On September 7th, 2015, the Federal Court in and for the City of Mar del Plata ruled in favor of the merger between business entities owned by the same economic group. Such decision was based on Law No. 20,628 about income tax (the “income tax law”), its regulatory decree, and precedents from the Argentine Supreme Court of Justice.
With regard to the reorganization of business entities, the income tax law establishes a system which allows the consequences arising from mergers, consolidations, spin-offs or transfers within the same economic group not to be reached by the income tax.
Specifically, Article 77 of said law provides that ” When the reorganization of business entities , goodwill and / or operations of any nature in accordance with this article take place, their consequences will not be subject to the income tax ( … ) Reorganization means : a) the merger or consolidation of business entities through a third new entity or through the absorption of one of them.; b ) The spin off or division of a business entity in another to continue joint operations in the first business entity ; c ) Sales and transfers from one entity to another which, despite being legally independent , constitute a single economic entity .( … ).”
In turn , Articles 105 to 109 of the Regulatory Decree set forth the requirements to be met when mergers and spin offs take place, which do not apply to transfers within an economic entity as referred to in Article 77 mentioned ut supra.
In “AMALUR SA v. AFIP on Appeal of Administrative Act” [“AMALUR S.A. c/ AFIP s/ Impugnación de Acto Administrativo], the company involved carried out a merger with another company called ESNEA. Taking into account Article 77, paragraph “a” of the income tax law, the Argentine Federal Tax Authority (“AFIP”) described this operation as merger.
The tax authority based its decision on the fact that the tax exemption provided for in Article 77, paragraph ” c” of the rule did not apply to the case , since he had not complied with the provisions of Article 105 , paragraph II of the Decree regulatory, that is, companies have developed similar or related activities during the twelve months immediately preceding the date of the reorganization.
As a result, AMALUR administratively challenged the decision of the AFIP, requesting that the reorganization in question as part of a single economic entity is considered and therefore tax-free. Since the appeal was denied, the company initiated legal action against the relevant administrative body.
Despite the fact that the court of first instance confirmed the position of AFIP, the Federal Court of Mar del Plata (the “ federal court”) annulled the decision of the lower court, taking into account the case “Frigorífico Paladini S.A. “, as well as the principles of informality in favor of the taxpayer , legality and economic reality. The federal court argued that the merger between AMALUR and ESNEA involved the situation referred to in Article 77, paragraph “c” of the income tax law, and therefore the requirements of Article 105 of the regulatory decree were not required.