Disposition of funds between third parties

On March 21, 2006 Tribunal IV of the Federal Court of Appeals in Contentious and Administrative Matters decided on the case “Fiat Concord S.A.”, related to the application of the figure of the "disposition of funds in favor of third parties" (disposición de fondos a favor de terceros), contained in Section 73 of the Income Tax Law, to certain transactions between related parties.

The above mentioned section of the law sets forth an irrefutable presumption of taxable income for corporations when they dispose of their goods or funds in favor of third parties, provided said transactions are not carried out “in the interest of the company”. The presumed gain is equal to the interest rate set forth by the Banco de la Nación Argentina for commercial discounts (descuentos comerciales) or to the variation of the inflationary index (índice de precios al por mayor, nivel general), plus an 8% annual interest. Pursuant to the Income Tax Law’s regulatory decree, this presumption applies in cases where, even though an interest rate had been agreed, it is lower than the one set forth in Section 73 of the law by 20% or more.

According to the relevant facts described in the decision under analysis and in the one of the Federal Tax Court (Tribunal Fiscal de la Nación), Fiat Concord S.A. had disposed funds in favor of its majority shareholder, Fiat Argentina S.A., who owned 99.99% of its equity. It is also mentioned that Fiat Concord S.A.’s main activity was to administrate the entity in charge of the social services of the group and to perform financial transactions and investments in real estate and movable properties. Fiat Concord S.A. rendered other services in favor of Fiat Argentina S.A., for which it was paid.

On October 16, 2002, in the first instance, Tribunal “D” of the Federal Tax Court had ruled that the figure of the disposition of funds in favor of third parties was not applicable to the case, because Fiat Argentina S.A. was not a “third party” to Fiat Concord S.A., because the first was the major shareholder of the latter and because the disposition was made in the interest of the group they belong to.

This decision was appealed by the Federal Tax Authority (Administración Federal de Ingresos Públicos – AFIP), and the Federal Court of Appeals revoked.

The Court of Appeals based its decision on the fact that Fiat Concord S.A. had not proved that the disposition of funds brought a benefit to itself or that such loans where necessary for its activity. Moreover, the Court outlined that Fiat Concord S.A. limited its defense to prove its relationship with Fiat Argentina S.A., but it did not argue and/or prove in any of the stages of the process, any benefit for Fiat Concord S.A. out of the transaction. It is important to mention that the Court distinguished the group’s interest from that of Fiat Concord S.A. stating that the fact that the companies are related does not imply per se that what benefits of one also benefits the other.

The Court highlighted that in other transactions Fiat Concord S.A. and Fiat Argentina S.A. acted as if they were not related and therefore accepted that it was correct to treat them as if they were "third parties". The Court also remarked that the position of Fiat Concord S.A. and Fiat Argentina S.A. to act as independent third parties for certain transactions, and as if they were one for others contradicted the estoppel doctrine (doctrina de los actos propios).

Pursuant to this case law, the requirements for not applying the interest presumption to cases of disposition of funds between related companies, would be to prove that the parties are related, as set by previous case law, and that the company disposing of the funds in favor of a related party also benefited from it, in addition to the benefit that could be generated at a group level. The disposition should be analyzed taking into account other transactions entered into by the parties, that is to say, how they had acted in the past.