Systematic interpretation of Article 18 of the Tax Statute

Within legal hermeneutics there is the systematic method of interpretation, according to which a rule is not an isolated mandate within the legal system but an element belonging to a set or normative system that seeks a specific purpose. Thus, the specific meaning of a rule can be obtained from the principles that inspire the normative system as such or, even, from the purpose of the other rules that compose it.

In this sense, our Civil Code, in Article 30, introduces the concept of "interpretation by context". This hermeneutic method indicates that "the context of the law will serve to illustrate the meaning of each of its parts, so that there is due correspondence and harmony between all of them".

Interpreting Article 18 of the Tax Statute (article that regulates the tax effects of business collaboration contracts in Colombia) has been a titanic task, both for businessmen and advisors who have something to do with the subject, as well as for the public officials in charge of applying the rule. The section that generates the greatest interpretative difficulty is the one that establishes that "The parties to the business collaboration contract must declare independently the assets, liabilities, income, costs and deductions that correspond to them, according to their participation in the assets, liabilities, income, costs and expenses incurred in the development of the business collaboration contract". Many addressees of the rule have interpreted that it is the obligation of both parties, in a business collaboration contract, to individually declare the assets, liabilities, income, costs and expenses used in the collaboration contract according to their participation in it. This interpretation is erroneous, as will be demonstrated below.

The key to correctly interpret this standard is the phrase "according to its participation in the assets, liabilities (...)". The rule does not establish that these items must be declared independently "according to their participation in the contract" or "according to the percentage they have in the collaboration contract" (hypothetical case in which the above mentioned interpretation of the rule would be justified), but only "according to their participation in the assets, liabilities, income, costs and expenses incurred in the development of the collaboration contract".

Thus, in the hypothetical case of a consortium where each party, having 50% of the contract, makes a substantially different contribution (for example, one of the consortium members contributes the use of a property for the performance of a certain industrial activity and the other contributes all the labor force of its own employees for the performance of the business), it would make no logical sense to interpret article 18 of the E.T. as meaning that the contributor of the property, having 50% of the consortium, should declare 50% of the payroll cost of the workers of its consortium member. This is because such obligation is limited to declare the costs "according to its participation" in such cost.

Since the contributor of the real estate does not have any participation in that particular cost, it makes no sense to oblige him to declare it, especially since the tax authority will surely proceed to reject it immediately since it does not comply with the causality requirement established in article 107 of the Tax Statute. Neither can the contributor of the labor force take as a deduction 50% of the depreciation of the property contributed, for the same reason.