Article 100 of the Law 17319 on Liquid and Gaseous Hydrocarbons states as follows: “license holders and concessionaires – for the purpose of exploring and exploiting hydrocarbons – must compensate the landowners for the damages caused to the land affected by the activity of the former”.

Likewise, legislative orders 860/96 and 861/96 provides for compensations to the owners of lands in which oil exploration activities are carried out and which are located in the provinces of Chubut, Santa Cruz, etc. The grounds for these payments are for the farmer or landowner to receive an appropriate compensation for the occupation of their lands and the damages caused to the activities (i.e. farming) performed in those lands.  

Indeed, the amounts received for the above-mentioned reasons are of compensatory nature, as their purpose is to indemnify the owners for the damaged caused as a result of the occupation of their properties and the activities of exploration, exploitation and transport of hydrocarbons that will be carried out. That is, the purpose of the said amounts is to indemnify the landowners for the occupation, use and consequences derived from such activities.

And so was construed in Judgment Number 4/01 (D.A.L) of the Federal Administration on Public Incomes (Administración Federal de Ingresos Públicos, AFIP) which states: “the amounts that may be required by the landowners to the license holders or to the concessionaires are of compensatory nature, as their purpose is to indemnify the former for the dismemberment of ownership (easement)– and for the damages resulting from the hydrocarbon-related activity.

According to what has been previously exposed, the damages paid to the owner are those directly resulting from the dismemberment of ownership, both subsequent and coming from the oil exploitation, such as the deterioration and disablement of the soil and others (consequential damages). That is why the owner does not receive a ground rent but rather compensation.

It is worth noting that the Law on Capital Gains Tax establishes that for the purposes of this law it will be considered as capital gains all profits, revenues or gains likely to be received periodically from a permanent source; as well as all earnings attributable to certain taxpayers regardless of their regularity and/or the permanence of the source and the results of the alienation of redeemable movable assets (articles 1, 2 and 3). This law distinguishes between the “Theory of the Source” (Teoría de la Fuente) and the “Theory of the Product Revenue” (Teoría del Rédito Producto) by applying the former to individuals and the latter to businesses. On the one hand and in this context, individuals will be those who are not businesses, either corporations or single-member companies, and they will only have to pay the tax when the revenue they got meets all requirements of regularity, periodicity and permanence of the source of the income.

On the other hand, according to the “Theory of the Product Revenue” applicable to all businesses (mainly corporations), the fulfillment of the above-mentioned requirements will not be necessary, since all revenues or profits will be taxed.

However, in certain cases the nature of the taxpayer may not be clear as the law only lists the legal and economic situations that produce the fiscal obligation. Especially when analyzing the tax nature of the landowners as the land may be exploited by single-member companies, de facto business associations (without deed of incorporation or registration in the regulatory body) or corporations.

Such was one of the unclear cases brought to the Supreme Court (Corte Suprema de Justicia de la Nación). In the lawsuit “"Yparraguirre, Juan (TF 27.337-1) y otro c/ DGI" of November 11^, 2014 the Supreme Court had to analyze the tax treatment applicable to a de facto business association regarding oil pipeline easements collected as compensations for the damages produced in one of their lands.

When deciding, the Court considered that the taxpayers acted as a de facto business association. However, the Court construed that the payees of the compensation would be the landowners themselves (individuals), and therefore the Court applied the above-mentioned “Theory of the Source”. That is, the judge interpreted that once the payment of the compensation would be made, the nature of the property affected by the hydrocarbon-related activity would not be maintained nor preserved, and therefore it would not be possible to “maintain and preserve” the revenues that it produced.

So as to pronounce the said ruling, the Court mentioned the case-law of “Lorenzo, Amelia Beatriz c/ DGI” and “Cuevas, Luis Miguel c/ AFIP” where the Court analyzed the taxability of the especial compensations according to the provisions in labor legislation in case of pregnancy and trade-union stability respectively. In these lawsuits, the Supreme Court also ruled in favor of not imposing the Capital Gains Tax, as it considered that after the payment of the respective compensations in none of these cases the source of the revenue was maintained or preserved.

In conclusion, the compensations paid to landowners who are individuals or de facto associations affected by oil exploration, will not be subject to Capital Gains Tax.