Challenge of the VAT credit arising out of transactions not subject to the tax

On September 5, 2006 Tribunal A of the Federal Tax Court (Tribunal Fiscal de la Nación) ruled in the case “Valle Fértil S.A.” about the computation of VAT credit arising from the sale of a trademark.

Pursuant to the facts described in the ruling, the company Su Crédito S.A. and Valle Fértil S.A. entered into a bulk transfer agreement, where the first transferred clients, movable property, credit instruments and the trademark “Su Crédito”. The transaction was instrumented in four different agreements, one for each of the transferred items. Su Crédito S.A. issued four different invoices, each one indicating the applicable VAT. Valle Fértil S.A. computed the VAT credit of the four invoices.

The tax authority challenged Valle Fértil S.A.’s computation of the VAT tax credit related to the purchase of the trademark on the grounds that it was a transaction not subject to the tax.

Valle Fértil S.A. appealed arguing that it was not possible to treat the sale of the trademark independently from the other sales, which are subject to tax. It also argued that the tax authority had not challenged the fiscal debit computed by Su Crédito S.A. arising out of the same transaction.

The VAT law sets forth that the sale of industrial, intellectual or commercial property will only be subject to the tax if they take place together with other transactions subject to the tax.

The Federal Tax Court unanimously ruled in favor of the tax authority on the grounds that the sale of the trademark did not take place together with another transaction subject to tax. It highlighted that the agreement pursuant to which the trademark was transferred was independent from the other three and that the parties had agreed only to transfer the trademark and pay the purchase price; that is to say, no other transaction subject to tax was agreed.

The case is interesting because the tax treatment of intangible assets is usually a sensitive issue in bulk transfer transactions.