Non-residents as hidden unitholders; tax effects

Nothing prevents that, in a business collaboration contract, one of the parties is a Colombian non-resident. In the case of certain collaboration contracts - as is the case of consortiums or joint ventures - it is common for non-residents (usually foreign legal entities) to establish branches in the country or to subscribe future corporate promises in order to be able to develop the contract in case they are awarded the contract. In other collaboration agreements, such as the joint venture agreement, this is not necessary when the hidden participant is the non-resident, since it is the managing participant who -in the eyes of third parties- is the owner of the joint venture and therefore the holder of all the rights and obligations inherent to such position.

The purpose of this study is to review the tax treatment to be given to the foreign hidden participant who is a non-resident for Colombian tax purposes, regardless of whether he/she is a natural or legal person. The problem and the doubt arises from the treatment that the Dian has given, in its concepts, to the principle of fiscal transparency, which would make inapplicable the traditional system of taxing non-residents according to the traditional rules of the Tax Statute ("E.T."). That is to say, according to 592-2 of the E.T., foreign individuals or legal entities are not obliged to file income tax returns in Colombia "when the totality of their income has been subject to the withholding at source referred to in articles 407 to 411" of the same body of law.

Now, such withholding at the source is made on the payments effectively made because such foreigners (and especially foreign companies), not being obliged to keep accounting records in Colombia, their income is understood to be realized by the cash system (i.e., it is understood to be realized when it is effectively received in cash or in kind) established in article 27 of the E.T. (Tax Code).

Up to this point it could be said that, as long as there is no effective payment for the non-resident or as long as all the payments made to the non-resident have been subject to withholding at the source, the non-resident would not have the obligation to file an income tax return in Colombia. Notwithstanding this, the Dian has set a dangerous thesis (embodied in its Concept 001283 of August 15, 2017) according to which the principle of fiscal transparency is applicable to all business collaboration contracts, including that of joint venture accounts. Although subsequently, in its Unified Concept of joint venture accounts (Concept 0376 of 2018) the Dian indicates that for certain matters fiscal transparency does not apply (such as for the transfer to the hidden participant of withholdings at source or deductible taxes generated by the managing participant), it does not expressly revoke its doctrine reason why it could be understood that the same is still in force.

The danger of the existence of the aforementioned doctrine, for this specific matter, is that the Dian could determine that, by virtue of the application of the principle of fiscal transparency, a non-resident hidden participant could be obliged to file an income tax return in Colombia even if nothing has been paid to it under the joint venture agreement. This could occur under the understanding that, being for the Dian the principle of fiscal transparency applicable to the joint account contract, the managing partner certifies the participation of the hidden partner (non-resident) in the income, costs, expenses, assets and liabilities of the contract, being then mandatory for the hidden partner, as established in article 18 of the E.T., to declare its participation in the same "in an independent manner”.