New interpretation of the criteria of Argentine source for Income Tax

Room C of the National Tax Court ruled in re: "Hidroeléctrica El Chocón S.A." ("HECSA") in which the source of the income obtained by two foreign companies was discussed, that helped to obtain external financing in favor of HECSA and simultaneously acted as guarantors in a loan to HECSA.

Income Tax Law establishes that Argentine source income obtained by non-resident individuals and corporations is taxed through a withholding regime pursuant to which, the payer must deposit the amount withheld with the Tax authority.

According to the statement of the facts, HECSA paid different kinds of commissions to two foreign companies without making the relevant withholdings, on the understanding that they were not Argentine-source income. On the other hand, the Tax Authority (Administración Federal de Ingresos Públicos – “AFIP”) claimed that the withholding was applicable and assessed a deficiency notice to HECSA, who appealed.

The National Tax Court first analyzed the aspects related to the negotiations fulfilled by the foreign companies abroad to obtain the loan for HECSA. The Court denied that the service had the character of technical advice as was claimed by the AFIP since there was no transference of knowledge in favor of HECSA. To decide in favor of HECSA the Tax Court supported that this commission was paid for activities developed entirely abroad that did not generate Argentine source income. Furthermore, it recalled that the AFIP itself had ruled likewise in Ruling (DAT) N° 46/99.

Finally the Court analyzed if the commissions paid to the foreign companies for acting as guarantors were Argentine source income. In this case the Court confirmed the position of the AFIP arguing that the guarantees were incidental to loans placed in Argentina, whose interest generated Argentine source income; therefore, the commissions for the guarantees also had to be deemed of Argentine source. Additionally, the Court understood that the guarantees were acting in this particular case as an "insurance" to cover a risk located in Argentina.

The case is significant because the position of the AFIP - confirmed by the National Tax Court-, that considers the commissions for guarantees levied by Income Tax, reverses previous opinions of the AFIP which considered foreign source income the commissions for collaterals, guarantees or other services given by foreign entities.

HECSA appealed the ruling before the National Court of Appeals.