The joint venture contract: the story continues...

Once again, the Dian gives us a reason to refer to the tax treatment of the joint account contract. On this occasion, on account of Concept 035394 of December 2018, in which the Entity changes its position regarding aspects such as the recognition of equity items associated with the contract and the special self-withholding at the source related to the income of the hidden participant.

Let us recall that until 2016 there was a meshing between the legal definition of the joint account contract (article 507 of the Code of Commerce) and the tax treatment addressed up to that time by the Dian doctrine. In this sense, the managing partner naturally assumed the totality of the operation associated with the joint venture and with it the tax treatment inherent to it (income, VAT, withholdings at source, industry and commerce) to distribute, in the term established between the parties, the profit (or income, as agreed) that corresponded to the hidden partner, constituting i) a deductible expense for the managing partner, ii) the quality of "other income" for the hidden partner subject to a withholding at source for this concept at 2.5%.

As of 2017, with the amendment introduced by Law 1819 of 2016 to Article 18 of the Tax Statute, the joint venture contracts were equated to other business collaboration contracts (joint venture, consortium, among others) stating that each party to the contract must incorporate in the income tax return its share, as appropriate, in the assets, liabilities, income, costs and expenses associated with the joint venture, so that the income or distributed profit treated until 2016 as a deductible expense for the manager would no longer have such quality.

Such distribution, according to the doctrine of the Entity issued since then, should be made on all the mentioned items, regardless of whether the hidden party participated only in any of these concepts (e.g. only income or profit). Thus, among others, in Unified Concept 08537 of April 2018 the Dian graphically pointed out that, regardless of who is the owner of an asset contributed to the contract, the participants should declare the same, as well as the depreciation according to the participation of each one, with all the problematic and antitechnical from the legal point of view that this would become. Likewise, the Entity pronounced in Concept 24226 of September 2018 indicating that the managing partner must practice the special self-withholding for the totality of income with which the hidden participant did not have such obligation.

Thus then, during 2017 and 2018 many income taxpayers, whose business model is developed through the use of joint account contracts, were forced to adjust to what was described above or even change the contractual figure.

Well, Concept 035394 of December 2018 referred to at the beginning of this column, refers, among other things, to the following aspects:

1. Equity treatment: if the economic essence of the business and what is agreed in the contract does not contemplate the participation in the assets and liabilities by any of the participants, this shall not incorporate in its income tax return any item.

2. Distribution of income or profit by the managing participant: as regards the income, the hidden participant will recognize in its income tax return the corresponding proportion of such item, which is different if the participation is on the profit, since it must distribute income, costs and expenses related to it. The Dian also reaffirms that there will only be a guaranteed return when there is a fixed and invariable value that does not depend on the success of the activities to be developed.

3. Special self-withholding: each participant must declare it and pay it according to the corresponding income; thus, the manager must do it with each payment or credit or in account and the hidden one in the same measure according to the certificate issued by the manager for all fiscal effects.

In order to avoid amounts doubly subject to self-withholding, it is necessary to keep a monthly accounting or control associated to the contract, because, if the liquidation of the same is made at the end of the term (moment in which the certificate is generated), it will be inconvenient for the manager to determine the amount of the payments or credits on account that during the year should not be subject to self-withholding on account of corresponding to the hidden one.

4. Submission of exogenous information: the hidden partner shall report in a consolidated manner the information corresponding to it, while the manager shall be responsible for reporting in detail (Resolution 060 of 2017 contains the specifications of the information to be submitted for 2019).

The above means that the certification delivered by the manager to the inactive party will only reflect global concepts and values without indicating whether, for example, the expense corresponds to compensation, loss of inventory, portfolio provision or other factors which raises the concern raised when contractual relationships were entered into between taxpayers of different economic sectors and, for example, for the financial sector the portfolio provision is allowed under the parameters set forth by the Financial Superintendence while for the real sector other requirements must be observed.

Thus, the interpretation of the Dian on this occasion is a little more accurate to the reality of this contractual figure and invites to review the contractual clauses agreed.

Finally, the variation in the Dian's interpretation of the rules, together with the mandatory compliance with the concepts by its officials and the impossibility of invoking them by the taxpayers (after the entry into force of the Financing Law) generates a level of legal uncertainty and violation of the principle of legitimate trust that leads us to conclude that business decisions must be based on the correct interpretation of the rules, measuring the risk associated with the official interpretations.