New Tax Court Precedent on the Concept of Permanent Establishment

A non-resident for tax purposes would be required to pay income tax as a resident both for its Argentine and foreign source of income, if it is deemed to have a permanent establishment in Argentina , among other consequences. The tax basis will always be determined in the proportion that the income obtained from the permanent establishment bears to the assets, functions and risks. Thus the existence of a permanent establishment is an exception to the rule according to which non-residents for tax purposes are only taxed on their Argentine source of income.

The ruling was issued by Division B of the National Tax Court on May 20, 2022, in the case styled “Solvay Indupa S.A.I.C. s/appeal of Income Tax.”

In this case, the Argentine Tax Authority (“AFIP” by its acronym in Spanish) had considered that the non-resident company Solvay S.A. (the “Foreign Company”) had a permanent establishment in the country under the terms of the Agreement to avoid Double Taxation and Prevent Tax Evasion in Matters of Income and Capital Taxes signed between our country and the Kingdom of Belgium (the “Agreement”).

The AFIP considered that income tax withholdings on payments made by a related local company (Solvay Indupa S.A.I.C.; the “Local Company”) to the Foreign Company as consideration for certain services performed under contracts related to the remodeling of an industrial plant in Bahía Blanca, province of Buenos Aires, should have been made by applying the regime set forth for Argentine residents (since the Foreign Company had a permanent establishment in Argentina) and not by the one applying to non-residents provided for by the Income Tax Law and the Agreement. The application of the regime intended by the AFIP, in its opinion, would have generated a higher withholding, so it made for the debt determination for the differences and the interest.

To support its position, AFIP considered two kinds of activities carried out by the Foreign Company:

• The execution of a construction in the country, in respect of which the Foreign Company assisted the Local Company in certain aspects to expand its industrial facilities, during which time the personnel of the Foreign Company was available to the Local Company.
   
• The technical assistance provided to the Local Company.
   

The Local Company based its appeal on the fact that a permanent establishment had not been set up under the Agreement, since:

• The construction was carried out by a third company located in the country and not by the Foreign Company, which only had provided the knowhow and supervision.
   
• The services were provided mainly from abroad and their employees had had a brief permanence in the country.
   

The Tax Court decided to revoke the debt determination made by the AFIP, pointing out the following fundamental arguments:

• That it was proven that the construction in the industrial facilities of the Local Company had been carried out by a local company through subcontracting (i.e., they were not carried out by the Foreign Company).
   
• Regarding the advisory services, it was demonstrated that the personnel of the Foreign Company had stayed in the country, considered individually, for an average of 57 days per year in the facilities of the Local Company. Such average per year in a period of twelve months does not constitute a permanent establishment, according to the definition of the Agreement, which provides that in the case of the rendering of services, it must exceed six months in any twelvemonth period.
   

Although the ruling can be appealed by AFIP, it is a precedent to be taken into account, since it validates the position of the Local Company regarding the absence of a permanent establishment.

On the other hand, although the Tax Court did not rule on all the points proposed by the parties, the ruling also raises interesting aspects to be considered with respect to issues such as: the extension of liability in the case of the existence of a permanent establishment, the computation of the terms, the scope of the certificate of residence filed by the non-resident for the purpose of the application of the rates of the Agreement, the effects of the registration of the agreements before the National Institute of Industrial Property, the constitutional hierarchy between the Income Tax Law and the agreement for the avoidance of double taxation, and the interpretative value of the OECD and UN model Agreements, among others.