Answer ... Law 11,683 includes the ‘economy reality’ principle as a general anti-avoidance rule, under which the tax authorities can analyse the economic taxation in each case and disregard the legal form and structured used by the taxpayer.
According to the Double Taxation Convention (DTC) between Argentina and Chile, dividends paid by a company are taxable only in the country of domicile (this treaty was modified by Law 27,274 on 7 September 2016). In other words, through the treaty, each country waived its tax authority over foreign-source income; its power of taxation is thus limited to income originated by subjects domiciled in their respective jurisdictions.
Molinos Río de la Plata v AFIP, a case which is pending before the National Supreme Court, arose from the tax reform introduced by Law 19,840. This incorporated in Section 41D of the Income Tax Law a preferential tax regime whereby an incentive was made available to foreign investors to canalise their investments abroad through ‘investment platform companies’, thus exempting them from paying taxes on dividends derived from investments made in other jurisdictions.
The Argentina Tax Department (AFIP) argued that a platform company established in Chile by Molinos had as its main and only interest the canalisation of income from group companies in order to benefit from the advantages enshrined in the DTC. Molinos argued that there was no divergence between the adopted form and the economic reality: the platform company had been established pursuant to a business decision made within the framework of freedom of commerce, which allows for a business to be structured in the way deemed most convenient within the framework of the law.
The principles of interpretation enshrined in Sections 1 and 2 of Law 11,683 (fiscal procedure) are established as anti-avoidance norms of double tax agreements.
The Argentina Tax Court decided in favour of AFIP. It held that most of the dividends received by the platform company were directly remitted to its parent company in Argentina. Likewise, the holding company never received dividends from Molinos Chile SA – these being the only dividends that would have been subject to income tax in Chile, as they were of Chilean source. There was thus an abuse of the treaty, as if the dividends obtained by companies incorporated in third countries were remitted directly to the Argentine company, those dividends would be subject to Argentine income tax. For this reason – there being no obstacle in the application of the anti-abuse clauses of the domestic legislation – the National Appellate Court held that it was appropriate to ignore the application of the DTC with Chile in this specific case.
The lack of a real economic link between the Chilean platform company and several Uruguayan companies and a Peruvian society was highlighted. Rents remitted did not remain in the patrimony of the holding company and were not used to fulfil its social object. On the contrary, they were immediately remitted to the majority shareholder in Argentina, so that the Chilean holding acted as a mere conduit; the real beneficiary was Argentine company Molinos.
Molinos has appealed and a decision is awaited from the National Supreme Court.