The framing of joint venture accounts

One of the great achievements of the tax reform contained in Law 1819 of 2016 was to have been able to outline a single tax regulation for business collaboration contracts. Unfortunately, due to the way in which article 18 of the Tax Statute was drafted, such regulation cannot -due to its own characteristics- be directly applied to the joint account contract, reason for which a hermeneutical effort must be made in order to include it in such regulation.

The first difficulty arises when the regulation makes a non-exhaustive list of what is to be understood as business collaboration contracts. There it indicates that "consortiums, temporary unions, joint ventures and joint venture accounts", among others, shall be considered as such.

Immediately thereafter, and throughout the law, the law intends to treat all these joint agreements (under its IFRS framework) as joint operations and not as joint ventures, which distorts the tax treatment that joint ventures must have.

Based on this premise, the rule states that "the parties to the business collaboration agreement must declare independently the assets, liabilities, income, costs and deductions that correspond to them, according to their participation in the assets, liabilities, income, costs and expenses incurred in the development of the business collaboration agreement".

The application of this rule with respect to the joint venture contract has been controversial, precisely because it is a rule applicable to joint operations (consortium type collaboration contracts) and not to joint ventures (joint venture type collaboration contracts). In their interpretation of this rule, some people have argued that the hidden participants must declare the income, costs and expenses incurred by the manager, in proportion to its participation in the profits of the contract. This position is not shared because it is clearly contradictory to the very essence of the participation account contract, an essence that cannot be distorted by the tax law.

Article 507 of the Code of Commerce, when defining the concept of participation accounts, states that "participation is a contract by which two or more persons (...) take an interest in one or several determined mercantile operations that one of them must execute in his own name and under his personal credit, with the charge of rendering an account and dividing with his participants the agreed profits or losses".

Thus, by its essence, the hidden participant is only called to declare the profits or losses generated by the joint business; never the income, costs or deductions of the manager, since these belong to him since the business was carried out "in his sole name and under his personal credit". Now, in order to comply with the provisions of paragraph 1 of article 18, according to which the manager must certify to the participant the financial and tax information related to the contract, it will be sufficient for the manager to certify the profit or loss from the joint venture, which will serve as a basis for the participant to declare such profit for tax purposes and transmit such information on magnetic media.