The curious case of tax loss carryforwards

Article 145 of Law 2010 of 2019 (last tax reform) created a particular and ingenious -but insufficient- mechanism to rescue Public Utilities Companies (ESP) that had been subject to intervention processes by the Superintendence of Public Utilities. Such regulation established that the ESPs that were in such situation and that created "new companies whose purpose is the preservation of the continuity in the rendering of the public service", may "contribute to these new companies the right to compensate the balance of the fiscal losses that the intervened company had not compensated in previous fiscal periods". It is indicated that, for accounting and commercial purposes, "the contribution will consist of the transfer of the corresponding deferred tax asset".

Once the contribution has been made, the receiving company (which must have as its main activity the rendering of one or several public services provided by the contributing company) may offset, against its net income obtained in the tax period of the contribution "or in the following tax periods" (that is, in any of the following years, without the 12-year limit for offsetting losses established in Article 147 of the Tax Statute -E.T.-), and in the proportion in which it has been offset against its net income obtained in the tax period of the contribution (i.e., in any of the following years, without the limit of 12 years for offsetting losses established in Article 147 of the Tax Statute -E.T.-), and in the proportion in which it has been offset in the following years. ), and in the proportion in which they were contributed at the time of the contribution, the tax losses transferred to them by the intervened company.

Up to this point, everything sounds very good; a tax benefit created to facilitate the preservation of the public service using a structural reduction coming from one of its shareholders. The problem begins when the operation is framed within the corporate reorganization regime created by Law 1607 of 2012 and applicable to all taxpayers, such as ESPs. It is worth remembering that, in accordance with the provisions of Articles 12, 22 and 23 of the Tax Statute, ESPs are taxpayers of income tax at the ordinary rate. Although until 2002 these companies could treat their income as exempt, such benefit, as established in Article 235-2 of the E.T., is not applicable today.

The first difficulty in this issue is whether, from the corporate perspective, it is possible to contribute in kind of a tax credit, such as a tax loss. This is because Article 136 of the Code of Commerce ("C. de Co."), when mentioning which assets may be contributed in kind, indicates that rights may be contributed, but only on "industrial property". Likewise, with respect to the contribution of credits, Article 129 of the same Code indicates that this could be done but that, in addition to being certain and due, "it will be credited to the account of the partner when it has been effectively paid into the corporate treasury". It is therefore questionable whether a tax loss can be taken into account as a right susceptible of being contributed in kind to a company.

Assuming that it is possible to contribute in kind a tax loss, the difficulty of this operation will arise -as indicated- when framing it within the regime of corporate reorganizations, established in article 319 of the E.T. (Tax Law). Such regime establishes that, for a contribution in kind operation to be considered fiscally neutral, for the contributor and for the recipient, several requirements must be met, among which is that "the tax cost of the contributed goods [is] the same that the contributor had with respect to such goods, which shall be recorded in the document containing the legal act of the contribution (T.S. Art. 319(2)). Art. 319(2)). Tax losses, being a tax right with a determinable commercial value (especially these, due to their capacity to be compensated indefinitely) are not an asset (nor are they goods that can be accounted for as an asset), and therefore do not have a tax cost. In this sense, the contribution of the same cannot be made "for its fiscal cost", reason for which, not being able to avail itself of the tax deferral regime for reorganizations established in article 319 of the E.T. (and therefore not being able to comply with the provisions of article 319-1 of the E. T.), the contribution will be subject to the tax deferral regime established in article 319-2 of the E. T. (and therefore not being able to comply with the provisions of article 319-2 of the E. T.). T.), the contribution will be taxed for the recipient of the losses for the value for which the same are contributed, and, in the same way, the contributor that receives shares of the subsidiary as consideration for the contribution of the losses, will also have a taxable income.

In conclusion, by not exempting the ESPs from compliance with the requirements established in the general regime for contributions to companies, as set forth in Article 319 of the E.T., the rescue mechanism structured for these companies -although ingenious- turned out to be insufficient.