Contributed By Pinilla, González & Prieto
The main sources of real estate law in Colombia are the political Constitution, the law, regulatory decrees issued by the national government, the Land Use Plans issued by the municipalities and districts, the administrative acts issued by the mayors and municipal and/or district planning secretaries, case law and doctrine.
From the political Constitution perspective, Article 58 indicates the condition of respect for private property and acquired rights with good title, but indicates the legal position of contemporaneous law in the sense that these must comply with a social and ecological function. In that sense, the particular interest must yield before the general interest by respecting the economic value of the right subject to assignment.
The specific legislation in real estate terms is based on this constitutional provision, especially Law 9/1999, Law 388/1997 and Law 810/2003, which indicate the general rules in terms of land planning, competence, procedures, soil management instruments, urban development financing tools, licensing regime, how real estate is affected by public interest, and acquired rights and limitations in real estate terms.
This legislation has been widely developed by the regulations of the national government, which was finally compiled in a single regulatory text, contained in Single Regulatory Decree 1077/2015, that sets forth the rules in terms of urban planning actions, special procedures, urban act, capital gain, subsidies in the housing sector, land uses, etc.
These regulations also indicate the rules of the municipal source in real estate terms, the Land Use Plans, which constitute the fundamental instrument of the territory, by means of which all rules applied to real estate, in the urban perimeter and urban and rural expansion land, are indicated. These include general land classification; environmental effects; travel, landscape and utilities systems effects; specific land uses; urban treatments; heights; isolations; volumetrics; urban loads; and land management instruments.
Finally, the Constitutional Court, the Supreme Court of Justice and the Council of State have issued several legal rulings constituting a substantial source of real estate law in Colombia.
The market trend over the last twelve months has been downward, a situation explained by the fact that Colombia has seen a growing real estate market over the last ten years, resulting in a wide satisfaction of the market. However, it is important to clarify that the reduction in the last months has been focused on housing in certain strata; the market in other strata continues to be very active thanks to the policies of the national government in terms of subsidies in these segments of society, which allow demand to achieve the financial closure required by these products. On the other hand, the market in other areas – such as commerce, institutional and industrial office space – maintains a high level of activity, especially in the regions that have been growing in terms of goods and services and therefore require this type of real estate for their activity.
Reforms that would significantly impact the sector are required, such as the regulation of capital gain, substantial elements for the distribution of burdens and benefits, clear definitions of urban procedures, the contents of studies for land use plans, competencies in environmental terms when there is already a partial plan and, in general, issues having an impact on the legal security of the land use and urban licences.
Currently, the national government is working on these fronts; however, it is not possible to establish a time span for these reforms to take place.
The categories of property rights that can be acquired are as follows.
The laws that apply to the transfer of the ownership right on real estate are the Civil Code and the Code of Commerce of Colombia in cases where one of the parties has the quality of merchant, the business is considered to be an act of trade or is related to commercial activities and business, or to compliance with commercial obligations.
There are special laws for the sale of real estate considered to be low-income housing, sale of real estate owned by public entities, sale of units of portions of land considered to be family agricultural units, goods that have been declared of public utility and for goods located in coastal or border areas, for which a specific procedure must be followed.
According to the Constitution of Colombia, the assets of the territory, assets of public use, parks and natural resources, and cultural heritage goods are exclusively owned by the state and cannot be acquired by private persons, including foreign investors.
A legal transfer requires title and modality. As an example, a title can be a purchase and sale, a donation, barter, etc and modalities to acquire domain include occupation, accession, conveyance, succession by death and prescription or time limit.
Real estate is subjected to registration, which is a public service provided by the state, through officials called public instrument registrars.
Any act, contract, decision contained in a public deed, judicial ruling, administrative or arbitral decision implying the constitution, declaration, clarification, awarding, modification, limitation, lien, precautionary measure, suspension or forfeiture of domain or another main or accessory real right on real estate is subject to registration.
Finally, regarding title insurance, it is important to mention it is a rare instrument in Colombia.
