An Argentine Branch of a Foreign Company Does Not Have to Pay Personal Assets Tax

Room II of the Federal Court of Appeals on Contentious and Administrative Matters had the opportunity to decide whether Argentine branches of foreign entities must act as substitute obligors in the payment of the Personal Assets Tax (the “Tax”).

It is important to remember that, pursuant to the Personal Assets Tax Law, the Tax on shares and other equity interest in companies governed by Corporations Law No. 19,550 that belong to individuals or companies domiciled abroad must be paid by the local company. Thus an effective collection mechanism is established and the Argentine company has the possibility of claiming a refund from the foreign company.

Also, the decree that regulates the Personal Assets Tax Law states that foreign companies’ permanent establishments in Argentina are affected by that disposition, i.e. the regulatory decree includes Argentine branches of foreign companies among the entities obliged to act as substitute obligors.

In a refund proceeding initiated by the Argentine branch of The Bank of Tokyo – Mitsubishi UFJ Ltd., the Federal Tax Authorities (“Administración Federal de Ingresos Públicos” or “AFIP”) considered that branches are imposed with the obligation to act as substitute obligors in the payment of the Tax, understanding that the refund of the Tax of fiscal periods 2003 and 2004 should be rejected.

On November 22, 2011 Room II of the Federal Court of Appeals on Contentious and Administrative Matters confirmed the decision of the lower judge that had rejected the AFIP’s position and decided that the branch should not act as substitute obligor of the foreign company for the payment of the Tax. Relevance was given to the fact that in the case of a branch there are no shares that can be subject to the Tax because branches do not have legal status or equity of their own, notwithstanding they must prepare separate financial statements from their parent company.

The Court pointed out that substitute obligors of the Tax must be separate persons from the substituted, which does not occur with branches that have no equity of their own and therefore could not obtain the refund foreseen by law. The Court understood that this interpretation concurrs with the legal dispositions in force, and the principles of legality and reasonability. Thus, it concluded that the Tax paid by the branch should be refunded by the AFIP.