Under Decree No. 1207/08 (published in the Official Bulletin on August 1, 2008), the National Executive Power has amended section 70.2 of the Decree implementing Income Tax Law (ITL) to abolish the preferential treatment afforded to close-ended mutual funds and financial trusts, with the relief remaining in force only as it applies to financial trusts related to infrastructure works to be used in the provision of public services.
The previous scheme
Section 70.2 of the executive order implementing the ITL granted close-ended mutual funds and financial trusts a preferential treatment for income tax purposes provided they met certain requirements established under subsections a) through d) of such implementing regulation. Such relief meant they were allowed to deduct from the taxable base any amounts which, however denominated, were to be allocated as profit distribution (normally, the yield on “pass-through certificates”). Thanks to this relief, big appliances store chains, among other players, managed to grow mass consumption in under-banked segments of the population. During 2007, major issues included Confibono, Megabono, Secubono, Consubond and Consubono, among others.
Effective date of the new scheme
Last August 1, the financial community was hit by the release of Decree 1207, according to which the amendment becomes effective on the same date it is published in the Official Bulletin. Therefore, in view that the Income Tax is a yearly tax, the Tax Authority is very likely to (i) consider that the preferential treatment is abolished for all fiscal years ending after August 1, 2008 and, thus, (ii) require that income tax advance payments be made in such cases.
Impact on the exemption from the banking transaction tax
The Executive Order does not refer to the effects that this amendment may have on the relief provided by section 10, subsection c) of the Decree implementing the Banking Transactions Tax Law, whereby financial trusts and close-ended mutual funds are afforded an exemption insofar as they meet the requirements established in section 70.2. As a result, unless the Executive Power issues a regulation to clarify this point, it is not clear whether (1) the exemption from the banking transaction tax remains in force only for financial trusts that both meet those requirements and are related to infrastructure works destined for the provision of public services, or (2) upon satisfaction of requirements established in subsections a) through d) of section 70.2, the exemption from the banking transaction tax applies whether or not financial trusts are related to such specific purpose.
Based on the information above, the following preliminary conclusions may be drawn:
· The preferential treatment under income tax –which allows the deduction of amounts characterized as profit distributions– is no longer applicable to close-ended mutual funds and financial trusts that are not related to infrastructure works to be used in the provision of public services.
· This limitation to the relief applies to yields earned on “pass-throughs”, as they represent profit distributions; yet, it does not apply to debt instruments, which continue to be fully deductible.
· Since Executive Order 1207 becomes effective as from its release in the Official Bulletin, the Tax Authority can be expected to consider that the elimination of this preferential treatment applies to all fiscal years ended after August 1, 2008 and, therefore, require that income tax advance payments be made in such cases.
· Since no reference was made to the exemption from the banking transaction tax, it is not clear whether for the exemption to apply the financial trust should be related to infrastructure works to be used in the provision of public services once Executive Order 1207/2008 becomes effective.
posted by P. Sebastian Lopez-Sanson @ 3:16 PM
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