Real estate due diligence usually corresponds to the review and analysis of the entries contained in the public document called Certificado de Libertad y Tradición (or Certificate of Conveyance) – regarding the property purpose of the business – issued by the Registry Office of Public Instruments of the city where it is located, since it must evidence any affectation, lien or transfer it may have suffered and/or that affects it. It is recommended for the due diligence date to be no later than ten days after the issuance of the certificate, in order to ensure that the study was based on information as up to date as possible.
A review of the documents related to acts or legal businesses noted in the mentioned certificate (acquisition titles, liens, etc), payment of the relevant taxes and the certificate of land use will also be necessary.
The due diligence will determine whether, at least during the last 10 or 20 years, there are no circumstances that can affect the operation, or, if any, they can be remedied beforehand. This includes verification of lists such as Specially Designated Narcotics Traffickers (SDNT), issued by the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury, among others, to assess the risk of the property being tied to natural or legal persons charged with drug trafficking or terrorism crimes.
Finally, a review and analysis of relevant pre-contractual documents is required (offers, letters of intent, memos of understanding, capacity of the parties, etc).
The usual representations and warranties of the seller regarding the property are:
Regarding false representations and warranties by the seller, the buyer can demand compliance with the agreement by the seller, the resolution of the agreement or a discount in the price of the property, in all cases with payment of damages caused, in addition to fines and additional sanctions provided in the agreement.
The most important areas of law for an investor to consider when purchasing real estate are foreign investment, urban planning law, authorisations and land uses, environmental law and tax law.
The person liable for pollution is the generator. A buyer aware of soil or environmental pollution in a property is obliged to notify the environmental authority of such fact.
The buyer may know the permitted uses in a real estate plot beforehand, since the municipalities and cities are obliged to regulate land use through the Land Use Plan.
Also, individuals along with the empowered municipal public authorities may pursue mechanisms together to regulate the land use of large land extensions, always in compliance with the national standard.
It is possible for the performance of public works pursuant to the priority of the general interest and it may be pursued through administrative and legal channels.
The registration expenses, corresponding to 0.54% of the sale value, must be paid at the notary office. Withholding tax is the responsibility of the seller of the property and corresponds to 1% of the sale value (if it is a natural person).
It is important to bear in mind that Law 1943/2018 provides that if the buyer of a property is a legal entity or de facto partnership, the withholding tax by way of income tax constitutes a prior requirement for the granting of the public deed.
The registration of the public deed generates a registration tax (departmental tax) ranging from 0.5% to 1% of the purchase agreement value, as well as registration fees equivalent to 0.5% of the sale value, which must be paid by the buyer.
The commercial custom in most of the country is that notarial fees are assumed in equal proportions, with registration taxes borne 100% by the buyer.
Finally, it is worth mentioning that the quoted Law 1943 revokes from 1 January 2019 the provisions relating to the accrual of the sales tax at a 5% rate on the first sale of new housing units whose value exceeds 26,800 tax value units. Instead, it includes the so-called new national excise tax for the alienation, under any title, of new or used properties whose value exceeds 26,800 tax value units, including the alienation made by assignment of trust rights or funds that are not listed in the stock market. The rate of this new tax is 2% over the sales price that must be paid by the buyer and withheld (before registration of the public deed) by the property seller or assignor. The alienation of properties exceeding the mentioned value located in rural land intended for agricultural activities and those rural or urban lands intended for the execution of low-income housing projects are excluded from the application of this new excise tax. The alienation of assets intended for social public interest collective facilities is exempted, as well as if the buyer is a public entity or a non-profit organisation, provided that the latter uses the property for meritorious activities.
As a general rule, any foreign investor may make a foreign investment in real estate that is part of commerce, acquiring it by any title.
There are different options: own resources, financial products (loans, leasing), real estate securitisation and private equity funds.
The typical securities created or entered into by commercial real estate investors who are borrowing funds to acquire or develop real estate are commercial trusts, mortgage security and personal property security.
There are no legal restrictions to grant securities on real estate to foreign lenders, since any person may grant a security on a property.
