Taxation of dividends received from abroad (Part 2)

In the previous column, an analysis was made on the supranational rules and on the double taxation agreements that affect the phenomenon of taxation of dividends received from abroad. It is now time to study the rules of domestic law governing this phenomenon.

Regarding domestic regulations, a distinction must be made between the treatment of natural persons and legal entities and, within the legal entities, the treatment of domestic companies with respect to other types of legal entities. For the case of natural persons, Article 5 of Law 1819 of 2016 establishes that dividends and participations received from foreign companies and entities will be taxed at the rate of 35%. Likewise, amidst a confusing wording, it establishes that, once the value of the tax is deducted, it will proceed, on such basis, to apply the income tax on the dividend (or "dividend tax"), which is taxed at a marginal rate of 0% to 10% depending on its amount. Thus, contrary to what happened before the reform, the dividend received from abroad will always be taxed at 35% for individuals, and not at the staggered rate that was applied depending on the amount of income obtained, and in addition to this, the dividend tax would be applied. It goes without saying that, in accordance with the provisions of paragraph 1 of article 49 of the Tax Statute ("E.T."), direct and indirect credits for taxes paid abroad (article 254 of the E.T.) will be applied in order to avoid double taxation on the same income.

However, for legal entities the tax treatment varies depending on whether the person receiving the dividend from abroad is a domestic company or another type of legal entity, such as a Non-Profit Entity (Esal). In the first case, based on the analysis of article 49 of the E.T., it could be concluded that such dividend, unless it has its origin in profits received from a country of the CAN or from Spain, Chile, Switzerland or Mexico (complying with the thresholds of participation in the capital established in each one of those treaties to avoid double taxation) would be a taxable income for the national company and it could only be affected with the direct and indirect tax credit established in article 254 of the E.T. However, and this is not a taxable income for the national company. Nevertheless, and different from what happens with natural persons, such income could be deducted with the ordinary costs and expenses of the legal entity. Another position -less conservative- on such issue would indicate that the amendment introduced by Article 2 of Law 1819 of 2016 would allow concluding that such dividends, provided that they were received by national companies, would always be Income Not Constitutive of Income or Occasional Gain -Incrgo-. Such conclusion is based on the statement set forth in Article 48 paragraph 1 of the E.T. which establishes that "Dividends and participations received by partners (...) that are national companies, do not constitute income or occasional gain". The old aphorism applies here according to which "where the legislator does not distinguish, it is not possible for the interpreter to do so".

In the case of the Esal, the dividends received from abroad will be part of the income for purposes of determining the net profit or surplus. Since the legislator has not established a special treatment for such income with respect to the dividend tax, multiple interpretations have arisen, such as that such tax could not be levied on the Esal because they are not established as taxpayers or others in which the dividend should simply be taxed as ordinary income in the Esal. That is why, with dubious legal support, the draft decree that intends to regulate the tax regime of such entities establishes, in the paragraph of article 1.2.1.1.5.1.14. that "Dividends and participations received by these entities shall have the treatment provided for domestic companies (...)". In this way they homologate -through a decree- with the national companies, the treatment that ESALs would have with respect to dividends received from Colombia and abroad.

In conclusion, it is clear that it is more efficient to receive dividends from abroad under the structure of a national corporation than as an individual, because while the former can deduct such income with the ordinary costs and expenses of the operation and is not subject to the dividend tax, the latter receives them at the rate of 35% plus the dividend tax. Likewise, it is highly inconvenient, for the above mentioned reasons, for an ESAL to receive dividends from abroad.