Tax and Accounting Effects of the Mandate Agreement: When Income Is Received on Behalf of a Third Party
1. Legal Nature of the Mandate Agreement
The concept of mandate is established in Article 2142 of the Civil Code, which defines it as:
“(...) a contract in which one person entrusts the management of one or more affairs to another, who undertakes them on behalf and at the risk of the former. The person granting the instruction shall be called the principal or mandator, and the one who accepts it attorney-in-fact, proxy, and in general, agent.”
Article 1262 of the Commercial Code states:
“The commercial mandate is a contract through which one party undertakes to perform one or more commercial acts on behalf of another. The mandate may or may not involve representation of the principal (...)”
According to Article 2177 of the Civil Code:
“The agent may, in the exercise of their duties, contract in their own name or in the name of the principal; if they contract in their own name, they shall not bind the principal before third parties.”
On this matter, the Supreme Court of Justice has stated:
“(...) in the case of mandate without representation, the principal has no rights or actions against third parties who have contracted with the agent (...)” (S.C.J. Civil Chamber, Ruling June 16/87)
2. Tax Aspects of the Mandate Agreement
2.1. Value Added Tax (VAT)
The agent must invoice VAT according to the principal’s tax status. They must also issue a certification signed by an accountant or statutory auditor indicating the income received on behalf of the principal, as required by Article 3 of Decree 1514 of 1998.
2.2. Withholding Tax
If the client is a withholding agent, they must withhold at the time of payment or accrual. It is essential that the invoice identifies the payment beneficiary and includes the principal’s tax ID (RUT).
2.3. Industry and Commerce Tax (ICA)
The agent declares this tax on their own income. The principal declares the income received on their behalf according to the certification provided by the agent.
2.4. Informational Returns
The agent must report the third parties from whom they received income on behalf of the principal, in accordance with the DIAN’s reporting requirements.
2.5. Written Mandate Requirement
The Council of State has reiterated the need for a written contract as evidence for tax purposes (Ruling 22185 of November 14, 2019).
3. Accounting Aspects of the Mandate Agreement
Agent’s Accounting Records
1. Issuance of sales invoice to the client:
| Description | Debit | Credit |
|---|---|---|
| Asset – Accounts Receivable (Clients) | XXXX | |
| Liability – Mandate Agreement / Income Received for Third Parties | XXXX |
2. Issuance of invoice for the agent’s own income:
| Description | Debit | Credit |
|---|---|---|
| Asset – Accounts Receivable | XXXX | |
| Income – Commission from Mandate Agreement | XXXX |
3. Recording incurred costs and expenses:
| Description | Debit | Credit |
|---|---|---|
| Asset – Accounts Receivable (Mandate Agreement) | XXXX | |
| Liability – Accounts Payable | XXXX |
4. Transfer of income to the principal:
| Description | Debit | Credit |
|---|---|---|
| Liability – Income Received for Third Parties | XXXX | |
| Asset – Accounts Receivable | XXXX | |
| Asset – Bank | XXXX |
Principal’s Accounting Records
1. Recognition of receivable from the agent:
| Description | Debit | Credit |
|---|---|---|
| Asset – Accounts Receivable (Mandate Agreement) | XXXX | |
| Income – Core Business Activities | XXXX |
2. Recognition of commission to the agent:
| Description | Debit | Credit |
|---|---|---|
| Expense – Commissions (Mandate Agreements) | XXXX | |
| Liability – Accounts Payable (Mandate Agreements) | XXXX |
3. Settlement between parties:
| Description | Debit | Credit |
|---|---|---|
| Liability – Accounts Payable (Mandate Agreement) | XXXX | |
| Asset – Accounts Receivable (Mandate Agreement) | XXXX | |
| Asset – Bank | XXXX |
Written by: Diego Sanabria and Claudia Benito.