For mortgages on real estate, notary fees are equal to COP3 x 1,000 plus value added tax (VAT) and 1% of the charity and registration tax. On its part, the registration fees correspond to 0.5% of the act value. If the mortgage is constituted as security to fund a housing purchase, the registration and annotation fees equal 0.35%.
If the mortgage is constituted as a security to fund the purchase of low-income housing (VIS, for its acronym in Spanish), notary and registration fees will have a discount between 60% and 90%, whether or not any family compensation fund or government entity grants a subsidy.
The registration of personal property securities has an estimated cost of USD25.
To grant a valid security, the requirements in the by-laws or internal manuals of the entity granting any security and whether they have prior encumbrances or commitments limiting their effectiveness will be reviewed.
In the event of a breach by a borrower, the lender may enforce the security constituted on the property through an executory proceeding. In this legal proceeding, the borrower will be allowed to pay the delinquent obligation and if he does not do so, the security constituted on the property will be executed and the lender will be paid the outstanding value.
When there are other creditors with securities on the same property, in the legal proceeding the judge will order to notify the other creditors with any security on the same, for them to join the mentioned proceeding, even when the debtor is not in default with such creditors.
The priority in the security on a real estate property will be determined by the constitution date and the level thereof.
It is not possible for existing secured debt to become subordinated to newly created debt. To ensure the transparency and legal security of the investors, the prospectus must indicate from the beginning the type of value offered and the issuance conditions.
The person responsible for the environmental damages is the generator according to the environmental legislation. In that case, the lender aware of the environmental impact is obliged to notify the environmental authority of such situation.
The security interest will not be null if the borrower becomes insolvent. Without prejudice to the foregoing, the effect of the borrower becoming insolvent is that from the start of a reorganisation or liquidation proceeding and according to Colombian insolvency standards, it will not be possible to enforce the security directly, since all collection proceedings shall be included in the insolvency proceeding, for purposes of rating and ranking, as well as the subsequent payment. In this way, the creditor’s security will only improve its position within the priority order of the credits.
The consequences are, among others, the following:
Without prejudice to the foregoing, at a local level it is not expected that the elimination of LIBOR will have any effect in the market given the high regulation of the local banks, led by the appearance in 2008 of the Bank Reference Indicator (BRI).
In Colombia, the public function of urban planning exists pursuant to Law 388/1.997, which basically means that the state, specifically the municipalities and districts, is empowered to exercise the urban planning action and acting; understanding the first as the capacity to issue the rules on use and utilisation of land as well as land planning, and the second as the competence of these territorial entities to authorise the intervention of a specific land based on the urban planning rule.
These competencies are exercised through processes regulated by law, which must end with the issuance of administrative decisions. In the case of the urban planning action or regulatory capacity of the land use plan of the municipality, these are agreements of the municipal or district council or decrees of the mayor, or resolutions of the urban planning secretaries; for the case of urban acting, these mean the urban planning licences issued by the urban planning officers (curadores) – or planning secretaries in the municipalities where there are no urban planning officers – since these are particular and concrete administrative acts.
In the case of the urban planning action, which constitutes the regulation of uses and utilisation of land, since these are administrative decisions, these are controlled not only by the institutional instances participating in their creation but by citizens through the citizen participation process and, of course, by the municipal councils, which finally adopt the act.
The fundamental act containing the urban planning regulations is the Land Use Plan (POT). This, as well as the other regulatory acts for use and utilisation of land, being administrative decisions, are subject to judicial control through annulment actions before the administrative and contentious courts, and by popular actions, which are constitutional actions defending collective rights.
First, there is the urban planning rule that is issued by the municipality or district. It indicates the rules in terms of specific uses of land, occupancy and construction rates, urban planning treatments, and volumetrics of buildings (eg, height, recession, isolations, gardens, parking spaces and handling of public space). It is necessary to submit an application for a construction licence for all new work or expansion, modification, restoration, adaptation, structural reinforcement, etc.
The urban planning officer or the corresponding urban planning authority must verify compliance with the project subject to the application for a construction licence with the corresponding urban planning rule.
The same administrative authority must verify compliance with the technical seismic-resistance rules for construction, by structural calculations ensuring the stability of the work subject to licence. It should be highlighted that the competence to confirm compliance with the technical seismic-resistance rule is held by the government and not by the local authorities.
