Tax Newsletter March 2019

VAT

Ruling No. 686, March 5th of 2019

In the context of Law No. 20.956, which allows Pension Funds and Unemployment Funds to invest, among others things, in real estate assets and infrastructure, through this ruling, the IRS establishes that these funds will be VAT taxpayers if they develop activities which are indeed levied with this tax. In this case, each fund shall have its own Tax ID Number and comply with all VAT related tax duties. The administrator company will have to impute the corresponding VAT credits and debits which result exclusively related to the transactions made by each fund.

Income Tax

Ruling No. 833, March 25th of 2019

Through this interesting ruling, the IRS solves a matter that generated many doubts, which is the tax treatment given to payments made under a non-compete clause, to a former employee. The IRS establish that, in order to be able to deduct the payment as an expense, it must comply with the general requirements of any expense; however, it gives examples of certain aspects that must be specially taken into account, such as if the employee handled relevant information for the development of the business, if the business may be competitively replicated within a short space of time, the lack of barriers to enter the business, no trademark differentiation, the absence of exclusivity contracts with suppliers, or other circumstances that make such payment necessary.

Inheritance and Donations Tax

Ruling No. 685, March 5th of 2019

Article 69 of Law 18.681 exempts donations made to Universities from the Donation Tax and allows taxpayers to use 50% of the donation as credit against the Income Tax. To be granted these benefits, donations must be destined to one of the purposes expressly established by law, being one of these to use the donated amounts to finance the acquisition of real estate and equipment, in order to support the improvement of academic activities, in a way that these real state result destined to the teaching, research and extension purposes of the institution. Nevertheless, if such destination is not complied with, the infringer University will have to repay all taxes that were discounted by donators, as a consequence of the donation perceived by the institution.

Ruling No. 685 of 2019 is very relevant, given that it interprets the requirement of the destination of real estate that were financed with donations, establishing that, for example, if these are leased to third parties, this does not imply that the requirements for the benefit are not fulfilled, as long as entirety of the incomes obtained under such lease are reinvested in the teaching, research and extension purposes to which the real state are destined to, and, as a consequence, the University’s obligation to reimburse the discounted taxes will not be applicable.

General Anti Avoidance Rule

Ruling No.778, March 15th of 2019

In the context of company mergers, the IRS is consulted if the general anti avoidance rule (GAAR) could result applicable if, in order to avoid the loss of VAT credit as a consequence of a merger, prior to the latter, the absorbed company sells a real estate to the absorbing one, with VAT. The IRS determined that the GAAR could indeed be applied if it is estimated that there are no relevant economic or legal reasons to execute the sale previous to the merger, beyond the aforementioned tax benefit, or if a simulation is verified, adding that, in this case, it must be taken into consideration the fact that the merger will generate the same effect of transferring the real estate to the absorbing company.