An opinion from the fiscal authority about the possibility of deducting interest

In Opinion (DAT) Nº 62/03 the fiscal authority determined the non-deductibility of financial interests from loans obtained by a taxpayer, in order to acquire shares from another company. The company in question was an Argentine company which used a “bridge loan” and a “bank lending agreement” to acquire the shares of another Argentine company. Once the shares had been purchased, the taxpayer cancelled the aforementioned indebtedness by issuing corporate notes, i.e., by a different type of loan. Then, through a tax-free merger process, the first company absorbed the company whose shares it had acquired.

The opinion pointed out that as a general rule, expenses are deductible when “they are inherent to the business activity and closely entailed to obtaining the profit which is a matter of determination”. On the other hand, it is mentioned that the “activity’s maintenance” requires a tax-free merger. Moreover, it underlines that even if it could not be determined by the records which activities belong to the absorbing and absorbed company, in case of “those activities deferring –if for example first company were the investor and the second the operative or commercial one– the fusion in question would not have come under the benefits available for reorganizations”.

In an earlier opinion, the fiscal authority had pointed out that “if an investment company indebts itself to acquire the shares of a company that it is subsequently is going to absorb, said debt has no relation to the prosecutor (operative) company’s activity; therefore, admitting its deductibility would imply a lack of respect to the dispositions of Article 80 of the Tax Law, since the expenses in question are not sufficiently connected with the source producing the benefits which this legal disposition requires such disbursements to be admitted”.

The opinion also expresses that “there is an intentional settlement of a passive meant to finance of the purchase of shares from which the absorbing company would obtain dividends from the absorbed company, because such passive was not necessary to finance the assets of the latter’s income generating source”. Hence, the opinion concludes that “interests subsequent to the merger are not deductible when determining income tax”.

Even when the Tax Authorities grounds are not clear, some definitions may be drawn. On the one hand, the following tax criterion appears to be confirmed, according to which the requirement of “activity maintenance” in tax-free mergers is not fulfilled when the absorbing entity performs an investment activity (for instance, to be entitled to other companies’ shares), and the absorbed, subsidiary of the first one, performs an operative activity. That criterion had already been underlined by the entity in charge of Legal and Technical Taxation in Opinion No 15/01. On the other hand, it seems that the principal argument the refutation of the deduction sentence was the lack of “necessity” of the expense, for the reason that the concept of interests would not be a “necessary” expense for the activity of the absorbed company, but to the absorbing that, after the merger, would only continue the absorbed company’s activity. This criterion that does not seem to follow the features of the current case-law on the subject.