The Eurnekian’s Case: Tax Treatment of Foreign Trusts
"Eduardo Eurnekian" is arguably the most important case relating to the recognition of foreign trusts and their tax treatment in Argentina. An Argentine resident, Mr Eurnekian transferred US$750 million to one Cayman Island and one Bahamas Island trusts - both deemed low / no-tax jurisdictions under the Argentine black list. The trust fund would then be transferred to certain beneficiaries at settler's death. Taxand Argentina comments on the National Tax Court's ruling regarding foreign trust, also known as ‘The Eurnekian's Case'.
Mr Eurnekian was neither the trust's beneficiary nor its trustee. A five-member committee was appointed by the settler, who also retained the power to remove its members, and played a central role in the conduct of the trust's administration. The settler was prosecuted for alleged tax evasion and preventive imprisonment was requested. This type of tax evasion carries time in jail for a period ranging from 3.5 to 9 years.
The Court of Appeals in Criminal Economic matters held that, under the "substance over form" principle, there was no "real" transfer of title to the funds to the foreign trusts because
(i) the settler retained the power to appoint and replace those persons in charge of the administration of the trust fund, and
(ii) the disposition of the trust fund by the trustees in favour of the beneficiaries could only take place at the time of the settler's death.
However, the Oral Court in Criminal Economic matters declared Eduardo Eurnekian not guilty for not paying personal assets tax on funds transferred to two foreign trusts based mainly on the following arguments:
- foreign trusts may be created for different legitimate reasons (business, safety, succession and the like)
- the enforceability, nullity, nature and obligations of agreements executed abroad are governed by the laws of the country in which they were executed
- regardless of the features of the structure, the settler had transferred his assets to the trusts and the actual owner of the trust fund was the trustee
- Mr Eurnekian's behaviour cannot be considered tax evasion, but tax avoidance taxpayers have no obligations to elect the most burdensome structure.
The federal tax authority appealed to the Federal Supreme Court, which rejected the appeal due to formal reasons and without analysing the substance.
In addition to criminal tax proceedings, the federal tax authority claimed the unpaid taxes by Eduardo Eurnekian due to the assets' transfer to the trust.
On 27 September 2010 the National Tax Court resolved the "Eduardo Eurnekian" case in connection with the federal tax authority's claim. Regarding income tax and personal assets tax, the National Tax Court decided to follow the Oral Court in Criminal Economic matters' arguments to recognise the existence of the trust and the exclusion of the trust's funds from Eduardo Eurnekian's assets. It is worth noting that the national tax court is not obliged to follow the criminal court's arguments. The court revoked the decision of the federal tax authority that had officially assessed the tax obligation of Eduardo Eurnekian.
The National Tax Court acknowledged that income tax and personal assets tax may not apply to Argentine settlers regarding assets transferred to a foreign trust if certain conditions were met.
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