Interest on capital stock

Article published on November 9 in the newspaper “LA REPUBLICA”.

These are instruments that, due to their unclear nature, may be classified as debt instruments (interest bearing) in one country and equity instruments (profit/dividend bearing) in the other.

This disparity in their classification can generate tax arbitrage that would lead to a transaction being deductible in one country and not taxed in the other, thus generating a double tax benefit that is not justified. This is the case, for example, of shares with a fixed dividend regardless of the percentage they represent in the capital (very common in S.A.S.), where the source country could take this as a normal payment of a dividend, while the country of residence could take it as the payment of an interest (because it has no direct correlation with the shareholding held).

The magnitude of the problem is such that the OECD has been studying the neutralization of the effects of hybrid instruments, as action #2 in its Beps action plan.

Although the subject is new for Colombia, hybrid instruments have always existed in our legislation (although sometimes hidden) and have not been explored or exploited by the specialized doctrine.

Article 149 of the Code of Commerce speaks of "Interest on the Capital Stock", it establishes that "Interest may only be agreed on the capital stock for the time necessary for the preparation of the company and until the beginning of its exploitation".

According to the above, the company could recognize interest to the shareholders who subscribe and pay their contribution, as long as this is done during the pre-operational stage of the company.

On the contrary, it would not do so with the subscriber who remains owing the payment of his contribution. Such contribution, since the enactment of Law 1607/2012 (Art. 91), must be understood in a broad sense, i.e., it must include the premium in placement of shares.

This is perhaps the article of the corporate regime least studied by the doctrine, and this may be due to the confusion of its raison d'être. Only Francisco Reyes Villamizar, in his book Derecho Societario (Ed. Temis, Second Edition, P. 468) deals with it, stating that "it could happen that the associates who pay their capital contributions in cash have the benefit of the agreed interest, in addition to the profits to which they may be entitled when the company begins to generate them". We are not alone in this matter; Brazil, through the issuance of Law 9249 of 1995, adopted a similar regime.

It could be considered that the purpose of this hybrid instrument is contradictory, since the more interest the company pays, the lower its profit and therefore, the lower its distributable dividend. Thus, the very figure of paying interest on capital decreases the dividend base.

From the tax point of view, for the paying company, the operation would have the following implications: (i) Although it is strange that a company takes as deductible the payment of interest on its own capital, this, in effect, would be deductible if it could be demonstrated that such expense is necessary, proportional, has a direct causal link with the income generating activity and is within the limit established in paragraph 2 of Article 117 of the Tax Statute, (ii) Although the main business is not a mutual, but an investment, if a remunerative interest is not expressly agreed, the regime of presumed interest for mutual operations entered into between the company and the shareholder would apply to the accessory legal business; (iii) It would apply the thin capitalization regime, i.e., the deductibility of interest would be limited to the interest generated by debts whose total average amount during the corresponding taxable year does not exceed the result of multiplying by three the taxpayer's net worth. Likewise, from a tax point of view, for the investor/lender, the operation would have the following implications; (i) the payment of interest would be taxed as such, and the company would withhold withholding tax at the source, (ii) this credit could be capitalized, in which case the investor would increase its shareholding in the debtor, (iii) the investor/lender would have to define how to account for the investment, which for IFRS purposes could generate inconsistencies, since there could not be double registration of such item as an investment and as an account receivable.

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Intereses-sobre-el-capital-social_​ENG.pdf

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