Tax-free reorganizations

Since the enactment of Law No 25,063 (Official Gazette 12/30/98), in the case of tax-free reorganizations, the transfer of accumulated tax losses not barred by the statute of limitations and benefits arising from fiscal promotion regimes to the continuing entity or entities is subject to certain requirements. This law requires the owners of the predecessor entity or entities to maintain during two years prior to the date of the reorganization, or from its setting up if that term is shorter, at least 80% of their participation in the capital of those entities, except if their stock is listed.

The Tax Authority through Ruling No 9/2003 (issued by the Technical Advisory Board) stated that the referred 80% requirement must be fulfilled stringently. A taxpayer had asked about the possibility of transferring losses or promotional benefits in a case where the indirect participation in the capital of the predecessor entities during the two years prior to the date of reorganization was 76.25%.

The Ruling mentions the existence of certain “discussions on the matter in judicial decisions that involve different ways of understanding the rules”. In this sense there is a precedent in 1965 when the Federal Court of Appeals in Administrative Matters held that an economic group existed (which broadly also requires the existence of an 80% of common ownership of the capital of two entities), although in that case there was only a 76.9% of common ownership of the capital of the entities (see “Ponieman Hnos. S.A.C.I.C.A.”, 9/6/65). But the conclusion of the court in the sense that an economic group existed derived from the analysis of other circumstances, and indicated that the requirement is only a presumption to determine the existence of an economic group, and that such presumption did not preclude the analysis of other circumstances.

Based on that case law it had been held that the 80% requirement is not a stringent requirement, and that it must be analyzed case by case. From that point of view, the 80% requirement necessary to transfer tax losses and promotional benefits could also be understood as a “flexible” requirement. But the ruling that we comment is conclusive and states clearly that “the merit or convenience of the limit (...) established was properly evaluated by the Legislative Branch (...), therefore, to accept a flexibility of the requirement would mean to ignore the legislative order, since no rule authorizes such a position”.