Disposition of funds in favor of third parties. A new ruling of the Argentine Tax Court

Section 73 of the Income Tax Law sets forth an irrefutable assumption 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”. Pursuant to this section 73, the presumed taxable income will be equal to the interest rate set forth by 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.Furthermore, Section 103 of the Income Tax Law’s regulatory decree sets forth the application of this assumption in cases that, even though an interest rate has been agreed, it is lower than the one set forth in Section 73 of the law by 20% or more.

In this particular case, Kasdorf, a company involved in the dairy industry, had entered into several loans with Milkaut, another company involved in the dairy industry with its industrial facilities located in the province of Santa Fe. The loans had been granted in U.S. Dollars during the years 1996, 1997 and 1999 at annual interest rates of 7.95% and 8.25% and the proceeds thereof had been used by Milkaut to improve its facilities in order to be able to comply with the obligations assumed with Kasdorf in different supply agreements.

The Argentine Tax Authority (Administración Federal de Ingresos Públicos – AFIP) assessed an income tax liability on Kasdorf on the grounds that the loans had not been granted “in the interest of the company” and that the interest rates agreed in said loans were lower than the ones set forth in the law. Therefore, it concluded that the loans constituted a disposition of funds in favor of a third party: Milkaut.

The Argentine Tax Court had to determine if the loans had been granted “in the interest of Kasdorf” and if the interest rates fell within the parameters set forth in the law.

Regarding the first issue, the Tax Court concluded that the loans had indeed been granted “in the interest of the company”, on the grounds that the same had made it possible for Milkaut to improve its facilities in order to increase the quantity and quality of its production, mainly to be able to supply Kasdorf.

Regarding the second issue, the Tax Court decided that the interest rates were consistent with the market practices at the time in which they had been granted, based on the information provided by the Argentine Central Bank (Banco Central de la República Argentina) and also considering that due to the agreements entered by Kasdorf and Milkaut, any default under the loans was unlikely.

The Tax Court hereby provides a quite broad interpretation of the concept “in the interest of the company” in order to apply the assumption of taxable income set forth in Section 73 of the Income Tax Law.

It should be noted that as of the date of this publication, this ruling has not been appealed by the tax authority.