In today’s business environment, where corporate and tax efficiency are essential to competitiveness, corporate reorganization structures play a critical role. Among them, the short-form merger stands out as a unique mechanism within the Colombian legal system, created to streamline procedures and provide an alternative to the traditional merger process set forth in the Commercial Code.
This article examines the corporate scope of the short-form merger, while also considering its tax implications and the circumstances in which it may serve as a useful tool.
For this mechanism to apply, there must be at least two simplified joint-stock companies (S.A.S.), with one holding a stake of 90% or more in the other. This structure helps prevent corporate deadlocks among groups unable to reach consensus on the approval of a merger. Unlike a standard merger—where approval depends on the General Shareholders’ Meeting—a short-form merger requires only the authorization of the legal representatives or members of the board of directors of the companies involved.
Furthermore, under its current doctrine, the Superintendency of Companies, through Official Letter 220-057303, has clarified that prior authorization from that authority is not required to execute this type of transaction. Likewise, paragraph 3 of Article 10 of Law 1340 of 2009 provides that it is not necessary to notify or submit the merger for approval by the Superintendency of Industry and Commerce, as long as the participating companies can demonstrate the existence of a duly registered business group.
Bypassing these authorization requirements can be highly advantageous, given that, in practice, the competent authorities generally take between eight and thirteen months to issue a decision on merger approvals. This timeframe may extend to thirteen to fifteen months during periods subject to guarantee laws, creating a significant barrier for companies that seek to carry out corporate reorganizations in an agile and timely manner.
At this stage, a distinctive element arises that differentiates short-form mergers from traditional ones: whereas under classic schemes the shareholders of the absorbed company could only receive shares in the absorbing entity, short-form mergers allow for the delivery of any type of asset as consideration. While this flexibility is appealing from a corporate standpoint, it also gives rise to a more complex question: is it truly efficient from a tax perspective, or does it ultimately create more costs and inefficiencies than benefits?
This question stems from the provisions of paragraphs (a) and (f) of Article 319-6 of the Tax Statute, which establish that a merger may become taxable for shareholders if certain minimum requirements are not satisfied. Specifically:
i. At least 85% of the shareholders must maintain, after the merger, an equivalent interest in the absorbing or resulting company.
ii. The consideration received by the shareholders must consist of shares in the absorbing or resulting company. If they receive cash or any other type of asset, the transaction is treated as a taxable disposition.
When contrasting corporate law with tax law, the first conclusion seems evident: a short-form merger could, in principle, result in a significant tax burden for the shareholders of the absorbed company, if the absorbing company grants them, as consideration, assets other than its own shares. In such cases, the presumption set forth in Article 90 of the Tax Statute applies, which provides that the transfer price may not be less than the intrinsic value of the share increased by 30%.
At this point, it is worth revisiting the concept of squeeze-out, of Anglo-Saxon origin, incorporated into Colombian law through the right of withdrawal established in Law 222 of 1995. This right allows absent or dissenting shareholders to withdraw from the absorbing company in a merger process, either when their ownership percentage is reduced or when the equity value or nominal value of their shares decreases.
At this stage, two key aspects must be highlighted. First, a short-form merger will always give rise to absent shareholders, making it appropriate—both from a corporate and practical standpoint—to apply the right of withdrawal. Second, the consideration received by the excluded shareholder, once the corresponding corporate process has been completed, will not be subject to taxation provided it is paid in the form of a capital reimbursement.
That said, for this tax neutrality to be effective, the reimbursed amount must correspond proportionally to the shareholder’s contributions made at the time of incorporation and throughout the life of the company. Otherwise, any excess paid would be taxable, either as a capital gain or as ordinary income, depending on the circumstances.
In conclusion, the key question is whether a shareholder should be subject to income tax or capital gains tax when, in a short-form merger, they receive shares in a company other than the acquiring entity, or even other assets such as accounts receivable, real estate, or intangibles, provided that these retain the same tax basis and the nature of fixed assets. From an economic perspective, no income tax should arise since there is no increase in equity; however, the tax regulations provide otherwise.
This contrast not only raises a fundamental legal debate but also underscores that, even if the transaction is not taxed as income or capital gains, other obligations may still apply—such as stamp duty, ICA (Industry and Commerce Tax), or invoicing of the transaction—which must be carefully assessed in advance with the support of legal counsel.