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Income tax – Deduction of interest and exchange differences from a loan by a related foreign company

“Kimberly Clark S.A. (TF 36115-I) c/ Dirección General Impositiva s/ Recurso Directo de Organismo Externo”

In this case, the Federal Revenue Administration challenged the deduction of interest expense and exchange differences arising from a loan entered into between Kimberly Clark Argentina and its foreign related company Kimberly Clark Irish Finance Corporation, on the grounds that the proceeds from such loan were used to pay dividends of the Argentine affiliate rather than to finance the company’s business activity.

To such end, the loan agreement, the Board’s minutes of meeting authorizing the payment of dividends and the bank account activity of the Argentine affiliate were examined in order to identify whether the loan had been used to finance the company’s business activity or the payment of dividends.

The Court of Appeals was mostly interested in the activity recorded in the company’s bank account given that on the same day the Company’s bank account appeared to have been credited for a very similar amount to that of the dividend payouts and an amount that matched the sum of the dividends paid out had presumably been debited from the same account.

Previously, the Shareholders’ Meeting had approved a dividend distribution and had increased the maximum amount that could be loaned under the borrowing arrangement between Kimberly Clark Argentina and its foreign related company Kimberly Clark Irish Finance Corporation.

Therefore, in view of the above, in considering the deduction of interest expense and exchange differences arising from the loan, the Court of Appeals held that the judicial precedent of the case “INC S.A.” rendered by the Argentine Supreme Court was applicable, in that both companies were subject to the “relevance principle” or “equity allocation principle”, whereby expenses are deductible insofar as they are incurred in order to generate income or maintain the income generating source. As a result, the deduction of interest expense and foreign exchange differences from the loan granted to Kimberly Clark Argentina was found to be inadmissible.

NATIONAL COURT OF APPEALS IN ADMINISTRATIVE LITIGATION MATTERS

DIVISION III

> For further information please contact:

Luis María Flores Gimenez
Partner
luismaria.floresgimenez@ar.Andersen.com