court resolved in favor of the application of the fine on the grounds that the taxpayer had finally paid the tax as the Federal Tax authority claimed and that therefore the lack of payment could not be justified under the so-called “error excusable” rule. This rule aims to justify the conduct of a taxpayer when it is based on a reasonable interpretation of the law, when the law is not clear and when there is no consistency in the case law or rulings.

Even though the Federal Tax Court had to rule only in relation to the applicability of the fine, the case allows for a preview of anticipating the position that Tribunal B of the Tax Court would adopt regarding the application of the tax itself. The Tax Court followed the guidelines of the General Attorney’s ruling No 170/2006, where it was stated that shares and other equity interest in Argentine companies held by residents of countries members of the ALADI are subject to this tax.

Notwithstanding the importance of this case, since the Dirección Nacional de Impuestos had previously ruled in its Memorandum No 1000/2002 in favor of the applicability of the most favored nation clause to tax matters, we strongly believe that the AFIP should not pursue the application of fines in cases like the one under analysis because of the application of the “error excusable” rule because of the existence of contradictory precedents.