Inter-company loans

On August 15 2007, Room “C” of the Federal Tax Court (“Tribunal Fiscal de la Nación”), ruled in re: “Compañía Ericsson S.A.C.I.”, case where the treatment for income tax purposes applicable to a loan granted to an Argentine company by a foreign related entity was at stake.

According to the statement of the facts, the Federal Tax Authority (“AFIP”) considered that such transaction had not been engaged in arm’s length conditions. Given the high level of indebtedness of the company and the amount of the loan, the AFIP mainly objected that the agreement had not been reflected in a written instrument, that it had not been approved by the borrower’s Board of Directors and that it had not been secured.

On the other hand, the taxpayer was able to establish that the terms of the deal were equivalent to an arm’s length transaction, not only proving the existence of the loan, but also offering evidence about other loans from different financial entities on similar conditions. Finally, the company highlighted that the loan at stake was paid off with another loan from the Citibank (i.e. an unrelated party to the borrower) also granted in similar conditions.

The Federal Tax Court resolved in favor of the taxpayer on the grounds that, because of their nature, agreements between related parties may require less formalities than those between non-related parties. Consequently, it understood that the transaction met the arm’s length standard.

Allowing certain flexibility to taxpayers, the Federal Tax Court followed OCDE[i] guidelines when stating that in cases involving transactions between related parties “the terms of a transaction may result from correspondence or communications between the parties, more than from a contract”.

In conclusion, the Federal Tax Court hereby provides a broader criterion in order to analyze the formalities to be followed by related parties when engaging in a transaction.