Portfolio investment dividends regime

The Ministry of Finance and Public Credit published -for comments- the draft decree regulating the rate applicable to dividends paid to foreign portfolio investors. The decree states that the rates applicable to dividends paid to foreign portfolio capital investors will be the same as those set forth in Article 245 of the Tax Statute ("E.T.") and that the Ministry of Finance and Public Credit will act as an agent for the payment of dividends. ("E.T.") and that the administrator of the investment will act as withholding agent at the source, who will receive from the company paying the dividend -without any withholding- the gross amount thereof with the indication of whether or not it is a taxable dividend for the portfolio investor, in order to then make the withholding at the source before making the corresponding repatriation or reinvestment of the same.

This treatment is logical and makes sense since it relieves the issuer of the operational burden of carrying out this procedure, placing it on the administrator, who due to his knowledge of the client can do it more easily. However, from a deep reading of the draft decree, conclusions can be drawn that would place on a plane of inequality -constitutionally unjustified- those investors who receive dividends from portfolio investment as opposed to those who receive them as a result of a direct foreign investment.

In the first place, the draft decree indicates that "The withholdings made constitute the final tax of the portfolio capital investor for that concept (...)". The purpose of this provision is to facilitate the procedures of the foreign portfolio investor and to avoid that the same -if he only has such income- must file an income tax return because the totality of his income has been subject to withholding tax in Colombia. Notwithstanding this, it must be taken into account that the dividend may also be paid in released shares of the same (Corficolombiana case), and, if this situation arises, and if it is understood that this dividend is not an INCRGO (as indicated in articles 36-2 and 36-3 of the E.T.), the rule would become completely inoperative since the administrator would have to receive an order from the client to sell such shares paid as dividend and proceed to practice, with those resources, the withholding at the source on behalf of the client.

Secondly, the same decree confers an anticipated "peace of mind" to the foreign investor since it expressly indicates that these withholdings can never be considered as an "over or under" payment.

For this reason, the portfolio investor who is entitled to use the provisions established in a treaty to avoid double taxation in Colombia and which exempt or reduce its tax burden on dividends, would see unknown its right to request (under a higher standard -treaty-) a refund for excess withholding, since, in light of the decree, it cannot be understood that such withholdings may constitute an excess payment. Moreover, when the foreign investor is a legal entity, this would violate the non-discrimination clauses established in most of these types of agreements.

Thirdly, it is still strange that the draft decree indicates that the withholding tax rate for dividends taxed on behalf of foreign capital investors is 35% (art. 245 of the E.T.), when article 18-1 of the E.T., which was neither repealed nor modified by law 1819 of 2016, indicates that "the withholding tax rate shall be 25% (...)". This antinomy is easily resolved since, by normative hierarchy, the law takes precedence over the decree.