Capitalizations in which no shares or quotas are released

Although the title of this article may seem illogical, since we have always understood that any capitalization (both of internal and external accounts) necessarily entails the release of shares or the increase of the nominal value of the same, the Superintendence of Companies has just issued a very interesting opinion where it indicates that this does not have to be so in all cases. Thus, by means of Oficio 220-052712 of April 13, 2018, such controlling entity established two important theses, namely; (i) when, within the framework of a limited partnership (simple or by shares) the managing partner makes a contribution in money or in kind to the partnership, without his will being that of participating in the same as a limited partner (as permitted by Article 325 of the Code of Commerce), "the capital stock shall be increased by the corresponding value, regardless of the fact that in that event no shares or quotas are delivered in consideration for such contribution", (ii) such act of transfer of ownership does not constitute a donation from the managing partner to the company because, although a direct consideration is not being received for it (as would occur with the release of shares), there may be other considerations agreed on the occasion of this operation such as obtaining an additional participation in the profits of the year or in the remainder of the company, given the contribution made.

Likewise, the Superintendency is clear in indicating that, in accordance with the provisions of article 1450 of the Civil Code, applicable by express reference of article 822 of the Code of Commerce, the donation between living persons "is not presumed except in the cases expressly provided for by the laws".

This novel position adopted by the Superintendence of Corporations necessarily leads us to ask three questions; (i) is there in this case a contract for subscription of shares or social quotas and, if so, can we speak here of a capitalization with premium in placement of shares? (iii) in such circumstances, can we choose to make use of the existing tax neutrality regime for contributions in cash or in kind? and (iii) in the event that the managing partner is a non-resident foreign exchange resident, how could he make such contribution and keep his drawing rights if he is not releasing shares?

In response to the first question, upon analyzing the content of articles 384 and 385 of the Code of Commerce which indicate that "the subscription of shares is a contract by which a person undertakes to pay a contribution to the company in accordance with the respective regulation and (...) the company undertakes to recognize him as a shareholder" and that the mentioned regulation shall contain "the amount of shares offered, which may not be less than those issued", it is clear that this operation cannot be framed within the framework of a share subscription contract.

For the specific case, the commercial law establishes a special rule contained in Article 325 of the Code of Commerce that states "when the general partners make capital contributions, in the respective deed they will be listed by their value, without prejudice to the liability inherent to the category of such partners". In this sense, since the managing partners may make capital contributions that do not release shares and consequently do not grant them the status of limited partners, it is possible -for corporate and partnership purposes- to carry out the capitalization without the existence of a share subscription agreement.

Of course, since no shares are issued as a consequence of the capitalization, it is not possible to speak of the existence of a premium in the placement of shares. Therefore, the total amount of the contribution must be charged to the equity capital account.

Regarding the second question, when analyzing article 319 (1) of the Tax Statute (article that establishes tax neutrality in contributions to companies) it is clear that one of the fundamental requirements for tax neutrality to apply is that, in exchange for the contribution, "there is an issuance of new shares or corporate quotas". In this sense, although the operation could be made from a corporate point of view, it would not enjoy the tax deferral inherent to reorganizations.

Regarding the third question, upon analyzing Regulatory Circular DCIN 83, it is clear that, as requirements for the channeling and registration of foreign direct investment in Colombia (both in foreign currency and in kind), exchange declarations must be filled out with the minimum data required for this type of exchange operations for international investments.

Among such minimum data is the number of shares or quotas that are acquired through the operation, since, if these do not exist, the investment would have to be registered as an "act or contract without participation in the capital", which is far from reality since it is -in effect- a capitalization where no shares are released. This may considerably affect the eventual right of the foreign investor to the transfer of profits.

In conclusion, the State, through its different entities (Dian, Superintendence of Corporations and Bank of the Republic) should harmonize -even through opinions and concepts- the treatment to be given to this type of operations, since it makes no sense whatsoever that an operation may be carried out from the corporate and corporate point of view, but it has no viability in tax and exchange matters.