In more detail

The main adverse tax consequences of operating with an LNTJ

1. Transactions with an LNTJ are not deemed at arm's length for transfer pricing purposes. This means that the taxpayer has the burden of proof that the transaction is at arm's length and not on the FTA to prove the opposite.
2. Amounts due to an LNTJ in consideration for transactions that trigger Argentine source income are deductible by the Argentine payor when the amounts are paid.
3. Transactions with an LNTJ must be declared to the FTA in those cases where one or more of the following situations are verified:
   1. Verification of a permanent establishment in Argentina.
   2. Verification of double non-taxation.
   3. Transfer of benefits to other jurisdictions.
   4. Verification of a scheme or plan to exclude funds or assets from reporting under CRS or FATCA; (v) Verification of a restructuring to be out of the scope of the country-by-country report for transfer pricing purposes.
   5. Sale of foreign companies that are, directly or indirectly, owners of Argentine companies or assets.
   6. Economic transfer of capital.
   7. International leasing resulting in a financial loan.
   8. Payments made by a nonprofit entity.
   9. Other international tax planning structures.
4. In addition, the Tax Procedural Law sets forth a presumption by which funds sent to Argentina from LNTJs are considered an "unjustified increase" on the net worth of the Argentine recipient of such funds. The amount received plus 10% of such amount would be considered subject to a 35% Argentine income tax and 21% value-added tax, as it may correspond. This presumption does not apply if it can be demonstrated that (i) such amounts arise from activities effectively performed by the Argentine recipient of such funds or by a third party in such LNTJ that could justify the origin of such funds, or (ii) such funds were previously declared for tax purposes in Argentina.
5. Therefore, all funding (intercompany loans and/or capital contributions) provided by LNTJs could be deemed by the FTA as an "unjustified increase" on the net worth of the local company subject to the taxation mentioned in point 4 above. Although the local company would be entitled to file evidence demonstrating the origin of the funds providing grounds to reject any tax claim, in practice, the FTA often adopts an aggressive position, and this kind of tax claim ends up in judiciary litigation.

Court precedent in GeoPark Argentina Limited

7. In the case of GeoPark Argentina Limited, the FTA applied the adverse tax implications listed in point 4 above based on the following: (i) the funds received by GeoPark Argentina Limited came from GeoPark Holdings Limited, a legal entity located in an LNTJ (Bermuda); and (ii) GeoPark Argentina Limited failed - during the administrative stage - to demonstrate the origin of the funds.
8. Once GeoPark Argentina Limited appealed the assessment to the Federal Tax Court (FTC), it had the possibility to submit the evidence and supporting documentation to justify the origin of the funds.
9. Finally, the FTC understood that the evidence and supporting documentation filed by GeoPark Argentina Limited was conclusive to justify the origin of the funds.
10. In effect, from the analysis of the bank statements and additional documentation, it was evidenced that the funds sent by GeoPark Holdings Limited to GeoPark Argentina Limited originated in the placement of shares carried out on the London Stock Exchange, which were acquired by different investors.
11. The FTA appealed the decision of the FTC and the Chamber of Appeals ratified the decision of the FTC in favor of GeoPark Argentina Limited.
12. To avoid the above-mentioned adverse tax implications, it is advisable that intercompany loans and/or capital contributions be granted by entities registered in a jurisdiction not considered as an LNTJ, preferably in a jurisdiction that has entered into a treaty to avoid double taxation with Argentina ("Tax Treaty"). This would allow the Argentine recipient of such funds to be released from the obligations to justify the origin of the funds and be charged lower withholding tax rates than those provided for in domestic tax regulations if the Argentine recipient of such funds pays to such Tax Treaty jurisdiction any class of income covered by the Tax Treaty (interest, royalties, technical assistance fees, etc.).