The rules on the use of land are issued by the local authorities, specifically by the municipal and/or district councils, and by the relevant mayors through the Land Use Plans and the instruments that develop and supplement them. The authorities responsible for specifically authorising the development of a specific piece of real estate are the urban planning officer or the planning secretaries (when there are no urban planning officers). It should be noted that the urban planning officers are private persons in exercise of a public function who – under their absolute responsibility and with the resources originated in the payment of the expenses that must be paid for the procurement of licences – autonomously perform the administrative proceeding and issue the construction licences.
There are two types of urban refurbishment: refurbishment for reactivation and refurbishment for redevelopment.
In reactivation, the entitlements to develop the new project are obtained through the proceeding of the relevant construction licence, which is done before the urban planning officer of the municipality or district, or before the planning secretary, as the case may be. This proceeding is regulated by the Single Regulatory Decree 1077/2015; under general conditions, it takes between two and six months approximately.
In redevelopment, a partial urban refurbishment plan must be processed and obtained, which is regulated by Law 388/1997 and by the Single Regulatory Decree 1077/2015. This proceeding is conducted before the planning authority of the municipality or district to which the environmental, road, utilities, risk studies, etc, must be submitted; it is required to formulate a new urban proposal that sets out the new formation of that portion of the city, both in terms of public space and in terms of the new conditions of construction rates, occupancies, volumetrics, heights and specific uses of land, etc.
The essential element of the partial plan is to achieve a new urban design that financially achieves the payment of the urban loads originated in the new model, for which the law has designed the instruments of implementation and financing of urban development that must be incorporated to the administrative decision with which the action is concluded.
Once the partial plan is obtained, the relevant urban planning licence must be requested before the urban planning officer, which allows the re-urbanisation and construction of the resulting units.
The adjacent neighbours of the property subject to application, or any third party that shows interest in the project, can participate in the administrative proceeding for the procurement of the urban planning licence. All of the above have the ability to oppose the proceeding for technical or legal reasons.
These third parties or intervening neighbours are also entitled to be notified of the administrative decision that grants the urban planning licence, and both they and the licence applicant have the ability to file a motion for reconsideration and/or in subsidy of appeal against the licence.
The motion for reconsideration is decided by the same urban planning officer before whom the licence was processed. The appeal is resolved by the planning secretary of the relevant municipality or district.
When land management procedures are conducted, such as partial plans – both in development and in urban refurbishment – it is possible and in many cases it is necessary to enter into agreements with state-owned entities in several circumstances, as listed below.
All land management and land use planning instruments indicate the restrictions on buildability and, of course, the rules on the permitted and prohibited uses in the relevant zoning. These restrictions must be verified by the urban planning officers at the time of granting the construction licence, such that the rights to build and of land use must be expressly contained in the administrative decision that authorises the urban planning licence.
Once the building has been built and the relevant real estate is operating, the urban planning control authorities, headed by the mayors and police inspectors, have the function of sanctioning the owners who infringe the land use regime through the police process, which may even conclude with a demolition order for what was built in contravention of the licence.
Besides direct acquisition, investors may use companies, trust mechanisms, real estate funds and real estate securitisation.
The main characteristics to incorporate the above-mentioned vehicles are the following.
There are no standards providing for a minimum amount for the incorporation and/or performance of the above-mentioned vehicles. Nonetheless, the companies’ regime provides special rules for the payment of capital in each of the companies above-mentioned.
There is no special requirement regarding the value of the contributed assets at the time of incorporation.
Once the mutual fund is operating, it must have a minimum equity defined in the relevant regulations, which will not be less than 2,600 current legal minimum monthly salaries (USD726,000 approximately).
Considering that each collective portfolio has regulations, it may establish a minimum and/or maximum amount of subscribers and contributions to begin operations.
The governance requirements that apply to each type of entity used to invest in real estate are as follows.
The maintenance and accounting costs of each of the above-mentioned options depend on the chosen vehicle and may be the following.
