The Argentine Tax Court decided on a case related to the deduction of interest and exchange differences from a loan entered into to purchase shares.
On March 30, 2016 Division B of the Argentine Tax Court ("Tribunal Fiscal de la Nación") ruled in re: "IVAX Argentina S.A. s/recurso de apelación", where the taxpayer and the Argentine Tax Authority discussed as the main issue the deductibility, for income tax purposes, of interest and exchange differences due to a loan entered into to purchase shares.
Pursuant to the facts stated in the Court's judgment, the company had entered into several loans to execute two leveraged buyouts (execution of loans to purchase shares, followed by the merger of the acquired companies).
The company deducted the interest paid as well as the resulting exchange differences. The Argentine Tax Authority challenged the deduction on the grounds that the expenses were related to non-computable profits (dividends), based on the principle that the deductions belong to the source income.
On the other hand, the taxpayer supported the deductibility of interest and exchange differences on the grounds that the loans were not entered into to purchase shares. In addition, the company considered that, even if that were the case, expenses would be entirely deductible due to being related to two types of income: dividends (non-computable profits) and capital gains (taxable income). To such extent, it argued that being an entity, it was ruled by the principle of global liabilities ("principio de universalidad del pasivo"), which states that all liabilities finance all of the assets and all of the companies' activities.
The Argentine Tax Court decided in favor of the taxpayer, and rejected the assessment made by the Argentine Tax Authority. The Tax Court considered that even if the loans were related to the share purchase, deduction of the expenses was proper. In addition, it pointed out that Income Tax Law sets forth two types of income: (i) product yield, applicable to individuals, which recognizes different sources of income allocating a liability to each source ("afectación específica de gastos de ganancias gravadas"); and (ii) income yield, applicable to entities (such as the case of the taxpayer analyzed here), which states that any increment in equity entails a profit, thus the attribution of income per "source" is superfluous, as it is only the relationship between assets and liabilities, known as the principle of global liabilities, that is relevant.
In other words, the Argentine Tax Court confirmed the deduction of interest and exchange differences for a loan entered into with the sole purpose of executing a purchase of shares, admitting the applicability of the principle of global liabilities.
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