Argentina: Case law against wealth tax on branches

Andrés Edelstein		Ignacio Rodríguez

Ever since the amendment of the Argentine wealth tax law in 2002, foreign investors doing business in Argentina through local companies are subject to wealth tax on their holdings as of December 31 of each year. This is based on the legal assumption without admitting proof to the contrary that the shares and/or participation in the capital of local companies whose owners are companies or other legal entities situated abroad belong indirectly to individuals or undivided estates located abroad.

The rule provides that the tax on the shares or participation in the capital of local companies owned by individuals or undivided estates domiciled in Argentina or abroad, and/or companies and/or any other type of legal person domiciled abroad is assessed and paid directly by the local issuing companies as a full and final payment (the issuing company will have the right to recover from the shareholders the tax paid).

The applicable rate is 0.5% on the value determined according to the book equity method arising from the last financial statements at December 31 of the year being settled.

Application of the tax on a branch of a foreign entity

A great deal of controversy had arisen as regards the application of the tax on branches of foreign companies. The issue was basically raised by the wording of the regulations governing this tax, which seem to exceed what is actually ruled by the law by providing that branches must also assess and pay the wealth tax although there are no shares and/or participations in any capital amount.

It was not until December 2004 that the attorney general interpreted in a case that a local branch of a foreign entity was not subject to the wealth tax. Although the specific case analysed by the attorney involved a branch of a foreign entity wholly-owned by a foreign government, by that time it seemed that the conclusion could apply to any other branch. However, later in November 2005 the attorney general, with no clear arguments, rectified his position by proclaiming in a new resolution that the one issued almost a year ago had been exclusively based on the fact that the foreign entity was held by the state of a foreign country, which made it impossible to presume the existence of a foreign individual owning the assets of the domestic branch pursuant to the law. This new statement led to an inference that the wealth tax should then apply to branches under any other different circumstances.

The issue remained open and, in general, branches have been taking a conservative approach of paying the tax to avoid any challenge from the tax authorities that, although relying on not-that-solid grounds, had shown their position about this matter.

In the case The Bank of Tokyo – Mitsubishi UFJ Ltd brought for the application of the wealth tax on its Argentine branch, the Federal Chamber of Appeals had ratified in November 2011 the tax refund requested by the taxpayer and initially denied by the tax authorities on the understanding that the legal rule and thus the tax are not applicable to that case considering the lack of any assessable shares and equity interests. This conclusion was reached after sustaining that the foreign company (head office) does not hold any interests in the branch's equity because it is the same legal person.

This decision constituted the first judicial precedent on this matter. Now, this position has been agreed by the Supreme Court of Justice (on December 16 2014), putting an end to such a long-standing controversy. As a result, multinational companies doing business in Argentina through branches may then consider or evaluate the possibility of requesting the refund of the wealth tax paid by their Argentine branches for the periods not barred by the statute of limitations – five years.

Andrés Edelstein (andres.m.edelstein@ar.pwc.com) and Ignacio Rodríguez (ignacio.e.rodriguez@ar.pwc.com)
PwC
Tel: +54 11 4850 4651
Website: www.pwc.com/ar

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