Income Tax and Deduction of Indebtness Expenses

In April 2012, the Federal Tax Court issued a ruling in the "Hoteles Argentinos S.A." case, where the tax authorities argued that certain interests derived from a loan granted to a corporation by two other companies -shareholders of the first one- should not be considered deductible from Income Tax.

The tax authority’s arguments –based on the idea that the expenses were not linked to taxable incomes since they were associated with a refund to the shareholders– were rejected by the National Tax Court which considered that:

a) A correct interpretation of the Income Tax Law and its corresponding Decree necessarily leads to the fact that deductibility principles vary according to the taxpayer’s characteristics. Regarding individuals, there is a common criterion of deductibility based on the principle according to which every single liability finances every single asset, a standard that does not apply to commercial societies. Regarding these cases, the Federal Tax Court stated that "loans do not finance an entity’s specific activity, but are aimed at financing its entire spectrum of activities; in other words, all of the liabilities finance all of the assets related to the company’s activities.

b) This deduction principle derives from the recognized fungible nature of money.

c) Notwithstanding, in this particular case, the loan was destined to refinance pre-existing debts which were cancelled with the loan. Such pre-existing debts derived from the financing of the remodeling of the company’s facilities. This leads to the fact that, ultimately, the deduction of the expenses questioned by the tax authorities "do not respond to liabilities related with the refund to the shareholders but, instead, respond to the payment of liabilities which, in turn, had been incurred to cancel a previous debt destined to finance the remodeling of the company’s facilities and not the acquisition of shares."