The Tax on Personal Assets is applicable to residents of countries who are members of the ALADI

Law No 25,585 (published on May 2002) established that the Argentine issuer company is liable for the Tax on Personal Assets levied on shares and other equity interest in such Argentine company held by individuals domiciled in Argentina or abroad, or any kind of entity domiciled abroad. The Argentine issuer company is entitled to seek recovery from the foreign individual or entity. The tax law sets an irrefutable presumption that shares and equity interest in Argentine corporations owned by any kind of foreign entity are owned by individuals domiciled abroad and are therefore, subject to this tax.

Argentina has entered into several conventions for the avoidance of double taxation with different countries. Some of them, such as the conventions entered into with Spain and Switzerland, provide that the assets of a person can only be levied in the country of residence of such person. Therefore, the Tax on Personal Assets cannot be levied on shares and other equity interest of Argentine companies held by residents of Spain and Switzerland. In other words, Argentine companies whose shareholders are residents of Spain or Switzerland must not pay the Tax on Personal Assets applicable to them.

Furthermore, in 1980, Argentina and other Latin-American countries, entered into the Treaty of Montevideo, which created the ALADI. Section 48 of this treaty contains the so-called “most-favored-nation” clause, by virtue of which persons from member countries of the ALADI cannot receive a less favorable treatment than the one given to persons from countries not members of the ALADI.

The application of this “most-favored-nation” clause to the Tax on Personal Assets generated a great number of inquiries and uncertainties. The Federal Taxation Office (“Dirección Nacional de Impuestos” – “FTO”) issued Memorandum N° 1000/2002 stating that provided the Tax on Personal Assets is not applicable to shares and other equity interest held by residents of Spain or Switzerland –countries not members of the ALADI- the tax could not be applicable to shares and other equity interest held by residents of countries members of the ALADI. Specifically, the FTO stated that the Tax on Personal Assets is not applicable to shares and other equity interest held by residents of Brazil or Uruguay.

The FTO added that said conclusion was not applicable when the shareholders were residents of countries members of the ALADI which had entered into specific international conventions with Argentina before the execution of the Treaty of Montevideo, and said conventions provided, specifically, a different treatment. This is the case of Bolivia and, as of the date of Ruling No 1000/2002, Chile, because under the conventions for the avoidance of double taxation entered into with said countries, Argentina could levy shares or other equity interest of Argentine companies when held by residents of said countries. This situation caused the convention with Chile to be provisionally amended in order to cause the residents of Chile to be treated equally as those from Spain and Switzerland.

The General Attorney recently issued two rulings analyzing this subject matter. In Ruling No 170/2006 the General Attorney made a general analysis of the “most favored nation” clause established in section 48 of the Treaty of Montevideo and its application to taxation, and in Ruling No 192/2006 analyzed the application of said clause to the specific case of a Brazilian company shareholder of an Argentine one.

In said rulings the General Attorney contradicts the previous rulings of the FTO, holding that shares and other equity interest in Argentine companies held by residents of countries members of the ALADI are subject to Tax on Personal Assets. The main argument of the General Attorney’s rulings was that the “most favored nation” clause is only applicable within the scope of the Treaty of Montevideo and that this treaty does not include tax matters, nor pursues the harmonization of internal taxes of its members; but that it was aimed to establish a common Latin-American market. In this sense it was remarked that the Treaty of Montevideo only contains tax issues related to custom duties applicable to the trade of goods and that tax issues were not considered in the regional agreements executed within its scope.

The General Attorney also understood that from the previous conventions entered into by Argentina, it could be understood that tax issues are excluded from the scope of the “most favored nation” contained in treaties to protect and promote investments, such as the Treaty of Montevideo.

Finally, the General Attorney referred to the amendment made to the Tax on Personal Assets law, which incorporated the provision pursuant to which the Argentine company must pay the tax. This amendment was aimed to levy shares held by holdings or trusts located abroad and in the relevant parliamentary hearings it was argued that one of the methods commonly used in order to avoid this tax was to set domicile in Uruguay, a member country of the ALADI.

These rulings of the General Attorney have a weak legal basis and create a great uncertainty to taxpayers, since up to now it was understood that, in accordance with the Rulings of the FTO, the Tax on Personal Assets was not applicable to shares and equity interest of Brazilian and Uruguayan residents. Furthermore, these rulings are also inconsistent with the amendments to the convention for the avoidance of double taxation entered with Chile, since the Argentine government had pointed out that such amendment was introduced in order to allow residents from Chile to enjoy the same tax treatment as the one granted to the rest of the members of the ALADI, such as Brazil and Uruguay.