Joint Venture Accounts: the new corporate Sudoku

On April 9, 2018, the Dian issued Concept 0376 by means of which it "collects" the doctrine issued by the entity to date and revokes all the concepts and offices issued by the entity on the matter and which are contrary to it.

In the aforementioned concept, the Dian, instead of interpreting the new regulation of business collaboration contracts (legal provisions established in Article 18 of Law 1819 of 2016) with a pro-business or business preservation perspective, does so with an anti-business and merely pro-recovery perspective, violating, in passing, the principle of legality by going -with its interpretation- beyond what the law itself authorizes.

The Dian dedicates a large part of the Concept to establish that certain conducts are legally unfeasible, such as the transfer of withholdings and deductible taxes between the managing partner and the participant, which is not in doubt, unless together with the joint venture contract there is another collaboration contract, such as the mandate contract.

The most relevant aspects of this kind of "Unified Concept" can be summarized as follows:

• "It is not enough for the hidden participant to record and declare the income from the net profit; on the contrary, it must record and declare the gross value of the income in proportion to its percentage of participation in the contract. Said income will be affected with the costs, expenses and deductions whose deductibility is appropriate".  Although the jurisprudence of the Council of State (Decision of the Fourth Section of April 1, 2004) recognized that through the participation account contract, gross income or profits could be distributed indistinctly and by virtue of the private autonomy of the will, it never prohibited that through this contractual figure exclusively profits could be distributed, since that is the same mandate of Article 507 of the Code of Commerce (to distribute among the co-participants "the profits or losses in the agreed proportion"). This is based on the already existing error of assimilating this type of contracts with "Joint Operations" and not with "Joint Businesses".
• The participants will record independently the percentage of their participation with respect to each asset and liability, following the same logic that applies to the other concepts (income, costs and expenses). Consequently, an asset corresponding to an asset (sic) must be recorded by each of the participants involved - regardless of who is the owner of the asset - in such a way that each of them may apply the same proportionality when recording and declaring, for example, the depreciation expense" (...) "The above under the understanding that such asset or liability corresponds to the contract and not to a particular participant". This position regarding the declaration of the ownership of the assets and liabilities immersed in a joint venture contract, although it is aggressive from the legal point of view (since it allows the non-owner to declare it and take tax benefits such as depreciation) is sensible from the point of view of the prevalence of the accounting principle of essence over form, which is why it is consistent with the dynamics of business.
• The managing partner may not take as an expense the profit paid to the hidden partner; neither will it have the obligation to withhold tax at the source. The above, to the extent that the managing participant will not transfer to the hidden participant a net profit but a gross value that must be affected with the costs, expenses and deductions that may be deductible". In line with the above, it is incomprehensible that the DIAN prohibits the transfer of profits to the hidden participant (and these must be replaced with gross values that can be deducted) and that such transfer of profits can be taken as an expense for the manager, when this is the very essence of such contract and it is so stated in the Code of Commerce.

Finally, the DIAN indicates that the differences between the income declared by the managing participant in income and VAT must be justified with a "subscribed" contract of joint venture accounts. With this, the consensual nature of the joint venture accounts contract is eliminated, thus becoming a solemn contract, at least for tax purposes.

Through this type of Concepts, the DIAN is turning a legal figure that exists and has been used for decades into a kind of business Sudoku, where the only thing that reigns is confusion and uneasiness and where the existing regulation must be applied in an anti-technical and conceptually wrong way in order to satisfy a whim of the tax collecting entity that is not clear and does not seem to have any logic whatsoever.