Tax benefits and parafiscal benefits in the capitalization of profits

From the tax established by Law 1819 of 2016 on the distribution of dividends to individuals resident in Colombia and to individuals and entities not resident in Colombia, it becomes especially important to study the impact that the distribution of dividends in shares and/or the capitalization of profits may have in order to optimize the impact on income tax as well as in the conformation (for shareholders who are individuals) of the "Contribution Base Income" (IBC) on which the contributions to the social security system will be made.

According to Articles 36-2 and 36-1 of the Tax Statute ("E.T."), both the distribution of profits in shares or quotas of corporate interest (distribution of dividends in shares), or its transfer to the capital account (internal capitalization of profits) is an income that does not constitute income or occasional gain (Incrgo). The same effect has the capitalization of the equity revaluation account. The latter is concluded from a systematic interpretation of paragraph 1 of article 36-2 of the E.T., since -contrary to the opinion of part of the doctrine- it could not be given a different scope because in such case it would have to be understood that the distribution of profits comes from the capitalization of the equity revaluation account, and clearly both patrimonial accounts have a different and unmistakable origin.

The treatment of the distribution of dividends in shares and the capitalization of profits benefits more the companies that are listed on the stock exchange than those that are not, since for the former such benefit extends even to the part that exceeds the profits that do not constitute income or occasional gain in accordance with the provisions of articles 48 and 49 of the E.T. (Tax Law). This discrimination between both types of companies (listed and unlisted) is not justified by any principle of constitutional rank, for which reason a lawsuit is currently before the Constitutional Court to grant both types of companies equal prerogatives before the law.

Both the capitalization of profits, understood as the transfer of the profits of the period or of the reserves for profits of previous periods to the capital account, and the distribution of dividends in shares or quotas (expressly authorized by Article 455, paragraph 3 of the Code of Commerce) can be carried out in one of two ways: by issuing shares that - in principle - would be awarded to all shareholders pro rata to their participation in the capital, or by increasing the nominal value of the already existing shares. If the first option is chosen, each shareholder would receive an income in kind equivalent to the commercial value of the number of shares issued at the time of delivery (art. 29 of the E.T.).

Such income, in case it is not an Incrgo, will have direct incidence in the determination of the income tax as well as in the determination of its "IBC", provided that the recipient is a natural person rentier of capital. On the contrary, if the distribution of dividends or the capitalization is made by increasing the nominal value of the share, the shareholder, far from receiving an income likely to enrich him, will have an appreciation in his investment, which does not generate any impact with respect to his income tax, but it does integrate the cost of his asset, thus benefiting him for the moment he wants to dispose of his investment.

In the same way, such capitalization or distribution of dividend in shares made through the increase of the nominal value of the shares, will not impact his "IBC", considering that article 19 of Law 100 of 1993 establishes that it has to be quoted on "the declared income keeping correspondence with the income effectively received". Therefore, since this is not an income actually received -either in cash or in kind-, it cannot affect in any way the IBC.