Of similarities and dividends

The Council of State, by judgment number 18788 of September 10, 2014, established that a pledgee, to whom the debtor-partner had assigned the economic rights of its shares of corporate interest, was entitled to receive - as dividends - the income that the partner would receive from the distribution of the profits of the aforementioned company. In this sense, if the dividend was decreed as not taxable for the partner, and the company paid it to the third party creditor due to the fact that such pledge was registered in the partners' registry book, the income not constituting income or occasional gain would be received -as such- by the pledgee.

The taxpayer's discussion with the administration arose due to the lack of application (and erroneous interpretation thereof) of articles 48 of the Tax Statute and 411 of the Code of Commerce, which establish, respectively, that "the dividends (...) received by the partners, shareholders, (...) associates, subscribers and similar (...) do not constitute income or occasional gain" and "the pledge shall not confer to the creditor the rights inherent to the quality of shareholder except by virtue of express stipulation or agreement". The administration argued (thesis accepted by the Administrative Court of Cundinamarca) that the tax benefits of the dividend could not be transferred to a non-member third party, since these were intimately linked to the associative will of whoever received them, in such a way that whoever did not hold the status of partner or shareholder could not count them as income not constituting income but as ordinary income. Faced with this position, the taxpayer argued that it would lead to a double taxation since the profits would be taxed on the head of the company and then, again, on the head of the recipient of the same and brought up the judicial precedent in which the Council of State recognized that the usufructuary could receive, as a dividend, the fruits of the shares subject to usufruct (Council of State, Decision of December 12, 1991 C.P. Jaime Abella Zarate).

The high Corporation issued its decision in favor of the taxpayer. It reached this conclusion after an in-depth analysis of what constitutes a dividend, and whether such character is affected by the fact that it is received by a third party who is not a partner. The conclusion of the entity was, ultimately, that the dividend is the distribution of a profit, which may have already been taxed to the company (in which case it would be distributed as non-taxed to its shareholders, subscribers or similar) or it may not have been taxed to the company (in which case it would be distributed as taxable income to the recipient). Thus, it is irrelevant for tax law, whether or not the dividend is received by a partner or shareholder, or, on the contrary, if it is received by a usufructuary or pledgee, subjects whom the law considers to have interests "similar" to those of the partners.

This judicial decision is of great importance because, in addition to being an excellent tool for tax planning (especially with respect to the new wealth tax), it clarifies the tax treatment to be given to the civil fruits of the shares that, under any modality, are assigned or transferred to third parties (regardless of whether or not they hold the status of shareholders of the company). Likewise, the issue has a superlative importance because the great majority of corporate entities existing today are simplified joint stock companies (S.A.S.) that may contain a number of binding contractual stipulations regarding the manner in which dividends are to be distributed among shareholders and third parties. Nevertheless, this position outlined by the Council of State may entail some logistical or operational inconveniences, such as: 1) the exchange classification of a dividend payment to a foreign non-shareholder (a foreign non-resident) who, in principle, would not have the right to draw, 2) the classification as a dividend of a payment made to a foreign non-shareholder (Colombian tax non-resident), under the framework of the agreements to avoid double taxation (article 10.3 of the OECD Model Convention), and 3) the classification as a dividend of a payment made to a foreign non-shareholder (Colombian tax non-resident), under the framework of the agreements to avoid double taxation (article 10.3 of the Model Convention of the OECD).