The "neither" of the Dian for the distribution of stock dividends

On occasion of the changes introduced in the tax system by the Financing Law, the Dian has indicated that the distribution of profits in shares (among others), referred to in Article 36-3 of the Tax Statute (ET), is subject to the application of the special income tax rates for dividends contained in Articles 242, 242-1 and 245 of the ET, at the corresponding rate as the case may be (0%, 15% or 7.5%).

In Concept 14495 of last June 6, the entity reiterated such position, stating that according to article 36-3 of the ET the "distribution of profits in shares (...)" constituted an income not constituting income or occasional gain as long as it was the result of applying articles 48 and 49 of the ET; otherwise it would be treated as taxable income, except in companies listed on the stock exchange.

It is important to remember that the purpose of Article 36-3 of the ET ("Capitalizations not taxed for partners or shareholders") was to encourage the capitalization of equity accounts. For this purpose, it was provided that such operation would not have any tax effect as from the classification of the income as not constituting income or occasional gain. This was stated by the same entity through Official Letter 51657 of August 17, 2004: "Article 36-3 of the Tax Statute, added by Article 6 of Law 49 of 1990, seeks to strengthen the equity of the companies, encouraging the capitalization of all those values that are part of the equity of the company, such as reserves, premium in placement of shares and revaluation of equity, by treating them for this purpose as income not constituting income or occasional gain".

However, the Dian is wrong in its interpretation, in the sense of indicating that the expression "neither" contained in article 36-3 of the ET ("...In the case of companies whose shares are listed on the stock exchange, the distribution in shares or the capitalization of the profits that exceed the part that does not constitute income or occasional gain in accordance with articles 48 and 49."), refers exclusively to the capitalization of profits by companies whose shares are listed on the stock exchange.

The Royal Academy Dictionary defines the word "neither" as "adv. U. to deny something after having denied something else", which does not occur in the wording of Article 36-3 of the ET, since such expression is preceded by an affirmation, therefore, it is not possible for the entity to reach the transcribed conclusion. It is worth noting that according to Article 28 of the Civil Code "The words of the law shall be understood in their natural and obvious sense".

Thus, according to Concept 14495 of June 2019, the tax effects derived from the referred legal act are subject to the application of articles 48 and 49 of the ET, with which, not only the untaxed part will be subject to the special rules of taxation on dividends but also what will be taxed, a fact that blurs the intended incentive (tax relief of the income destined to capitalize the companies).

Therefore, if it is decided to distribute dividends in shares and it is considered to be covered by the aforementioned article 36-3 of the ET, it is important to inform the shareholders/partners the value of the withholding at source applicable so that they can consign the respective amount and the company, as withholding agent, complies with the obligation that corresponds to it.  If it is decided to be pragmatic, the company may assume the value of the tax resulting in a non-deductible expense in the income tax. In either of the two options, the Dian is counting on the taxpayer's interpretation of the norm to be a fiscal interpretation that leads to the payment of the corresponding tax.