Corporate and tax benefits in insolvency proceedings by COVID-19

The pandemic caused by COVID-19 has generated an unprecedented economic and social crisis throughout the Colombian territory. Therefore, the national government, in exercise of its constitutional and legal powers, issued legislative decrees 560, 772 and 842 of 2020, through which it seeks to adopt special measures regarding insolvency proceedings, which will help to preserve and recover the assets of the companies that have been affected by this emergency.

In this current state of affairs it seems then that the definitions of Antonio Tonón in his work Insolvency Law (1988) regain importance: "states of crisis" and "states of difficulties" have been presented as a broader interpretation of the "state of insolvency", in which the opening of legal instruments for the recovery of the companies is facilitated.

The measures adopted in the aforementioned decrees not only seek to broaden the tools and reduce the terms contemplated in the corporate insolvency regime provided for in Law 1116 of 2006, but also to establish figures for corporate reactivation and tax relief to reduce and/or defer charges that provide liquidity to debtors.

In corporate matters, the regulations have prescribed several extraordinary rescue and recovery mechanisms, for a term of two (2) years, as follows: emergency negotiation and business recovery; and for micro and small companies, abbreviated reorganization and simplified liquidation.

Additionally, debtor entrepreneurs may include agreements that make the form and time for the payment of their obligations more flexible, based on three novel figures:

1. The capitalization of liabilities, which will allow interested creditors to subscribe shares, risk bonds, among others.

2. The discharge of liabilities, with the purpose of approving a new capital stock structure where creditors become part of the internal liabilities, subject to the approval of the majority of creditors, provided that the company's liabilities exceed the company's valuation.

3. Sustainable debt covenants, by means of which obligations with financial entities may be restructured, without the need to agree on payment schedules, subject to the approval of 60% of the financial creditors.

In short, these are the main new tools and figures authorized by the national government, as temporary relief for business recovery, through agile mechanisms for negotiation between debtors and creditors.

From the tax perspective, the new rules have provided a package of tax incentives for companies admitted in corporate reorganization processes or for those that are executing an agreement under the terms of Law 1116 of 2006, as follows:

1. they will not be subject to withholding at source or self-withholding for income tax until December 31, 2020.

2. They are exonerated from liquidating the advance payment of income tax for the taxable year 2020.

3. They are not subject to presumptive income for the 2020 taxable year.

4. VAT withholding at source will be liquidated at the rate of 50% until December 31, 2020.

5. For the year 2020 and until December 31, 2021, rebates, discounts or capital reductions, fines, as well as penalties or interest obtained by debtors, will be taxed in all cases as occasional gain and not as ordinary income or net income.

6. The occasional gains of the previous point will be compensable with occasional losses and with accumulated tax losses.

Undoubtedly, these tax reliefs result in an additional sacrifice in tax collection, which is already severely affected due to the health crisis.

However, Banco de la República pointed out, in its study Tax exemptions and regional development: evidence in Colombia, that the main concern regarding tax exemptions is that the national government rarely accompanies those special treatments with a policy focused on measuring with a greater degree of certainty the impact that may be generated on business recovery, job preservation and quality of life.

In conclusion, corporate and tax benefits are ideal tools to protect the business and productive sector of the country, understanding it as an engine of economic production and employment generation; however, according to what was pointed out by the Banco de la República in the aforementioned article, it will be necessary that these incentives can be maintained for a longer period of time and be accompanied by a series of economic policies in order to determine whether they effectively generate a positive effect on business reactivation.