Legal Bulletin No.

9 April 2009

NOTES OF INTEREST

Banking law, insurance and capital markets

New functions for the Securities Market Self - Regulation Organisms Through Decree 039 of 2009 the National Government authorized the self regulatory organizations (SRO) two new activities: a) regulatory, disciplinary, supervision and certification functions regarding any activity operation, service, product, or market participation carried out by the entities supervised by the Financial Superintendence (Colombian supervisory agency for the financial institutions and the securities market), or by other entities that develop related activities upon voluntary request or upon law requirement; it is a very significant regulation that allows, in addition to the mandatory self regulation for securities intermediaries, the development of voluntary self regulation, an important instrument for

the improvement of professional standards in the market, using the infrastructure, know how and reliability of the Colombian SRO (Autorregulador del Mercado de Valores AMV); b) the consolidation of the securities market information obtained from the trading systems, the trade reporting systems, and the securities intermediaries; this is a function of great importance for assuring market transparency, having in regard the marketfragmentation that can result from the recent opening of the OTC market for all the operators, and the likely appearance of new organized trading venues; the Colombian SRO (AMV) is the most suitable entity for the compilation and disclosure of market information as it happens with other SROs from other jurisdictions. (E.g. FINRA Trace in the United States)

Shared companies systems

Equity Capital of managing negotiation

Through Decree 450 of 2009 the companies with an international

recognition on management of exchanges, trading systems, or trade reporting systems, were allowed to hold up to 100% of the equity capital of a trading system or a trade reporting system operating in Colombia. This is

an important change because it allows the creation of Colombian companies by foreign entities exclusively engaged in the operation of these systems, without the 30% capital limitation that exists as

a general rule in the regulation. The Decree might facilitate the opening of new systems, fostering competition between the providers of these services.

Commercial law
New Law unifying invoices was challenged for unconstitutional Recent Law 1231 of 2008 which intended to unify the invoice as security has been challenged before the Constitutional Court for violating the Constitution, in the opinion of the plaintiff Humebrto de la Calle Lombana. In the lawsuit the plaintiff considers that the violation lies on the parts of the Law repealing Article 944 of the Commercial Code, granting effects of acceptance to the silence of the obligated, establishing as essential appointing an expiration date but rejecting other expiration alternatives, establishing the possibility of recording payments in a different document or by different means besides the invoice, establishing the impossibility of restraining the invoice negotiation and the impossibility of arguing misrepresentation, as well as the inappropriate prevention of money laundering. The draft of bill had been object of numerous critics by members of the private law network including the ones made by our associate Daniel Rodriguez Bravo at the time of the bills discussion, as quoted on the footnotes of the lawsuit.

Trusts and insolvency regime

Decree 1039 of 2009 regulates Law 1116 of 2006 in connection with the requirements for the admission to the insolvency proceedings for trusts developing business activities, and the exclusion of assets transferred to the trust for guarantee purposes from the bankruptcy state. Trust developing business activities are the ones which object is the administration or custody of assets dedicated to production

processes, transformation, or rendering of services. Assets transferred to the trust as a guarantee in favor of the beneficiaries of the trust, are excluded from the bankruptcy state when the contract is registered at the commercial registry or the corresponding registry according to the assets nature. If assets transferred to the trust are part of the economic exploitation unit of the trustor and this unit is likely to be sold, the liquidator and the trust manger could agree on a joint sell.

Tax law

Deduction for investment in productive fixed assets. Recent developments Ruling 2376 dated January 14, 2009 issued by DIAN confirmed Ruling 35197 dated June 10, 2005 and Ruling 012519 dated February 19, 2007, which stated that the 40% deduction does not apply to expenses for repair, additions or improvements made to productive tangible fixed assets of the taxpayer,

since applicable rules (article 158-3 of the Tax Code and Decree 1766 of 2004) demand the actual acquisition of a productive tangible fixed assets for the deduction to apply. Construction of infrastructure costs for the assembly or starting up of productive tangible fixed assets that have to be recorded as assets and will be amortized will form part of the base to calculate the 40% deduction, situation that differs from repairs, additions and improvements.

