Solidarity Contribution Does Not Apply to Irrevocable Trusts

The Solidarity Contribution—created through Law 27605 and published in the Official Gazette on December 18, 2020—was levied on Argentine residents for their assets in the country and abroad, and on non-residents for their assets in Argentina, both as of December 18, 2020.

Article 3 of the Law established that the tax assessment basis for residents in Argentina "must be calculated including contributions to trusts or private interest foundations and other similar structures, participation in companies or other entities of any kind without tax personality, and direct or indirect participation in companies or other entities of any kind, existing at the date of entry into force of this law."

In turn, article 2 of Decree 42/2021 established that “the subjects of article 3 of the law must declare as their own and include in the basis for determining the contribution the assets contributed to such structures, for a percentage equivalent to their participation in them (...)."

In the case “María Magdalena Williner”, on November 15, 2019, the taxpayer created an irrevocable and discretionary trust in The Bahamas and then, on December 12, 2019, contributed to the trust the shares of a company in The Bahamas. The beneficiaries of the trust were her descendants.

As a result of an audit, the Argentine Tax Authority (ARCA) included the assets the taxpayer contributed to an irrevocable trust before the entry into force of Law 27605 in the taxable base of the Solidarity Contribution.

The taxpayer accepted the tax assessment, paid the Solidarity Contribution under protest, and initiated a refund claim. In the appeal, she held that it was not appropriate to include the assets contributed to the trust because she had ceased to be the owner of the assets. She pointed out that the contract of the trust showed that the trustee had full discretionary powers over the capital and income, could freely dispose of them (among other acts), and that she did not control these powers.

The Argentine Tax Court analyzed the trust structure and pointed out that, in Opinion 9/2013, the Argentine Tax Authority made a theoretical analysis of the structure where the conditions for a trust to qualify as irrevocable were listed:
 

1. an effective divestment of the assets contributed, i.e., that they do not return to the settlor's estate,
2. the settlor does not have decision-making powers important enough to be interpreted as the effective owner of the trust assets or its indirect manager,
3. the settlor or beneficiaries do not act as protectors of the assets or interfere in their administration.

The Tax Court considered that the Tax Authority did not challenge these requirements, so it was not questioned whether it was an irrevocable trust. Therefore, the taxpayer did not own the assets contributed after its incorporation at the time of verifying the taxable event and should not be considered for determining of the taxable base of the Solidarity Contribution.

This ruling highlights that, although article 3 of the Law states that the taxable base is calculated including the contributions (among others) to trusts, not distinguishing between “revocable” trusts and “irrevocable” trusts, article 2 of the Decree clarifies that the assets contributed to the structures provided in article 3 of the Law must be included in the percentage equivalent to the participation of the taxpayer. Thus, it is clear that article 3 does not refer to an irrevocable trust since, by virtue of the nature of the structure and the situation of the case, the taxpayer does not participate.

The Court ruled that, since the settlor could not revoke the trust, and since the settlor had no decision-making powers over the management of the assets or their administration, the assets contributed ceased to be part of the taxpayer's estate, and therefore could not be taxed.

The Court concluded that the taxable event was not verified at the time the Solidarity Contribution came into effect, so it overturned the appealed resolution and granted the requested refund, plus the corresponding interests from the date the administrative claim was filed and at the average passive rate published monthly by the Argentine Central Bank. The Chamber also ruled that each party must bear its own court costs and fees.

This ruling is not final as of today, since the 30-working-day period for ARCA to file an appeal before the Court of Appeals in Federal Administrative Matters in the City of Buenos Aires has not elapsed.