Decision on the applicability of the exemption provided by the Income Tax Law on severance payments

Ediciones B SA acquired all the outstanding shares of an economic group. At the same time, Ediciones B SA entered into an employment contract with Mr. Blanco who was a Director of one of the acquired companies. The agreement provided that Ediciones B was going to honor Mr. Blanco’s years of service in the acquired company. Two years later, Ediciones B SA dismissed Mr. Blanco without cause. 

The Argentine Tax Authority (AFIP) challenged the applicability of the exemption provided by section 20 i) of the Income Tax Law (ITL) to some of the years of Mr. Blanco’s service. The AFIP argued that the exempted amount was limited to the limits provided by section 245 of the Employment Law.

The Argentine Tax Court held that the exemption provided by Section 20 i) of the ITL applied to the whole severance payment including those years Mr. Blanco worked for the economic group acquired by Ediciones B SA, i.e. 20 years. The Tax Court quoted the ruling in re “Vizzoti” in which the Supreme Court decided that the amount of severance payment in excess of the Employment Law limits was under the scope of the exemption. 

The Court of Appeal affirmed the Tax Court decision. The judge pondered the contractual autonomy of the parties, who agreed to honor the years previously worked by Mr. Blanco in the economic group, and repeated the reasons stated by the Tax Court affirming that the upper limits provided are for the employee’s benefit and there were no limits dividing the tax treatment of severance payments.

The Court of Appeal’s decision was appealed by the AFIP and taken to the Argentine Supreme Court.