Mergers and spin-offs: new developments in share disposals

One of the interesting changes brought by Law 1943 of 2018 "Whereby financing rules are issued for the reestablishment of the balance of the general budget and other provisions are enacted" (Financing Law), is the repeal of literal d) of Articles 319-4 and 319-6 of the Tax Statute (ET), which established a kind of "penalty" to the shareholder, partner or participant of companies involved in a merger or spin-off process (acquisitive or reorganization) that assigns in any way the shares, social quotas, participations, political or economic rights received in such operation, before the end of the second taxable year following the taxable year in which the merger or spin-off was perfected.

Let us remember that the above provisions (articles 319-4 and 319-6 of the ET) were incorporated to the tax system by Law 1607 of 2012, as a particular regulation of the tax effects of business reorganizations, reason for which, the necessary assumptions were extensively related so that, in acquisitive and reorganizational mergers and spin-offs, there is what has been called tax neutrality. It is emphasized that such neutrality, by virtue of such regulations, extends to all those involved in this type of operations, i.e., the companies and the shareholders, partners or participants.

Thus, currently, if such assumptions are complied with, in the merger and spin-off processes there is no fiscal alienation -for income and VAT purposes- between the intervening entities and between them and their shareholders, partners or participants, and the companies may compensate the losses in proportion to the assets of the intervening entities.

The repealed paragraphs (paragraphs d) of articles 319-4 and 319-6 of the ET) established as a requirement to maintain the effects described above that, in the event that the alienation or assignment of the shares, quotas, participations or rights received on the occasion of the merger or spin-off, should be carried out before the expiration of the term of the merger or spin-off, the company may offset the losses in proportion to the equity of the intervening entities, was made before the expiration of the second taxable year following the reorganization, the transferor or assignor had to pay the income tax and complementary taxes caused by such transfer, plus thirty percent (30%), limited to ten (10%) of the value assigned to such shares, quotas, participations or rights in the merger or spin-off. The rule in question provided:

If the shareholders, partners or participants referred to in paragraphs a) and b) above, dispose or transfer in any way the shares, quotas, participations, political or economic rights before the end of the second taxable year following the taxable year in which the respective merger or spin-off is completed, they shall pay income tax and complementary taxes for the respective act of disposal or transfer, that which applies to the same act of alienation, plus thirty percent (30%), without in any case such income tax being less than ten percent (10%) of the value assigned to the shares, quotas, participations or rights of the respective shareholder, partner or participant in the merger or spin-off according to the valuation method adopted for the same. The provisions contained in this paragraph d) shall not apply to forced sales, transfers by reason of death, transfers by way of spin-off or merger that comply with the same requirements set forth in this article and transfers by way of liquidation. (Emphasis outside the original text).

This measure implies a great advance in the matter of mergers and spin-offs, by allowing the shareholders, partners or participants, at any time after the merger or spin-off operation, to freely dispose of the shares received, liquidating and paying the corresponding income tax and complementary taxes on the profit received from such transfer, without additional taxes being imposed.

The foregoing does not mean that in the past the alienation or assignment of the shares, quotas, participations or rights resulting from the merger or spin-off was restricted or limited, since their negotiability was free for their holders, except for the restrictions imposed by means of the corporate bylaws. What happened was that the alienation within the two taxable periods following the operation implied assuming a higher value of the tax to be paid, reason that led the interested parties to refrain from entering into any business dealings on the same in such period.

Considering that one of the banners of the National Government to present this tax reform was precisely to strengthen the business sector, the described derogation is a measure that will contribute to the development of new business dynamics.