A first for Argentina
Argentina’s Federal Tax Authority has recently published a decision that begins to clarify some of the issues relating to untested recognition, characterisation and effects of control retention by founders during their life.
The following excerpt is the anonymised description set forth in the Argentine Federal Tax Authority’s Tax Technical Advisory Department Opinion No. 73/2008 (Opinion 73/08): ‘The assets contributed to the foundation on 20 May 1999 constitute 100 per cent of the shares of “MM” Ltd (a company formed in the Isle…), the assets of which [in turn] consist in investments in foreign banks and Guaranteed Loans of the Republic of Argentina… On 3 January 2000 the shares of MM Ltd were contributed to “LL” SA, a Uruguayan company, subject to the condition that the LL SA shares would be contributed to the “CC” Foundation… According to the foundation statement of the CC Foundation, the latter is organised “… as a self-standing legal entity for an indefinite time period… pursuant to the provisions of the Law on Persons and Companies of the country… (Sections 552 et seq)”.’1
It takes a private eye to fill in all the blanks; however, we can confidently guess that the CC Foundation was organised under Liechtenstein’s Law on Persons and Companies (LLPC), as sections 552–570 regulated family foundations at the time of its formation in 1998.2 Opinion 73/08 seems to evaluate the asset-holding structure shown in Figure 1.
The incorporation of the Uruguayan company into the structure may have been to prevent the application of the Argentine anti-deferral rules to the founder for income tax purposes. Based on the Income Tax Act No. 20,6283 rules related to shareholdings in foreign stock companies, Argentine-resident shareholders must include taxable income earned by such entities organised in low- or nil-tax jurisdictions (or in any other country or jurisdiction with similar tax treatment) from passive transactions, regardless of whether or not such passive income has already been paid as a dividend, plus all passive income obtained by the underlying entity organised or located in a low- or nil-tax jurisdiction. This pass-through effect applies only when either type of entity’s passive income exceeds half of the income resulting from its commercial or industrial activities. With the Uruguayan company as a blocker in this structure (provided there was a business reason for the incorporation of the foreign company as a blocker and the company presented reasonable substance in the jurisdiction of organisation), the founder would pay income tax only on the dividends effectively declared by the Uruguayan company.
The founder’s continued, extensive involvement in the foundation and its affairs, as well as her position as a beneficiary, led the tax authority to characterise the foundation as an entity of corporate nature
After the CC Foundation’s inception and until the consultation was brought to the tax authorities by its founder, the founder had been incorporating what had been contributed to the foundation into the annual assets tax return. The founder thought this practice should end, for those assets were not comprised in the taxable base in accordance with the Argentine Personal Assets Tax Law. The founder’s criterion was to consider the foundation as transparent, and thus the assets were included in the annual tax return.
In addition to the founder’s intent to prevent the application of the anti-deferral rules for Argentine income tax purposes, the founder sought to exclude the Uruguayan company’s shares from the annual assets tax return.
Not long ago4 we expressed the view in connection to Jersey private interest foundations (JPRIFs) – which we consider applicable to their Liechtenstein peers – that, from an Argentine tax perspective, the factors to differentiate between a transparent entity (that would subject the founder to taxation as if no foundation exists) and a non-transparent entity are the transfer of assets to the entity (not only from a purely legal perspective but also from a substantive, economic one), the founder’s surrender of control over that property in favour of the entity’s council, the irrevocability of the foundation and the asset transfer, and the exclusion of the founder as a beneficiary.
Opinion 73/08 has been made public only recently and we were not aware of it when we expressed our opinion on JPRIFs. However, the opinion’s treatment of the Liechtenstein family foundation involved in the case closely relates to our view of the likely application of anti-avoidance rules to its Jersey peers.
Opinion 73/08 stresses that the foundation’s purpose is managing the assets and making grants to ‘the founder and her relatives and/or the individuals’, that its governing bodies are ‘the founder herself, the family committee – founder, children and former husband (NN) – and the foundation’s council – executive body’, that ‘the founder would have the powers to issue by-laws that would govern the beneficiaries’ rights and the appointment of councillors, being empowered – with the express consent of her former husband – to exclude or appoint beneficiaries’, and that the foundation’s ‘family committee, among other powers, is authorised to establish the general guidelines on the foundation’s investment strategy, except for the initial ones – which would be established by the founder – additionally it may decide on changes to the beneficiaries’ rights, modify any by-laws or the foundation statement, except as it concerns beneficiaries’ appointment and exclusion.’
If we are to rely on Opinion 73/08’s brief description of the case, the founder’s continued, extensive involvement in the internal regulation and administration of the foundation and its affairs, as well as her position as a beneficiary, led the tax authority to characterise the CC Foundation as an entity of corporate nature, akin to an investment management vehicle, the owner of which also owns the assets managed by the entity. Although this characterisation is arguable, it can be conceded that similar grounds – control retention and reservation of benefit – may have also triggered a transparency challenge, even if the foundation had been typified as a hybrid between a legal entity and a trust.
The final outcome of the proceedings before the Argentine tax authority or courts, of which Opinion 73/08 may represent a milestone, is not yet known. What is certain is that Opinion 73/08 begins to clarify some of the issues related to untested recognition and characterisation and control retention by founders during their life.
- 1. Excerpts from sections I and II of the Argentine Federal Tax Authority’s Tax Technical Advisory Department Opinion No. 73/2008, published in AFIP Gazette No. 186, January 2013
- 2. LLPC Sections 553–570 were repealed as a result of the 2008 revision
- 3. Section 133 of the Income Tax Act No. 20,628, as amended
- 4. JE Ayuso, E Lipovetzky and SO Zebel, ‘PRIFs in non-PRIF territory: Jersey PRIFs for Argentine clients,’ section ‘JPRIFs under the light of Argentine anti-avoidance rules,’ Trusts & Trustees (2012) 18 (7): 652–658
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