Trusts are not industry commerce tax, ICT, taxpayers

and

Through decision dated November 13, 2008, file 17333, Council of State ordered the provisional suspension of article 29 of the Tax Statute issued December 31, 2004 by the Municipality of Yumbo, which appointed trusts as taxpayer of industry and commerce tax, for being contrary to article 32 of Law 14 of 1983. Through a decision issued on the same day, file 16642, Council of State revoked official assessment 3874 dated August 9, 2005, by which the municipality of Medellin added taxable income to a taxpayer for the sale of property that were under the name of a

trust, based on the fact that articles 64 [par 2] of Decree 710 of 2000 and 1 [paragraph) of Rule 61 of 1999, by appointing trust as ICDT taxpayers and thus fixing an essential aspect of the correspondent tax different than those ruled by Congress, violate article 32 of Law 14 of 1983 and are against articles 287 [3], 313 [4] and 338 of the Constitution. Finally, and in the same sense, through decision dated February 5, 2009, file 16261, Council of State confirmed nullity of article 6 of Rule 105 of 2003 issued by the District of Bogota and ruling 1043 dated July 26, 2004, issued by Bogota tax authorities, which designated trust as taxpayers.

 Foreign Exchange income is not subject to ICT Administrative Tribunal of Cundinamarca, acting as court of appeal, by means of decision dated January 28, 2009, file 00070-01, stated that a transaction may be subject to ICT, but the adjustment for the currency fluctuation does not produce the same effect, as it is an adjustment

ordered by a rule originated in an economic fact but not in the performance of a taxed activity. Thus, income generated in said adjustment is not an income that forms part of the ICT base. In the same sense the Tribunal issued decisions dated October 25, 2007, file 2004-2001, dated May 22, 2008, file 07-074, and dated October 23, 2008, file 07-005.

Remember

As general rule payment of dividends abroad is not subject to withholding taxes; neither do profits obtained by branches of foreign companies. In the case of payment of dividends subject to taxation for the Spanish shareholder, verify the possibility to obtain the benefit of 0% tax by reinvesting such dividends in the country. Payment of dividends by companies domiciled in Bogota is not subject to industry and commerce tax withholding.

The execution of a Legal Stability Contract may be requested for Project already completed that comply all requirement as long as said Project are subsequent to law 963 issued on July 8, 2005. Stamp tax on taxed documents applies for 2009 at a 0,5% rate; from 2010 the rate will be 0%. To avoid generation of tax agreement may be structured through commercial offers accepted by means of a purchase order; in any case it is worth to review the possibility to apply to your particular case any of the other legal exemptions.

Corporate Social Responsibility CSR

Westpac New Zeeland, first bank in the world in achieving the CEMARS certification

Westpac New Zeeland became the first bank in the world in achieving the CEMARS certification (Certified Emission Measurement and Reduction Scheme), awarded to those organizations that in

compliance with the ISO 1464- 1 for the greenhouse gas quantification and reporting, reduce their CO2 emissions on a remarkable way. The program targets a 20% reduction of the annual emission of the company of 14.058,8 CO2 tones. To that end, the corporate social responsibility team created policies like the reduction of traveling budgets discouraging air traveling, the reduction of energy consumption, the use of hybrid vehicles on the company's fleet and the creation of a pilot central print management for the reduction of paper consumption. With these policies

the company expects a reduction of CO2 emission from 12 kilograms per active costumer to 9,3 kilograms. The policies adopted by Westpac represent a true example of corporate social responsibility for the banking system around the world, to which the need of generating and developing environmental and social sustainability initiatives must not be ignored. Colombia banking institutions should assume this challenge originating virtuous initiatives on corporate social responsibility.

Opening of a Pilot Plant for bioethanol production derived from Yuca On Friday January 27th 2009, a pilot plant for ethanol production derived from yuca at the Microbiology School of the University of Antioquia, opened its doors. The plant is currently implementing the program strengthening the chain of bio-ethanol from yuca, its evaluation and co products (fortalecimiento de la cadena de bioetanol a partir de la yuca, su evaluacin y coproductos"), which object is the energetic and environmental evaluation of the fuelethanol mixtures and the research on the use of CO2 (product of the fermentation) in the chemistry industry.

In addition to the program the plant evaluates the use of liquid waste from the fermentation on the cattle feeding. The Plant is the result of the research done by the Alliance University of Antioquia FUNDAUNIBANand Antioquias agricultural Secretariat. On the other hand, the project "strengthening the chain of bio-ethanol from yuca, its evaluation and co products" its implemented by the contribution of real sector companies such as SOFASA and QUIMICA BASICA S.A. on the developing of their corporate social responsibility policies. We congratulate these environmental responsible initiatives and invite new private-public alliances to support them.

