Argentine Tax Court Ruled that “Payment in Lieu of Notice” and “Proportional Vacations” are Excluded from Income Tax Payment

1. Background

The case law under analysis refers to facts which occurred prior to the amendments made to Section 79 of Income Tax Law, where certain amounts collected by administrators and executive charges derived from the termination of employment are taxed. Accordingly, the dismissal of the employee occurred prior to the entry into force of the amendment to the Income Tax Law, thus the interpretation of the judges refers to the legislation in force at that time. Such legislation did not differentiate between the income tax treatment applicable to employees who were administrators or executives and those who were not. Moreover, the taxpayer in question did not occupy any of such positions.

In the context of the dismissal without cause of Ms Mouratian (the “Complainant”) decided by Unilever Argentina S.A. (the “Company”), the Company withheld Income Tax on the items “Special Bonus”, “Gross Bonus” and “Additional Grossing up” (the last two items corresponding to the grossing up of the income derived from assumption of the payment of the tax by the Company), “Payment in Lieu of Notice” (plus the proportional 13^th salary), “Proportional Vacations” (plus the proportional 13^th salary), paid as a consequence of the termination.

The Complainant filed a refund request with the Argentine Tax Authority ( the “AFIP,” after its acronym in Spanish) challenging the withholding made by the Company, considering that all the items were originated in the termination of the employment and did not comply with the requirements of periodicity and permanence of source that Income Tax Law requires from the individual taxpayer.

The AFIP issued a ruling through which it only admitted the refund of the amounts corresponding to the item “Special Bonus”, taking into account the “Negri” precedent of the Argentine Supreme Court (the “CSJN” after its acronym in Spanish). As a result, the complainant appealed the decision with the Argentine Tax Court (the “Court”)

2.  The decision of the Argentine Tax Court

The Court, after analyzing the grounds of the ruling issued by the AFIP, decided to revoke such decision, ordering the refund of the withholdings made with regards to all the other items.

The Court considered that none of the items complied with the requirements of periodicity and permanence of source that Income Tax Law requires from the individual taxpayer. It also mentioned the “Negri” legal precedent and other leading cases of the CSJN such as “De Lorenzo, Amalia Beatriz c/ DGI” and “Cuevas, Luis Miguel c/AFIP – DGI”.

Regarding the “Gross Bonus” and “Additional Grossing Up”, the decision pointed out that they consist of a lump-sum payment, and in the context of the termination of the employment. This confirmed that the conditions required by the Income Tax Law were not met; thus, the withholdings were not applicable.

On the other hand, regarding the items “Payment in Lieu of Notice”, “Proportional vacations” and “proportional 13^th salary,” the Court mentioned that their purpose is to compensate the employee for termination. In addition, the Court restated that conditions required by Income Tax Law were not met with regards to these items too.

3. Conclusions

Notwithstanding the leading cases of the CSJN regarding the non-application of the Income Tax on the items originated in the termination of the employment, the taxability of some items, such as the “Payment in Lieu of Notice” is still under discussion.

Even when the one of the judges of the Court (Ms. Guzmán) had already decided in the same way in previous resolutions, “Cano Juan Carlos” dated February 18, 2019, the exclusion from the Income tax of the items analyzed here was not accepted unanimously. In fact, there are some contrary decisions of the Administrative Court of Appeals such as “De Freitas, Antonio Joaquín c. E.N. – A.F.I.P. – Periodo Fiscal 2011 y otro s/ D.G.I.”, CNACF, Sala IV, decision of March 8, 2016 and “Turconi, Horacio Antonio c. EN-AFIP-DGI”, CNACF, Sala V, decision of June 28 2017.

As a result of the above, a new ruling by the CSJN may be required to resolve this matter.