Argentina: Court characterizes intercompany loan as capital contribution

Argentina: Intercompany loan as capital contribution

A recently published decision of the Argentine tax court (Tribunal Fiscal de la Nación) concerns a challenge from the tax authorities (AFIP) of the terms and conditions—as well as the economic substance—of an intercompany loan between an Argentine taxpayer and a foreign related party.

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The court's decision (issued in late October 2016, but only recently made publicly available) was in favor of the tax authorities, but reflects a "split decision" of the court (that is, two judges held for the AFIP, whereas one judge supported the taxpayer's position). 

Summary

The tax authorities asserted that the loan at issue represented “funds integrated as capital contributions.” The taxpayer took a contrary view, claiming that there were several elements of the loan that reflected a valid lender-borrower relationship such as:

  • The principal was finally reimbursed.
  • There were capital injections previous to the time when the taxpayer received the loan, and this was appropriate considering long-term businesses involved (real estate developments).
  • There was no evidenced intention that the taxpayer would benefit from the loan, such as using the foreign exchange deductions related to the foreign currency-denominated loan; rather, this was merely a consequence of the lack of an “inflation correction” in the tax base calculation.

In rejecting these claims, the court majority found that the debt-generated tax deductions (e.g., interest as well as foreign exchange losses) were not aligned with the arm’s length principles, and on considering the economic relationship between the parties and the “permanence of the funds,” the transfer would more appropriately be treated as a capital contribution.   

The court minority, however, disagreed and expressed an opinion that the loan was reasonable and supported in the transfer pricing reports as being in line with market interest rates (as well other conditions). This assertion was countered by the court majority which noted that:

  • The maturity agreed upon with respect to the loan principal was not realistic, taking into account the business activities of the taxpayer.
  • The recurrent extension of the maturity date would have not been commonly possible between independent companies.
  • The indebtedness represented more than the value of the assets of the taxpayer/company.
  • The repayment capacity of the borrower had not been verified.

Finally while noting there is certain flexibility allowed with respect to formal requirements between related companies (items that are not commonly omitted in agreements between independent parties), the court majority held that in this particular case, the formal instruments and the economic substance of the loan were not sufficiently well articulated to demonstrate a loan transaction.

KPMG observation

The unique and particular features of each situation clearly depend on the facts and circumstances of each case. It is expected that if the decision is appealed, an appellate court decision could bring more clarity to this and similar situations.

 

For more information, contact a tax professional with KPMG's Global Transfer Pricing Services group in Argentina:

Marcelo A. Castillo | +54 1143165891 | macastillo@kpmg.com.ar

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