Disposal of repurchased shares

By means of Official Letter 220-100614 of July 14, 2018, the Superintendence of Companies answered a query made by a citizen in which he asked whether "the tax nature of the acquisition of own shares is that of the payment of dividends (sic), when it is made to all shareholders with the proportion indicated in paragraph 1 of Article 150 of the Code of Commerce".

Although the question is not clear, and does not seem to have much logic (since it seems to confuse the term "acquisition" with "alienation"), this does not exonerate the public entity from the obligation to interpret it correctly in a way that makes sense, and thus give the citizen an answer that clarifies any obscure point that the rule may have and that generates confusion. Contrary to the above, the entity (deepening the error) indicated in its answer to the petitioner -incurring in a conceptual error- that the alienation of repurchased shares did not correspond to the payment of a dividend because "the alienation of repurchased shares must correspond to a share subscription contract".

It must be emphatically stated that, contrary to what was stated by the Superintendence of Corporations, the alienation of repurchased shares cannot be made through a new stock subscription contract. It is sufficient to analyze, for this purpose, the provisions of Articles 384 and 417 of the Code of Commerce ("C. de Co.") which establish, respectively, the legal definition of the share subscription contract and the measures that companies may take with the repurchased own shares. Regarding the first matter, Article 384 of the Commercial Code states 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 regulations and to submit to its bylaws. In turn, the company is obliged to recognize the person as a shareholder and to deliver the corresponding title".

Regarding the second point, the regulation establishes that the following measures may be taken with the shares acquired in the manner prescribed in Article 396 (acquisition of treasury stock): "(i) To dispose of them and distribute the proceeds of the sale and distribution of the shares. To sell them and distribute their price as a profit, ii. Distribute them among the shareholders as a dividend, iii. To cancel them and increase proportionally the value of the other shares, by means of a reform of the corporate contract. iv. To cancel them and reduce the capital until the concurrence of their nominal value, v. To allocate them to charitable purposes, rewards or special prizes".

In view of the above, it is clear that the share subscription contract is inherently different from the operation that the company may carry out with its own repurchased shares (sale, donation, cancellation, etc.) because while the first operation configures an operation of equity or corporate reorganization (which may be fiscally neutral if the requirements established for it are met), the second - if it configures a disposal under any title - affects the statement of income and, consequently, generates a tax impact on the transferor. This position is precisely evidenced by the provisions of Article 319 paragraph 1 of the Tax Statute (rule that regulates tax neutrality for contributions to companies) when it establishes that "The receiving company shall not realize any income or loss as a consequence of the contribution, when in exchange for it there is an issuance of new shares or social quotas. In the case of placement of own shares or quotas repurchased, the income of the company receiving the contribution shall be determined according to the general rules applicable to the disposal of assets".