1. Legal Basis

Article 272 of the Tax Statute sets out the patrimonial value of shares, contributions and other rights in companies as follows:

“Shares and corporate rights in any type of companies or entities must be declared at their tax cost, where applicable.

For taxpayers required to use special valuation systems for investments, in accordance with the provisions issued on the matter by the control authorities, the patrimonial value shall be that which results from the application of such valuation mechanisms.”

2. Options for Declaring Shares

From the transcribed rule it is inferred that the taxpayer has two options for declaring the shares held in a company:

• At their tax cost.
• For taxpayers required to use special investment valuation systems, the patrimonial value shall be that which results from such mechanisms.

3. Nature of the Equity Method

It is necessary to clarify whether the equity method constitutes a special investment valuation system, in order to determine whether it forms part of the value for which shares must be declared.

4. DIAN Ruling (Ruling No. 029461 of 2008)

DIAN, through Ruling No. 029461 of March 2008, stated the following:

“This office has consistently held (Rulings 041336 of 1997, 002382 of 1998 and 047427 of 1999), based on the analysis of Joint Circular No. 009 and 13 of November 17, 1996, issued by the Superintendence of Companies and the Superintendence of Securities, that the equity method is a true investment valuation system acceptable for tax purposes...

However, it is necessary to revisit this thesis... according to which the Equity Method is an accounting method, not a special valuation system...

Indeed, in official letter No. 2002-01-059630 of May 2, 2002... the Superintendence of Companies concludes that the joint circular establishes general rules that become an accounting procedure... without imposing a special valuation system for this type of investments.

In the same direction, in official letter No. 20033-905 of May 17, 2002... the Superintendence of Securities (today the Financial Superintendence of Colombia) concludes... that the Equity Method is an accounting procedure... and clarifies that accounting methods and valuation methods are two different aspects inherent to accounting science.

Recapping, the Equity Method is not a special investment valuation system for the purposes of the second paragraph of Article 272 of the Tax Statute…”

5. DIAN Ruling (Ruling No. 048359 of 2009)

In line with the above, the Tax Administration, through Ruling No. 048359 of June 2009, stated:

“(...) it was concluded, based on the pronouncements of the Superintendence of Companies and the Superintendence of Securities (today the Financial Superintendence of Colombia), that the equity method is not an investment valuation system... Consequently, the recording of investments in subsidiaries under this accounting method has no tax impact...”

6. Conclusions

By virtue of the foregoing, it is concluded that the equity method is not a special investment valuation mechanism. For this reason:

• The amount recorded in accounting as an increase or decrease in the investment resulting from this method will not form part of the tax patrimonial value of the shares.
• The income will not be taxable (numeral 4 of article 28 of the T.S.).
• The expense may not be treated as a deduction (numeral 2 of article 105 of the T.S.).