Income Tax, Financial Trusts and the Public Offering requirement

In Ruling No 72/2006, the Federal Tax Authority (Administración Federal de Ingresos Públicos, “AFIP”) analyzed the scope of the public offering requirement for a financial trust to be granted the benefits set forth in the income tax law. In principle, financial trusts are not subject to income tax because they are allowed to deduct the distributions they make to the investors as an expense. In order to take advantage of this benefit, some requirements must be met. One of these requirements is that the debt securities or certificates are placed through a public offering.

The case under analysis consisted of a financial trust securitizing a credit portfolio. Pursuant to the facts described in the ruling, the offering memorandum provided that:

(i)           the debt securities and the certificates of participation had to be offered in a public offering, and

(ii)           if the offers did not reach a certain price threshold all the certificates of participation had to be assigned to the grantor in repayment of the assignment of the portfolio; and this is what finally occurred.

In a first analysis, the AFIP concluded that there had been efforts to carry out a public offering. In this sense, it highlighted the distribution of offering memorandums, the performance of road shows and the advertisements in well known newspapers.

In a second analysis, it concluded that, notwithstanding the above mentioned efforts, the public offering was not concluded. Since the offers of the investors had not reached the threshold and consequently all the certificates had been finally assigned to the grantor, the AFIP concluded that the public offering procedure had not been completed. In other words, the public offering procedure failed because not even one single third party investor acquired certificates of participation.

As a consequence thereof, the AFIP concluded that the public offering requirement necessary to take advantage of the tax benefits had not been complied with.