Private equity funds are not subject to ICA tax.

In a Concept dated December 1, 2017, the General Directorate of Fiscal Support ("Dgaf") of the Ministry of Finance and Public Credit stated that Private Capital Funds ("PCFs") are not taxpayers of the Industry and Commerce Tax ("ICA") and that their investors are, under certain rules that will be explained below.

Regarding the first point, the Dgaf concluded that the FCPs are not taxpayers of the ICA because Article 54 of Law 1430 of 2010 (amended by Article 177 of Law 1607 of 2012) made a restrictive classification of the taxpayers of the departmental and territorial taxes within which it is not possible to fit an investment vehicle such as an FCP.

Regarding the second point, the Dgaf concluded that the activity of those who make the investments in the FCPs does constitute an activity susceptible to be taxed with the ICA, whose taxable base is composed of "the totality of the income obtained in their capacity as investors (...) registered in accordance with the tax rules of the tax authorities". ) recorded in accordance with the tax and accounting rules applicable to them", which must be distributed to the investor "at the same title that they have received them in the fund and under the same tax conditions that they would have if they were received directly by the subscriber or participant", and that - in light of the provisions of Article 343, paragraph 2 literal d) of Law 1819 of 2016 - such income shall be understood taxed in the municipality where the headquarters of the company where the investments are held is located.

While the first conclusion of the Dgaf is sensible and does not offer any doubt, the second one does, since it leaves in the atmosphere a feeling that the unitholders would have to be taxed with the ICA, even if the income of the Private Equity Funds had not yet been distributed, which is far from a reasonable interpretation.

In order to really understand the scope of these assessments, it is necessary to refer to articles 23-1 and 368-1 of the Tax Statute, rules that regulate the income tax effects on the PCFs. Thus, Article 23-1 of the Tax Statute indicates that the CPFs shall not be taxpayers of such tax and Article 368-1 regulates the mechanism of withholding at the source of income tax in the distribution of income to the subscribers of these funds, withholding that by express legal provision shall be made at the time of payment.

Likewise, it is important to emphasize that the so-called "principle of transparency", adopted by Law 1607 of 2012 to regulate the tax effects of trust contracts (art. 102 of the Tax Statute), does not extend to other investment vehicles, such as the CPFs. In this sense, it cannot be indicated that (as it happens in the trust) the income of the FCP can be automatically considered as income of the subscriber, since -due to its special rules- it will only be so at the time of payment.

Thus, from a systematic interpretation of the law, it is possible to conclude that since the tax law creates a special rule for the realization of the income belonging to the subscribers of the CPFs, and therefore these can only be taxed at the time of payment (and not at the time of accrual), it is only at such time that the ICA taxable event for the participants of the CPFs will be understood to be configured.