On October 14, 2011 the Uruguayan Court of Administrative Claims—Supreme Court equivalent for administrative matters—decided for JPMorgan Chase, Chemical, Credit Suisse and Dresdner Lateinamerika in an action brought to overrule a decision from the Uruguayan Tax Authority that claimed over US$ 85 million in unpaid taxes from these entities.
The Tax Authority (DGI, for its Spanish acronym) claimed that the banks were jointly and severally liable for San Luis’ alleged tax debt arising from its management of Banco Comercial in Uruguay. The banks were minority shareholders of San Luis.
The DGI claimed that San Luis’ management of Banco Comercial had created a taxable presence in Uruguay and that the foreign financial institutions were jointly and severally liable for these unpaid taxes. The basis for alleging this joint and several liability was that San Luis’ shareholders had lost the protection of corporate limited liability because San Luis had acted in Uruguay without registering a branch, and, therefore, had to be treated as an “irregular company”, by analogy with a local corporation that failed to perform all incorporation proceedings.
The ruling concluded that no tax rule supports the DGI as the banks did not participate in the administration or management of San Luis and cannot then be considered San Luis’ representatives and therefore jointly and severally liable for the company’s tax debts.
The ruling also established that San Luis was not an irregular company and that the shareholders could never be held liable for the company’s purported tax debts. The Court concluded that such a sanction, joint and several liability, is not applicable by analogy with other rules. According to the Court, if a foreign company has been regularly incorporated abroad it cannot become irregular, triggering its shareholders’ liability, for not registering a branch in Uruguay.
This ruling has huge precedent value as this is the first time the highest administrative tribunal, or any judicial court in Uruguay, decides on the theory of the purported irregularity of foreign companies that fail to register a branch locally.
Alberto Varela, partner at FERRERE who heads the Tax Department, said: “This ruling speaks highly of the strength of the institutions in Uruguay. This was a case for a huge amount, dealing with an extremely complex subject matter and related to very critical events in our country’s history. The Court was able to remove itself from all of these circumstances and correctly lay down the law through a ruling that is sound and indisputable. This is to be highlighted.”