Withholding tax on dividends 2019 version leaves loopholes to be regulated

On December 27, 2019, the national government issued Decree 2371, in which it regulates the income tax on dividends declared as payable under the terms of the Financing Law, in force (both the law and the decree; the latter due to legal decay) only for the taxable year 2019, following the unenforceability of Law 1943 of 2018. This regulation must be issued again in 2020, for the purpose of implementing the provisions of the Economic Growth Law, in addition to the changes introduced by the latter on the matter.

In general terms, the decree in question clarifies several doubts that had arisen since the issuance of the Financing Law and ratifies, among other things, that:

i."Dividends or participations decreed as payable" are those whose immediate payability is predicated because no term or condition has been established, or that, if they had been established by the highest corporate body, the term has already arrived or the condition has already been fulfilled;

ii. Dividends distributed against profits generated before 2017 (on this point the Dian had already ruled), by application of the transitory regime of Article 246-1 of the Tax Statute -ET-, will be subject to withholding at source to the extent that they correspond to dividends taxed under the terms of Articles 48 and 49 of the ET, in which case the withholding tax rate applicable will be 20% or 33%, depending on whether they are residents or non-residents and foreign companies or entities not domiciled in Colombia, respectively, or residents not required to file income tax returns that would be taxed at 33%;

iii. Dividends corresponding to profits generated as of 2017 that have not been decreed as payable as of December 31, 2018, will be subject to withholding at the source at the following rates:

Therefore, the decree in question replaced Article 1.2.4.7.3 of Decree 1625 of 2016 (which had been added by Decree 2250 of 2017), which stated that the withholding on dividends taxed on distribution between domestic companies was 20%. This makes a lot of sense if it is understood that this article regulated a situation when there was no tax on dividends and as of the Financing Law it should be interpreted that this provision only applied for profits generated prior to 2017 or for those that arose subsequently, but that were decreed as payable as of December 31, 2018.

iv. Regarding the dividends that were distributed as taxable (from profits generated as of January 1, 2017, decreed in force of the Financing Law), the decree specifies what the law had not done, that for the combination of rates the ones provided in Article 240 of the ET must be considered, as appropriate. Therefore, it could be thought that not all taxed dividends should have been subject in 2019 to the general rate of the first paragraph, but that the different rates established therein (in general terms, 9%) should have been respected.

v. The transfer to individuals of the 7.5% withholding tax charged to companies on the first distribution will be imputed proportionally to each shareholder according to their shareholding.

On the other hand, under the regulation, the doubt as to whether the company could refrain from applying the withholding at source when it was certain that the final beneficiary of the dividend was covered by a BIT in force entered into with Colombia (and thus also the doubt as to the application of the BIT) is removed, since it is established that in all cases the respective percentage must be withheld and, in the event that this had not been done or was done for a higher amount than that set in the treaty, the recipient of the dividend must request the Dian to return the improper withholding.

This situation could imply a violation of the treaty, since it would result in a "non-conforming taxation" in the terms of article 869-3 of the ET, since this is a result that is at odds with the way of application of the DTAs for the reduction of withholding for dividends, and therefore the mutual agreement procedure -MAP- could be initiated (see Resolution 000053 of 2019).

Additionally, it is an excess of paperwork that would only become relevant in the eventual case in which, for example, the withholding agent is liquidated, and the taxpayer would not have been able to advance the regular procedure, i.e., to request the excess withholding before said agent.

In this sense, the ample term to request the refund (up to five years after complying with the term of permanence of the investment in Colombia according to each DTT, article 6 of Decree 2371 of 2019) would be useful in these cases. However, the best for commercial traffic would have been to establish the condition of not practicing withholding (only in case of certainty) or to maintain the regular refund process and, only in a subsidiary manner, the procedure before the Dian.

On the other hand, the refund of the withholding is contemplated for those cases in which the beneficiary is or is not a taxpayer of the special tax regime, for which the same comments of the previous point are applicable regarding the non-need to practice the withholding when the quality of the beneficiary is certain, although it does establish that the procedure is made before the company that practiced the withholding.

Regarding taxpayers under the simple taxation regime, it was if dividends shall be subject to the income tax rates for this concept, as well as to the provisions of article 49 of the ET; for this purpose, the national component of the tax that was paid by the company shall be considered. In this regard, it must be said that:

i. It is complex to apply Article 49 of the ET, since these taxpayers do not have a net income subject to income tax and, therefore, a tax payable under the terms of that provision. Thus, neither Decree 1468 of 2019, which regulated said regime, nor Decree 2371 dealt with this issue.

ii. In any case ("taxed" or "non-taxed" dividends), no withholding shall be made, since, according to the provisions of Article 911 of the ET, SIMPLE taxpayers only act as withholding agents for purposes of labor payments and, consequently, the income tax related to the dividends of the partners/shareholders of a company under SIMPLE shall be collected by the tax administration upon the filing of the income tax return of such partners/shareholders;

iii. Although the regulation refers to the withholding rates for dividends, including the one for non-residents, numeral 1 of Article 905 of the ET excludes non-residents from this regime (the partners of a company under SIMPLE can only be individuals and foreigner’s resident in Colombia).

Finally, Decree 2371 of 2019 indicates that the withholding at source made on dividends that are taxed to taxpayers with income tax rates different from the general rate, will be subject to the general rate of the date on which the dividend is paid as payable. Having said the above, companies with preferential rates (companies incorporated in exclusive economic and social zones -Zese-, Zomac, beneficiaries of Law 1429 of 2010 and others with a rate of 9%) will be subject to a withholding at the source under the general income tax rates, generating them, contrary to the provisions of the law, a differential income tax rate with respect to dividends.

Companies that declared dividends in 2019 must review whether the withholding tax rate applied is in accordance with the Financing Law and Decree 2371 of 2019, because there may be a deficit or surplus of withholdings.