ICA in dividends in light of the Tax Reform

The Council of State and local courts have drawn a clear jurisprudential line regarding the non-taxation of dividends with the Industry and Commerce Tax (ICA), provided that such dividends come from shares held as fixed assets.

The legal basis for such position is none other than the absence of the generating event, since the income is obtained without the performance of a commercial, industrial or service activity. In this way, dividends are taxed with the local tax, if they come from shares that are held or possessed with no vocation of permanence and with speculative spirit, since a commercial activity is configured.

Thus, the industry and commerce tax on the income in question was always approached from the jurisprudence rather than from the same rules that regulated the matter (Law 14 of 1983, among others). The same was always the case with respect to the place where such income should be taxed, which in practice was declared in the municipality where the investor had its headquarters or domicile.

Well, this issue, like many others, was incorporated in Law 1819 of 2016 (Structural Tax Reform). Thus, through Article 343 of said law, the territoriality of, among others, investment activities was regulated, indicating that the income "is understood to be taxed in the municipality or district where the headquarters of the company where the investments are held is located".

First of all, it should be noted that no change in the tax generating event is derived from the mentioned provision, so it should not be understood that the income derived from the possession of investments is taxed with the local tax, except in those cases where the investment is held for speculative purposes and not as a fixed asset, in which case a commercial activity taxed with ICA is configured. For this last event, what the law defines is the municipality in which the dividends must integrate the taxable base of the tax.

What now arouses curiosity is what should be understood by "headquarters of the company where the investments are held". This is because such expression may refer to: i) the registered office of the investor -owner of the investment-, or ii) the registered office of the company that distributes the dividends.

If we opt for the first hypothesis, we would be concluding that the rule sought to regulate only investors constituted under the legal form of companies, since the provision refers to "registered office of the company", leaving aside natural persons or other legal entities that could also be taxpayers (such as non-profit entities).

Thus, a reasonable interpretation must lead the interpreter to the conclusion that the municipality called to collect the industry and commerce tax on the investment activity is the one where the company distributing the dividend is located.  Therefore, dividends received from abroad would not be covered under the ICA generating event.

The next step is for the municipalities to issue the necessary agreements to establish a withholding at source system, which would be the most efficient collection mechanism for this concept (dividends), thus returning to what the District of Bogotá intended to do in 2005.