On 27 December 2024, the Argentine Supreme Court issued a unanimous ruling asserting that interest expense incurred in connection with dividend income is deductible (CAF 9548/2021 “Telecom Argentina S.A. (TF 70161445-I) c/ Dirección General Impositiva s/ Recurso directo de organismo externo”). In an 8-page ruling, it has done more than Congress this year to promote investment in Argentina.

In this judgment, the Argentine Supreme Court states that, under the Argentine integrated system of corporate income taxation, dividend income is to be considered taxed income for shareholders, rather than income that is exempt or not subject to tax, as the Argentine tax authorities had claimed until now. Therefore, the interest expense connected to such income can be deducted.

Although the Supreme Court refers to the text of the Argentine income tax law (“AITL”) to support the interest expense deduction, this should not be construed as Congress’s having the liberty to overrule this judgment by amending AITL. On the contrary, the Supreme Court concludes that dividend income consists of taxable income. Therefore, it establishes the basis to argue in a court of law that the disallowance of deductions related to such income through such an amendment may result in confiscation.

From a strategic perspective, this ruling has broader implications than the Incentive Regime for Large Investments (“IRLI”, or “RIGI” in Spanish), one of the key pillars of Milei’s administration’s program to boost Argentina’s economy, which was enacted by Congress last June. While IRLI is available to certain new investments (as long as they are larger than USD 200 million and are not in the agricultural, cattle or industrial sectors), all taxpayers willing to acquire stock in Argentine companies generating taxable income can now be benefited by the Telecom ruling when financing such acquisition with borrowing (including LBOs). This is because a company’s stock is as much an asset generating taxable income as the company’s equipment that generates the earnings that are distributed as dividends. (It should be noted that, pursuant to the Telecom case, interest expense deductions would not be available when dividend income comprised exempt income—e.g., dividends from companies operating under the preferential tax regime of the Province of Tierra del Fuego.)

Also, this ruling should be considered together with a recent Argentine Central Bank regulation, which authorizes payments of interest on related-party debt through the official foreign exchange market without prior approval, provided that such interest expense accrues as from 1 January 2025.

With the Telecom ruling, the acquisition of Argentine companies no longer needs to be financed solely with equity; borrowing is once again an option. Any potential abuses can still be addressed through existing rules on earning stripping, transfer pricing, thin capitalization, public offering requirements and tax-free reorganizations—or GAAR, if necessary—, which would limit the amount of interest expense deductions. In other words, no additional regulatory restrictions seem to be needed.

At the same time, consideration should be given to a recent opinion from the National Directorate of Taxes stating that NOLs should not be adjusted for inflation,2 which could be seen as a setback. However, this should not be an issue if inflation can be significantly reduced from now on, making that opinion relevant only for past NOLs. Therefore, if Milei’s administration is successful in its fight against inflation (as it seems to have been so far), this would be a non-issue for the future.

Please feel free to contact us with any questions or comments on this matter.

It seems that the table is set for planning new investments in Argentina. Just for New Year’s Eve! A happy, prosperous, peaceful and healthy 2025 to all!