Professional entities... third or fourth category of income?

On August 25th, the Federal Court of Appeals rejected the appeal filed by the Tax Authority in re “Pistrelli Diaz y Asociados c/ EN – AFIP DGI – RESOL 208/06 s/ Dirección General Impositiva”.

The Court of Appeals affirmed the decision held by the Federal Tax Court according to which the profits of the taxpayer, a professional civil entity, are included in the fourth and not in the third category.

The main difference between the two categories lies in the method of allocating income and expenses. In the case of the fourth category, they shall be allocated by the cash method and, in the third one, by the accrual one.

The Court of Appeals stated that only the income derived from a “commercial exploitation” must be framed in the third category, distinguishing the concept of “enterprise”.

The Court of Appeals held that the firm was developing a civil activity (and not a commercial one), despite the profit purpose. 

To conclude so, the Court of Appeals highlighted that the Commercial Code specifically defines the concept of “commercial acts” without including the exercise of liberal professional activities.