The Supreme Court of Justice of Argentina (the “SCJ”) confirmed the ruling that upheld the ex officio determination of income tax by the Federal Tax Administration (the “Tax Authorities”) applicable on dividends that the Chilean subsidiary of Molinos Río de la Plata paid to its Argentine parent company.
The SCJ rejected Molinos Argentina’s appeal against a ruling of the National Court of Appeals for Federal Administrative Matters upholding the Tax Authorities’s ex officio imposition of the aforementioned tax for the tax periods 2004 to 2009 on the Argentine food company, a case involving an amount exceeding AR$65 million from the company’s subsidiaries in Chile, Peru and Uruguay, which the Argentine firm considered to be covered by the application of a Double Taxation Treaty (“DTT”) between Chile and Argentina of 1976.
In 2011, the Tax Authorities issued two rulings in which it imposed ex officio the payment of income tax to Molinos Argentina, on the grounds that Molinos had misused the DTT by using the Chilean holding company as a “vehicle company”.
The company appealed the decision before the National Tax Court (the “NTC”) because it considered that it was in breach of Section 11 of the DTT by incorporating in the taxable income tax base the dividends distributed by Molinos de Chile and Río de la Plata Holding S.A., a company incorporated in Chile.
Faced with the unfavourable decision of the NTC and Hall I of the National Chamber of Appeals in Federal Administrative Litigation, Molinos Argentina filed an extraordinary appeal, which was partially granted, and filed a de facto appeal with the SCJ.
The joint vote of judges Maqueda and Rosatti indicates that, citing the principles of public law to which treaties must conform, especially good faith and reasonableness, Molinos Argentina’s behaviour is not covered by the rules of the DTT. It adds that similar conclusions are reached from private international law, and then they are introduced in the principle of economic reality and the power granted to the Treasury to disregard the forms and structures assigned by taxpayers to their acts or businesses and to reclassify them.
In his vote, Lorenzetti examined the main question of whether the dividends distributed by Molinos Chile to Molinos Argentina were subject to income tax and the meaning and scope of article 11 of the DTT, which provided that “dividends and shares in the profits of companies, including the returns or surpluses of cooperatives, shall only be taxable by the Contracting State where the company distributing them is domiciled”, and points out that the article is clear, but the company’s interpretation gives it a meaning contrary to the principles that prohibit abuse of rights and require interpretation in good faith.
Judge Elena Highton did not vote and the President of the Court, Carlos Rosenkrantz, voted in dissent, upholding the plaintiff company’s appeal and reversing the appealed judgment insofar as it upheld the tax adjustment. He considered that article 11 of the DTT, then in force, offered no interpretative difficulty whatsoever and forced the conclusion that Chile was the only State with the taxing power to tax the dividends distributed by the Chilean holding company.
The SCJ held that the position taken by Molinos Argentina was “abusive and unreasonable”, as it did not seek to rely in good faith on the international treaty to avoid double taxation, but was a way to avoid paying the tax in Argentina and Chile.