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Cross Border Software Licenses: Supreme Court Rules on Tax Treatment


After a long period of uncertainty, the Supreme Court finally ruled on the tax treatment applicable to royalties paid in consideration for cross-border software licenses. The decision re "Application Software S.A." supports the application of the 31.5% withholding income tax rate to royalty payments made to foreign corporate licensors instead of the reduced 12.25% rate.

Following a heated debate amongst practitioners, and after the issuance of conflicting decisions reached by the different administrative and judicial courts, taxpayers are now aware of the scope of the provision. Taxand Argentina discusses how the Supreme Court sheds light on what the taxpayer should consider when conducting everyday transactions involving cross-border software licenses.

The debate focused on the application of the withholding tax rate on royalties arising from cross-border software licenses.

According to the Argentine licensees' position, a 12.25% withholding tax rate should be applicable on royalties paid to their foreign corporate licensors. To apply this withholding rate, Income Tax Law (ITL) requires that:

(i) the software be registered as copyright with the Direcci?n Nacional de Derechos de Autor

(ii) the taxable income should derive from the exploitation of the author's rights and the applicable tax should directly affect the author or its assignees (derechohabientes)

(iii) the taxable income should derive from the publication, performance, representation, exhibition, sale, translation and other ways of reproduction of the copyrighted materials, and shall not derive from works completed by request or originated in the rendering of work or services contractually agreed.

Pursuant to the criterion of the Argentine tax authorities ("AFIP"), royalties arising from cross-border software licenses should be subject to the residual 31.5% withholding tax rate, since they qualify as "other income" under domestic provisions. Under this understanding, AFIP discarded the argument stating that a company could be considered as the "author" or as the "assignee" (derechohabiente) of such intellectual property. According to this position, this right can only be borne by individuals and their heirs, respectively. As a result, AFIP stated that these payments should be subject to the residual 31.5% withholding tax rate [1], thus practicing the corresponding tax adjustments to software licensee companies.

Many software companies have challenged AFIP's position and, in some cases, obtained favourable decisions within the Federal Tax Court or the Federal Court of Appeals [2]. However, the outcome was favourable to AFIP's position in many other decisions [3]. In all cases brought before Court, the core arguments discussed whether companies could be considered as "authors" of intellectual property rights (mainly considering the software development process cannot be the result of a single individual's work), and whether the term "assignees" exclusively involves a transfer made mortis causa or inter vivos.

In 2005, a case dealing with royalties from trademarks -"Picapau S.R.L."- reached the Supreme Court. Prior to the latter's decision, the General Attorney of the Argentine Republic rendered a preliminary opinion holding that the terms "author" and "assignee" included in the ITL should be construed as referring to the author-individual and to the mortis causa assignees, respectively, in accordance with the outcome previously reached by the Federal Court of Appeals [4].

Despite the fact that the Supreme Court rejected the taxpayer's appeal based on formal reasons, the General Attorney's preliminary opinion, in most cases followed by the Supreme Court's judges, addressed the interpretation of Article 93, paragraph b) of the ITL, hinting at the decision later assumed by the Supreme Court in the recent case "Application Software S.A.".

On 22 February 2011, the Supreme Court finally stated its position in connection with software-related royalty payments, confirming the application of the residual 31.5% withholding tax rate, considering that the requirements needed for the application of the 12.25% withholding tax rate are not met in those cases involving companies, and making an express reference to the General Attorney's opinion in re "Picapau S.R.L.".

Taxand's Take

Under current market demands, software could be characterised as a complex and collective work that requires qualified human resource, specific equipment and relevant investment. As a result, these endeavors are usually undertaken by companies which may afford such costs.

However, the Supreme Court's decision discarded the application of a reduced 12.25% withholding tax rate when the foreign licensor is not the intellectual property's "author" or "assignee", the latter terms being referred to an individual or its heirs, respectively. Instead, the Supreme Court confirmed the application of a 31.5% withholding tax rate in cases of foreign corporate licensors, thus discouraging these types of cross-border transactions and overlooking current market trends in the software industry.

Your Taxand contacts for further queries are:
Ezequiel Lipovetzky
T. +54 11 4021 2300

Daniela C. Rey
T. +54 11 5288 2308

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[1] As set forth under Rulings DAT 142/1994 and 68/2002.

[2] "Syscom & Cipher S.A.", Federal Court of Appeals, Courtroom III, 07/04/2010; "Application Software S.A.", Federal Tax Court, Courtroom A, 31/08/2005; "Syscom & Cipher S.A.", Federal Tax Court, Courtroom A, 29/03/2005; "Application Software S.A.", Federal Tax Court, Courtroom C, 20/09/2001; "Picapau S.R.L.", Federal Tax Court, Courtroom C, 19/04/1999, among others.

[3] "Availability S.A.", Federal Tax Court, Courtroom C, 26/02/2010; "Sap Argentina S.A.", Federal Tax Court, Courtroom B, 08/04/2008; "PSI Technologies de Argentina S.A.", Federal Tax Court, Courtroom B, 20/02/2007; "Picapau S.R.L.", Federal Court of Appeals, Courtroom IV, 29/09/2000, among others.

[4] "Picapau S.R.L.", Federal Court of Appeals, Courtroom IV, 29/09/2000.

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