The Uruguayan Administrative Court of Claims –the equivalent of the Supreme Court of Justice for administrative matters – has sided with Ferrere’s client and overruled a decision from the Uruguayan Tax Authority (DGI, for its Spanish acronym) that assessed over US$ 14 million in unpaid taxes arising from an intercompany debt writing off.
Ferrere’s client was a company set up in Uruguay under a preferential tax regime. For several years, it conducted off shore trading activities. In 2003, it was decided that the trading business would be wound up. As part of the wind up, an affiliate company –incorporated outside of Uruguay- wrote off a several million dollar debt that the Uruguayan company had generated over the course of its trading business.
The DGI claimed that the write – off caused the Uruguayan company to obtain a gain that was taxed in Uruguay and intended to collect the unpaid taxes, plus penalties and surcharges.
The company argued that because of its preferential tax status, the company only paid taxes on a notional basis unrelated to actual gains and that, in any case, under Uruguayan sourcing rules, this particular gain would be considered a foreign sourced gain and therefore not subject to Uruguayan Corporate income tax.
The ruling established that, regardless of whether the Uruguayan company was subject to a preferential tax status, it was right on its interpretation of sourcing rules. The Court stated that the gain derived from the debt write – off was tantamount to a donation and therefore source was determined by the location of the creditor, and not the debtor. In this case, as the creditor was a company incorporated outside of Uruguay, with no presence in the country, the source of the gain was foreign and thus not subject to taxation.
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