ANALYSIS MATTERS Good will in the sale of the commercial establishment By Benjamin Cubides - Pinto Partner of the Tax Law practice
The difference between the sales price of the commercial establishment, company, or any other economic entity, and its fiscal cost may be considered for the seller as income for good will. It is presumed that 30% of the sales price of said intangible corresponds to its sales cost. The support for such cost to be accepted for tax purposes consists in a technical appraisal and that said cost is declared in the income tax return of the year previous to the sale. Decision of the Council of State, Fourth Section dated January 26, 2009 file 16274 discussed the matter of the so called good will which is an intangible originated in the sale of the commercial establishment and the requirements for the acceptance of the cost that can be attributed to the income in the sale of said intangible. Case under analysis consists in a sale made by the claimant company of its commercial establishments (drug stores). The claimant considered the difference between the sales price and the commercial establishment assets cost as income for the sale of the formed intangible named Know How; to said Know How income it allocated the 50% cost (currently 30%) accepted by article 75 of the Tax Code, which presumed such percentage as the sales cost of formed intangibles. DIAN rejected the cost of the formed intangible named Know How, based on the fact that Know How corresponds to the secret experience gathered in an art or technical on the manner to do something; as the case under study was related to the sale of a commercial establishment that does not produce any product, nor require any technical knowledge to manufacture them, it was not possible to sale such type of intangible. In addition tax authorities did not find recorded in the accounting books the amount of expenses incurred to form the intangible and so demonstrate its existence under requirements of article 74 of the Tax Code on acquired intangibles. When analyzing the file, the Council of State concluded that the difference between the sales price and the cost in the sale does not correspond to Know How, but to good will which consists in the reputation of the enterprise that allows it to have certain commercial advantages over its competitors and that in financial terms is understood as futures greater profits compared with other similar enterprises, not only

because the good treatment to customers, but also due to other intangible factors such as locations, on time deliveries, quality and product warranties. Will no value has to be allocated to formed good in the accounting books because it is not tied to clearly identified expenses. In the case under analysis as it was related to a formed intangible asset it was not possible to demonstrate its acquisition cost, considering that the intangible is materialized at the moment in which it is subject to a transaction (sale). As consequence, evidence means, such as purchase agreements, balance sheet and auditors certificate, prove that the claimant sold an intangible asset named good will. Thus, in the sale applies the presumed cost for formed intangible assets of article 75 of the Tax Code. As indicated by the Administrative Tribunal of Cundinamarca in the first instance decision and confirmed by the Council of State, the tax administration is wrong when considering that is not possible to accept the formed intangible Know How because no method to valuate it was used and it was not indicated how it was obtained. Although article 279 of the Tax Code states that proved acquisition cost is a parameter to determine the value of intangible assets, in the case under analysis the good will was formed during the life of the company and it was not acquired through a specific transaction (in the

same sense see Council of decision dated March 31, 2000)

State

By virtue of the foregoing, the difference between the sales price of a commercial establishment and its fiscal cost may be considered as an income for the intangible good will, without requiring an accounting evidence of its existence, as it can be demonstrated through the purchase agreement or any other mean. This situation changed as consequence of the current wording of article 75 of the Tax Code (as modified by Law 788 of 2002, after the filing of income tax return subject to analysis which occurred in 1996), which in its second paragraph demands that such cost in the sale should be (i) included in the income tax return of the year previous to the sale and; (ii) supported in a technical appraisal. Based on the commented decision and the current wording of article 75 of the Tax Code it can be concluded: 1. The difference between the sales price of a commercial establishment (applies also to the sale of a company or any other economic entity) and its fiscal cost can be considered as income for formed good will. 2. Said formed good will does not have any accounting record. 3. It is presumed that out of the sales price 30% corresponds to its cost. 4. The support for the cost to be accepted for tax purposes, consists in a technical appraisal and to have it declared in the income tax return of the previous year.

5. No additional evidence of its existence is required. Nevertheless it is

recommended to include a mention to it in the purchase agreement.

Academic activities of our members

Annual meeting of the Trust International Academy. Trust International Academy, with more than two hundred specialists around the world, will meet in Colombia for its first time and will take place in Cartagena. The meeting will be attended by the two Colombian members Juan Manuel Prieto and Sergio Rodriguez Azuero, our partner and founder.

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This bulletin is merely informative y, when signed, constituted the non binding professional opinion from who prepared it, but does not compulsory reflects Rodriguez Azuero Abogados opinion. Decision about applying criteria included therein corresponds exclusively to addressees of this bulletin, as well as consequences derived from their application. To apply to specific cases any of the norms, rulings or decisions mentioned, specialized advice is recommended.