Withholding tax on profit distributions on shares of stock

Through pronouncement No. 100208221-000018, dated January 10, 2019. 100208221-000018, dated January 10, 2019, the Sub directorate of Regulatory Management and Doctrine of the National Tax and Customs Directorate (Dian), concluded that, in the events in which the distribution of profits in shares or quotas of social interest is made, withholding at source must be made in accordance with the provisions of articles 242, 242-1 and 245 of the Tax Statute (ET), even though such payment is considered as an income not constitutive of income or occasional gain (INCRNGO).

Let us recall that Law 1819 of 2016 introduced to the tax system the obligation to make withholding at source on dividends declared in favor of individuals, whose marginal rate, according to the amendment made by Article 27 of Law 1943 of 2018 (Financing Law) to Article 242 of the ET, is 0% or 15% depending on the range in UVT to which the payment of dividends amounts, provided that these have the quality of INCRNGO, otherwise, the rate to be applied will be the nominal rate established in article 240 of the ET, under the precisions contemplated in the aforementioned article 242.

Likewise, the Financing Law added Article 242-1 to the ET, by which the tax on dividends on profits declared in favor of national companies [1] was established at a rate of 7.5% or the nominal rate (with the additions referred to in the same law), depending on whether the profits are considered as INCRNGO or not, respectively. This law also modified the rates applicable to profits received by foreign companies and entities, and by non-resident individuals (article 245 of the ET). This tax, according to the aforementioned provisions, will be withheld at the source by the company distributing the dividend.

Now, in accordance with the provisions of Article 455 of the Code of Commerce, the payment of dividends may be made in cash or in shares of the same company, which may originate in profits that may be distributed as INCOME or as taxable income in the light of the procedures established in Articles 48 and 49 of the ET.

For its part, Article 36-3 of the ET has established that the distribution of profits in shares or quotas of corporate interest, as well as their transfer to the capital account, on the occasion of the capitalization of the equity revaluation account, constitutes an INCRNGO, as follows:

"The distribution of profits in shares or quotas of corporate interest, or their transfer to the capital account, as a result of the capitalization of the Equity Revaluation account, is an income not constituting income or occasional gain. In the case of companies whose shares are listed on the stock exchange, the distribution in shares or the capitalization of profits in excess of the part that does not constitute income or occasional gain in accordance with articles 48 and 49 does not constitute income or occasional gain".

As can be observed, the rule in question makes a distinction between listed and unlisted companies by providing for the former, that "the distribution in shares or the capitalization of profits exceeding the part that does not constitute income or occasional gain in accordance with articles 48 and 49", which implies that the distribution in shares or the capitalization of profits from unlisted companies, considered as taxed by application of article 49 of the ET, shall not constitute INCOME.

On the occasion of such provision, several concerns have arisen regarding the treatment of untaxed dividends distributed in shares of the same company, which, as indicated, would be perceived as a GAT.

In order to clarify this issue, it must be considered that one thing is that the dividend to be distributed by application of articles 48 and 49 of the ET is considered as INCRNGO and another, that, by legal provision, the form of payment of the dividend through shares of the company, is considered as INCRNGO (Art. 36-3 of the ET). The origin of one and the other is different and so will be their effects.

Thus, in the first case, the rules related to the distribution of dividends will be applicable, among which are the provisions that establish the withholding at the source for the payment of dividends established in articles 242, 242-1 and 245 of the ET, without having to consider the form in which the dividend will be paid (e.g. in shares or interest installments). In such virtue, it is indifferent for the application of the mentioned rules, that the payment of dividends with shares constitutes, for the beneficiary, an INCOME.

This is how the Dian understood it when concluding that "the withholding at the source established in articles 242, 242-1 and 245 of the E.T. is applicable to the distribution of profits in shares or quotas of corporate interest [2]".

By virtue of the foregoing, companies that distribute dividends must be clear that they may not abstain from the obligation to withhold withholding tax on such dividends, even when the payment has been made in shares of the same company. A contrary action would imply, among other consequences, incurring in the crime established in Article 402 of the Criminal Code (omission of withholding agent).

[1] The effects of this rule were analyzed by Dr. Gina Marcela Ortiz, partner of the tax area of the firm Ignacio Sanín Bernal & Cía Abogados S.A.S., in a column of January 11, 2019, entitled "Withholding at the source for untaxed dividends decreed to companies", published in this media. 

[2] Concept No. 100208221-000018 of January 10, 2019.