Lawyer case in Argentina

The facts of Los Acollarados were particular because the irrevocable capital contribution was converted into a loan in foreign currency before the huge devaluation of the Argentine peso in 2002. This situation and the characteristics of the loan led the Tax Court to consider that the loan should be characterized as equity and the conversion of the irrevocable contribution into a loan was a mechanism used by the taxpayer to take advantage of the devaluation of the Argentine peso.

In other cases, the Tax Court recognized as a loan the debt that a corporation had with its shareholders arising from the delay in the payment of dividends. The Tax Court also allowed the deduction of interest arising from a loan that was obtained to pay a capital reduction.

In the case Distribuidora Gas Cuyana SA (11 May 2004), the Tax Court analysed the case of a company that approved dividends but agreed to pay the dividends some time later. Such debt accrues interest and the Tax Court allows the deduction. In this case, the by-laws specifically provided for an actualization in the case of late payment of dividends. In the case Swift-Armour SA (25 October 2005), the Tax Court allowed the deduction of interest arising from a loan obtained to pay a capital reduction.

The analysis of situations like that detailed above is not easy. The local tax authority must carry it out taking into account all the available proof to demonstrate that the taxpayer's treatment has not been accurate. Irrevocable contributions must comply with corporate law, the Civil Code and regulations issued by the Superintendency of Corporations, stressing that the analysis has to be done on a case-by-case basis.

Another tax authority ruling 21/06 about the deductibility of FX, in the case of the conversion of a loan received from the parent company abroad used to buy its branch's shares, has been issued. According to this, expenses can only be deducted when related to taxable transactions. Shares generate non-taxable results. Interest and FX losses generated by the loan used to buy the shares are non-deductible, according to this ruling and the ITL.
In the case of Argentine residents who obtained income from personal services (fourth category), there is some discussion about whether FX gains and losses should be recognized. Argentine individuals do not recognize income upon accrual in the fourth category. They recognize income upon collection, so no FX exists.
For example, a lawyer rendered a service and invoiced an amount of USD 100 when the rate was 1 peso = USD1. The lawyer collected the fee when the exchange rate was 3 pesos = USD1; the lawyer would collect USD 100 equal to 300 pesos. Consequently, in the case of devaluation of the Argentine peso, the gain would be reflected in a higher fee obtained by the lawyer. Thus, the FX would be embedded in the fees. The Tax Court in the case O'Farrell, Jorge Eduardo adopted this approach.19
The tax authority in ruling 38/05 assumed a similar position. An employer executed an insurance retirement plan in favour of an employee. The employer made contributions in US dollars when the exchange rate was USD1 = 1 peso. After the devaluation of the peso, the insurance company agreed to pay the benefits of the plan in US dollars. When the employee collected the benefits of the plan in dollars, he argued that the FX gain was not subject to income tax. The tax authority rejected this position and held that the amount in Argentine pesos arising from the conversion of the dollars into Argentine pesos at the exchange rate of USD1 = 3 pesos was subject to tax. No FX gains existed because the income had to be recognized on a cash basis.