In the long-standing conflict regarding the appropriate harmonisation of domestic general anti-avoidance rules (“GAARs”) vs treaty law, the Argentine Tax Court sided with the Argentine Revenue Service (“ARS”) in an attempt to enhance the goals and principles contained in the Argentine Double Tax Conventions (“DTC/s”).
On 28 September 2022, the Argentine Tax Court ruled on the “Empresa Distribuidora La Plata” (”EDELAP” or the “company”) case, in which the Tax Court had to analyse whether the benefits of the Argentina-Spain DTC were applicable to an Argentine company with Spanish shareholders. According to treaty law, asset tax powers were only vested in the contracting state where the shareholders were located. Indeed, Article 22.4 of the Argentina-Spain DTC, in force at the time of the events, provided that: “(…)Shares, stocks or equity participation in the capital of a company, may be taxed only in the contracting state where the shareholder is resident”.
On the other hand, the Argentine Personal Assets Tax (“PAT”) provided that equity interests in Argentine companies held by non-resident aliens, in general, were subject to an annual tax burden of 0.5% or 0.25% (depending on the taxable year), which was applicable on the net-equity value of their equity participation. The same tax applies to Argentine resident individuals — other than local companies — who are required to exclude their equity participations in Argentine companies from their annual PAT tax returns. The companies who issued the stock or shares were responsible for collecting and paying the tax to the government.
In this case, EDELAP considered that its shares owned by Spanish holding companies were not subject to the PAT, due to DTC Article 22.4. However, the ARS understood that there was no substance attached to such Spanish holding companies, so they should consider properly constructing the treaty law.
To rule on this matter, the Tax Court applied the domestic general anti-avoidance rule of the “economic reality principle” (provided in the Argentine Tax Procedure Law) and determined that the Spain-Argentina DTC should not apply to the Spanish shareholders, as they were part of an unsubstantiated internationally triangular transaction. In fact, according to the Tax Court, the Spanish shareholders, whose shareholders were Uruguayan holding corporations, were created for the exclusive goal of profiting from the DTC. In practice, the Tax Court applied the so-called “principal purpose test”. Therefore, just the same as the Supreme Court in the “Molinos” case, the Tax Court decided once again to deprive a resident of a contracting state from the treaty benefits by applying a domestic general anti-avoidance rule that was not included in the DTC.
Consequentially, it is of utmost importance to scrutinise the substance of foreign holding companies prior to applying treaty law, despite the fact that the DTC wording may not yet include limitation of benefit rules or even principal purpose test standards expressly agreed by the contracting states. To illustrate further, this same outcome would be applicable for income tax purposes, at the time of determining whether a foreign holding company would profit from the reduced rate of withholding tax generally included in the OECD Model Convention Section 10. The fact that treaty law ranks above domestic legislation does not impair per se the application of domestic anti-avoidance rules.
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