The Treaty of Montevideo 1980(1) established the Latin American Integration Association (ALADI), which today includes Argentina, Bolivia, Brazil, Colombia, Cuba, Chile, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela. The association's main objective was the establishment of a common market for the Latin American region.
The treaty includes a most-favoured nation clause, as follows:
"Within the territory of other member countries, capitals originating from member countries shall have the right to a treatment not less favourable than that granted to capitals coming from any other non-member country, notwithstanding the provisions set out in agreements which might be concluded on this matter by member countries under the terms of the present Treaty."
In In re Losa Ladrillos SA, the Federal Tax Court recently analysed the scope and application of the clause.
Foreign entities and individuals owning stock in Argentine corporations are subject to personal asset tax (PAT) at a rate of 0.5% on the proportional net-worth value of their participation. The tax is assessed and collected by the Argentine issuing corporation.
The case brought before the court centred on whether shares held in a local company, Losa Ladrillos SA, by a shareholder domiciled in Uruguay were subject to PAT. The issue was raised as, after signing the ALADI treaty, Argentina entered into conventions with both Spain and Switzerland, under which neither Spanish nor Swiss residents were subject to PAT on their participations held in Argentine corporations (both treaties granted exclusive wealth tax jurisdiction to the country of residence). Losa Ladrillos argued that, based on the most-favoured nation clause guaranteed by the treaty, the treatment granted to Spanish and Swiss residents must be extended to all ALADI members, including Uruguay.
The tax authorities followed an opinion issued by the attorney general, which stated that the most-favoured nation clause did not apply to tax matters,(2) and therefore denied Losa Ladrillos's argument. In contrast, the Tax Court upheld the taxpayer's position and concluded that PAT was not payable.
In doing so, the Tax Court resorted first to Article 31.1 of the Vienna Convention on the Law of Treaties 1969, which prescribes that "a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose".
The court further understood that from a "simple reading" of Article 48 of the treaty, it was clear that the contracting states' intent had been to establish the most-favoured nation clause in the broadest sense possible, extending benefits granted to third-party states to all ALADI members, without the exclusion of tax matters. In the opinion of the court, the clause was written in ample and general terms, and its application was not restricted to any particular subject matter.
The Tax Court then stated that it is a general principle of law that exceptions to a rule must be provided for expressly and not be construed as implicit. The court referred to the example of another treaty, known as the Protocol of Colonia,(3) to demonstrate that when a treaty wished to introduce an exception to the clause, it would do so expressly.
The relevance of this case goes far beyond its specific and practical effect regarding the non-application of PAT on shares held by Uruguayan residents. The Tax Court adopted a very clear position on how the scope of the most-favoured nation clause must be construed, in the context of the treaty in particular, and in any other treaty with similar features. As a planning point, should the Tax Court decision be affirmed in upper judicial instances, equity investment in Argentine companies channelled through ALADI jurisdictions must be afforded the PAT exemption on shareholdings allowed under the Spanish treaty (the Swiss treaty formerly applied on a provisional basis, in accordance with the Vienna Convention, no longer applies following a government decision published in the Official Gazette on January 31 2012).
For further information on this topic please contact Guillermo O Teijeiro or Ana Lucía Ferreyra at Negri & Teijeiro Abogados by telephone (+54 11 5556 8000), fax (+54 11 4328 5628) or email ([email protected] or [email protected]).
(1) Approved by Argentina through Law 22,354.
(2) Attorney General Ruling 170/06.
(3) Protocol of Colonia for Reciprocal Investment Protection in MERCOSUR, approved by Argentina through Law 24,891.