Technology transfer agreements: restrictions to royalty deductions

In a recent case law sentenced by the National Tax Court (“Deca Piazza S.A. on appeal - Income Tax Law, 09/06/02), the tribunal had the chance to consider the restrictions applicable to tax deductions of royalty payments made to entities domiciled abroad, in accordance with contracts subject to the Technology Transfer Law (Law No. 22,426). The precedent might be considered a leading case as the ruling sets forth a new doctrine never heard before.

The case was solved by Chamber B of the referred Court upon Deca Piazza S.A.’s appeal to a tax assessment made by the Argentine IRS (Dirección General Impositiva). During the tax assessment procedure, the Argentine IRS challenged the deductions made by Deca Piazza S.A. in its tax return, due to certain royalties paid to a foreign company for transferring technology. Tax authorities did not challenge the deductions themselves but their amount, which exceeded the amounts stated by licensee when filing the contract with the National Institute of Industrial Property (“NIIP” - Instituto Nacional de la Propiedad Industrial).

The discussion of the case in question requires that we analyze the way we should interpret Section 8 of Law No. 22,426, which contains a list of requisites and information that licensee must include in the affidavit to be submitted when registering the contract with the NIIP.

Section 8 of Law No. 22,426 provides: “Together with the acts to be submitted to the relevant authorities, the parties must file a sworn statement whereby they shall declare the following: name and domicile of the parties, participating interest of licensor in licensee’s equity, description of the technology and trademarks licensed or assigned by the referred acts, number of licensee’s employees and an estimate of the royalty amounts to be paid. The lack of filing of this information will trigger the provisions set forth in Section 9.”

As to the relevance for this case, Section 9 of the Law No. 22,426 provides that the lack of inscription of technology transfer agreements does not affect enforceability though it impedes royalty deductions by licensee when determining taxable income as provided in the Income Tax Law.

As Argentine IRS intended to challenge the deductions (as a production cost) of the royalties paid in excess to those estimated by licensee when registering the technology transfer agreement with the NIIP, Deca Piazza filed an appeal alleging that:

(a) The registration of technology transfer agreements with the NIIP is exclusively for information purposes. Therefore, there is no need to count on the prior approval of relevant authorities to deduct the royalties paid in accordance with registered contracts; and

(b) The amounts of royalties to be paid as stated in the inscription request are simply an estimate.

Chamber B of the National Tax Court rejected Deca Piazza’s arguments and agreed to the interpretation proposed by tax authorities, sustaining that: “... the non-compliance with the actualization of payments to be made as per the transferring of technology, implies a situation substantially similar to the lack of registration of the corresponding contract regardless the unaltered subsistence of the other data informed”. Consequently, by applying Section 9 of Law No. 22,426, the Court considered the deduction (for tax purposes) of the royalty payments, made in excess to the amount that Deca Piazza S.A. (licensee) has originally estimated, inadmissible.

It seems that the Court has concluded on the existence of a presumed obligation of “bringing up to date” the information concerning the amounts of royalties to be paid, which must be originally filed as an estimate. This is surprising since this “obligation” is neither provided in the wording of the law (Law No. 22,426) nor in its regulatory decree (Decree No. 580/81).

In light of this, and regardless of whether we share the criterion expressed by Chamber B of the National Tax Court or not, licensees of agreements ruled by Law No. 22,426 should analyze the convenience of making any filings to update the amounts originally estimated for royalty payments.