Personal Assets Tax / ALADI

On August 5, 2008, it was published in the Official Gazette the Memorandum No 5/2008 issued by the Federal Tax Authority (“AFIP”) (the “Memo”). In the Memo, the AFIP states that tax matters do not fall within the scope of the most favored nation clause (cláusula de la nación más favorecida) of the treaty of Montevideo of 1980 (the “Treaty”) which establishes the ALADI or Latin-American Integration Association.

Current members of the ALADI are: Argentina, Colombia, Paraguay, Bolivia, Cuba, Perú, Brasil, Ecuador, Uruguay, Chile, México and Venezuela.

The Memo has effects on the assessment of the personal assets tax (the “Tax”) for the shares or equity —issued by companies incorporated in Argentina— held by residents of any country member of the ALADI.

The Tax law provides that every individual domiciled in Argentina is subject to this Tax over his/her assets located in Argentina and abroad. Thus, the individuals are taxed on their assets on a yearly basis, every December 31. Individuals domiciled outside Argentina are only taxed over their assets located in Argentina.

Shares and other securities are deemed to be located in Argentina if they have been issued by a company domiciled in Argentina. The applicable Tax on shares and other equity participations in Argentine companies is paid by such local company itself. The applicable rate is 0.5% on the net worth value of the company.

Furthermore, the law contains an irrefutable assumption that those shares or securities issued by a company domiciled in Argentina, but belonging to companies or entities domiciled abroad, belong to individuals domiciled abroad. For example, if a non-resident holds shares issued by an Argentine corporation, this assumption will apply and the Argentine corporation must pay the Tax equal to 0.5% over the proportional equity value of those shares.

If a treaty to avoid double taxation applies, this amount may be reduced even to zero. The Tax law should be construed under the international treaties and may not abrogate them (Section 75:22 of the Federal Constitution).

Argentina is a party to several treaties to avoid double taxation and some of them, as the ones in force with Spain and Switzerland, provide that a person’s estate may only be taxed by their country of residence. Therefore, the Argentine companies do not have to pay this Tax if the holders of their shares or equity are residents in any of these countries. 

Section 48 of the Treaty provides that investments from any member states of the ALADI will be afforded a not less favorable treatment than investments from any other non member state (most favored nation clause).

Construing this clause, the Federal Tax Agency (Dirección Nacional de Impuestos) (Memorandum No. 10/2002) had pointed out that shares or equity held by Brazilian or Uruguayan residents must not be taxed.

Different agencies of the public administration held different opinions. This situation gave rise to an amendment to the Convention to avoid double taxation entered with Chile, which currently provides a similar provision to the convention with Spain.

In view of those dissimilar opinions on the matter, the AFIP issued the Memo aiming to conform its criteria that the Tax should apply on the shares and other equity participations held by corporations or individuals residents of a country member of the ALADI.

The Memo provides that the criteria set forth therein should apply as of the tax period ended on December 31, 2002 (date when the regime introduced by the section added after the section 25 of the Tax Law, modified by Law No 25,585, became applicable).

Without doubt, the AFIP’s position is arguable and it is likely to raise interesting case law.