Disbursement of Funds in Favor of Third Parties: Limits

In the case "NORDELTA SA (TF 26811-I) C/DIRECCIÓN GENERAL IMPOSITIVA S/RECURSO DIRECTO DE ORGANISMO EXTERNO," Chamber IV of The Court of Appeals in Federal Administrative Matters affirmed the Tax Court ruling. The Court had held that the characterization of a disposition of funds in favor of third parties—which gives rise to the presumption of deemed interest under article 73 of the Income Tax Law (currently, article 76)—did not apply, as it had been duly demonstrated that the challenged advances were not made in favor of third parties but rather in furtherance of the company’s own interest.
 

To apply the presumption analyzed in this case, the following requirements must be met:

• there must be a disbursement of funds in favor of third parties,
• it must be made by one of the taxpayers described in article 49 (a) of the Income Tax Law (currently, article 53),
• it must not be related to transactions carried out in the company’s own interest.

Nordelta SA is a company that, since its foundation, has carried out the activities necessary for the development of the Nordelta project. To do so, on September 17, 1998, it incorporated Nordelta Administradora Fiduciaria SA, to manage trusts, carry out works and constructions, and perform other activities associated with construction and the real estate business. Nordelta SA held 99.98% of the share capital of the trustee company.

The Nordelta–Niella Trust was structured as follows:

• the taxpayer acted as settlor–beneficiary together with an individual (Mr. Niella),
• Nordelta Administradora Fiduciaria SA acted as trustee.

The purpose of the trust was to develop—on the land contributed by Nordelta SA—a real estate project aimed at the sale of plots and, eventually, the construction of housing units and sports facilities, within the scope of the master plan approved by the Province of Buenos Aires and the Municipality of Tigre.

During the audit, the Argentine Tax Authority (ARCA) identified that Nordelta SA had recorded—under the account “Companies – article 33 of Law 19550” within “Other Receivables” of Current Assets in the financial statements as of December 31, 1999—amounts receivable from Nordelta Administradora Fiduciaria SA, a company within the same economic group.

In ARCA’s view, such receivables accrued deemed interest under the “disbursement of funds in favor of third parties” provision. The taxpayer included those receivables in its income tax return as a positive adjustment to the accounting result for the fiscal year.

The expert report stated that the taxpayer owned 99.983% of Nordelta Administradora Fiduciaria SA, and that the amounts transferred by the taxpayer to the trustee company were used in 1999 to make contributions to the Nordelta–Niella Trust.

In the analysis of the Nordelta Administradora Fiduciaria SA’s accounts, the experts detailed the destination of the funds for each item, concluding that:

1. debits corresponded to payments for works, professional fees, tax withholdings, and other expenses related to the Nordelta–Niella Trust,
2. credits corresponded to the offsetting of contributions and reclassifications.

The documentation submitted by the experts showed that the funds delivered to the trustee company were allocated to the trust and that the amounts contributed to such company matched the Trust’s Statement of Financial Position as of December 31, 1999.

The expert evidence demonstrated that the funds in respect of which ARCA sought to apply deemed interest had been transferred to the trustee company so that, on behalf of the taxpayer, it could make the corresponding contributions to the trust to carry out the works required to develop the “Ciudad Pueblo Nordelta” real estate project.

The Court of Appeals held that, in addition to the economic relationship, it was proven that the challenged receivables were connected to the taxpayer business activity and generated a benefit for such company (cf., among others, Chamber IV in “Dragados y Obras Portuarias c/DGI,” ruling issued June 5, 2008). Accordingly, the Court rejected ARCA’s appeal and upheld the first instance decision.

This ruling is, however, not final: ARCA filed a Federal Extraordinary Appeal before the Argentine Supreme Court of Justice, which has yet to be resolved.