The Argentine Supreme Court (“ASC”) ruled on the Molinos1 case, a milestone one related to treaty shopping. Here, the ASC - with the affirmative vote of three of its members - upheld the revenue service (“ARS”) criterion, thus preventing the taxpayer from being entitled to tax treaty benefits under the double tax treaty Argentina - Chile (“DTT”). The DTT avoided double taxation by means of the exemption method, so that dividends distributed by a Chilean holding company to its Argentine-resident shareholder should not be taxed in Argentina. Chile, in turn, created the “exempt holding framework” (“plataforma fiscal”), aimed at exempting holding companies incorporated therein, which would invest outside of Chile. Molinos – an Argentine listed company – did have such a Chilean holding to invest in Uruguayan and Peruvian subs. Such dividends were not taxed either in Chile or in Argentina, an outcome that was not upheld by the ASC.
The majority vote was based, mainly, on the following considerations:
- The interpretation of the provisions of the DTT must be consistent with Argentine public law standards, recognised in the Argentine Constitution, among which, the standard of “reasonableness” can be found, so that taxpayer’s rights are not absolute and cannot be invoked abusively, regardless of the inexistence of an anti-abuse rule in the treaty itself.
- According to the Vienna Convention on the Law of Treaties, applicable to the DTT2, the terms of a treaty must be construed in “good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”. Considering that the purpose of the DTT was to prevent double taxation, a good faith reading of its terms should not allow interpretations that would lead to the opposite result: i.e. a double non-taxation.
- The Argentine domestic law provides a General Anti Avoidance Rule (“GAAR”) that allows the tax authorities to disregard inappropriate legal forms and structures and consider the real economic situation whenever there is a manifest discrepancy between the economic substance and the legal forms adopted by the taxpayers. In this sense, the ASC considered that evidence collected in the case was enough to conclude that the legal structure of the Chilean holding company and its Argentine shareholder had no substance. Therefore, such structure could be re-characterised by the ARS under the Argentine domestic GAAR.
To reach such a conclusion, the ASC took into account a set of evidence and facts, such as: i) the Chilean holding was incorporated just one year after the unilateral amendment of the Chilean law - subsequent to the effective date of the DTT - which created the “platform entities”; (ii) that the Chilean holding company immediately remitted to its Argentine shareholder the income collected from the lower tier subsidiaries located out of Chile, so that the income did not remain in the holding company in order to fulfil its statutory objective; and (iii) there were no double tax treaties between Argentina and the countries from where the income came (i.e. Uruguay and Peru).
The minority vote of Judge Rosenkrantz concluded that the DTT clearly ruled this case, in accordance with the Andean Model Treaty, so that dividends paid by a Chilean holding company should not be taxed in Argentina. Having in the DTT no anti-avoidance provision that could jeopardise double non-taxation outcomes, taxpayer’s criterion should prevail, for the revenue service intends to rewrite the DTT.
1 Argentine Supreme Court, Molinos Rio de la Plata S.A. v. Dirección General Impositiva, 2 September 2021.
2 Law No. 19.865 (Argentina)
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