Expenses related to accounting matters such as preparation of the financial statements, integral management of accounting and accounting advice have a cost of around USD26,000 a year based on the fees of the Central Board of Accountants, which in all cases shall depend on the size of the transaction.
The lease is that by which two parties are reciprocally bound, one to grant the enjoyment of a property and the other to pay a price for this enjoyment. The main matters to be regulated are identification of the property that is the subject matter of the agreement, rent and method of payment, term, and breakdown of the services, things or related uses.
The operating lease is defined as the lease of goods in the medium or long term by which the lessee undertakes to pay a regular rent (usually monthly, quarterly or semi-annually) during the agreement term.
Besides the commercial lease, there is the accommodation agreement and the operating lease.
Rents and lease terms are freely negotiable provided they follow the regulations of Articles 518 to 524 of the Colombian Code of Commerce.
A lease term usually exceeds two years.
The obligation to maintain the good in the condition it was received corresponds to the lessee. Repairs necessitated by force majeure or acts of God, or damages to the property correspond to the lessor.
There is no legal definition on rent payment frequency; traditionally the rent payment is monthly and paid in advance within the first five calendar days of each month, which does not prevent the parties from establishing another frequency by mutual agreement.
The regulations for the adjustment of the rent are normally established by mutual agreement during the term of the agreement. For commercial premises, there is no rule established to define the increase of the rent.
There is no regulation in connection with the rent increase for commercial properties, thus it may be mutually agreed. In the event that the parties have not defined the rent increase and there is no agreement thereon, a legal proceeding may be resorted to in order to set the rent.
VAT is accrued in connection with the lease of properties for uses other than housing, exhibitions, national handcraft shows, artistic and cultural events.
Costs other than rent are administration instalments and utilities. Depending on the insurance company with which an insurance policy is underwritten, a value for the lessee’s study may be borne. Additionally, there may be expenses relating to a deposit or collateral that must be established as security, commission for the brokerage in the lease of commercial premises, when the property is provided in administration and when not returned in administration.
Also, in the case of commercial premises with privileged location, it is a traditional commercial practice in the market that the lessee pays in favour of the lessor a commercial premium to occupy a premises completely unoccupied.
When the property is part of a building or complex subject to a horizontal property regime, these items are included in the administration instalment part of the obligations that the lessee must pay.
If it is not possible to differentiate the utilities accounts from the telecommunications ones for each lessee, internal meters may be installed to determine the expense of each lessee, or the payment may be generated proportionally to the leased area and use intensity.
The insurance cost of the property by general rule corresponds to the lessor and regularly covers damages by fire, lightning, earthquakes, tremors, volcanic eruptions, explosions inside the home, hail, floods, strong winds, smoke, aircrafts and land vehicles.
Regarding insurance covering risks specific to the lessee’s activity, they are borne by it.
A landlord can include restrictions such as the use of the property. If such property is part of a horizontal property, the lessee will be bound to comply with the regulations set by the lessor regarding business hours, noise, waste disposal, adjustments and window dressing handbook, and he will have environmental legal restrictions in connection with the disposal of pollutant and chemical substances.
The lessee may alter or modify the properties under the conditions established in the lease agreement. If this matter is not specifically regulated, it will be necessary to resort to the legislation indicating that the lessee cannot make improvements without the lessor’s consent.
If the lessor does not expressly accept the improvements, the lessee may remove them and, if possible, separate them from the property and take the materials as long as it does not cause any damages thereto.
For urban housing, leases are regulated by Law 820/2003, where the specific regulations for these agreements are established, the basic conditions of which are general aspects of the agreement, the formalities required, the obligations of the parties, the rules on security, the rent and the rules for agreement termination.
For the accommodation agreement, Articles 1192 to 1199 of the Code of Commerce and Article 79 of Law 300/1996 apply.
With regard to commercial goods, the existence of express regulations that protect the lessee are highlighted, which include the following.
Under the terms of the agreement, if the lessee fails to comply with the payment of the rent and the other obligations under its charge, it will generate a breach for which the lessor may terminate the same.
With regard to insolvency law, from the moment a reorganisation process is opened, no processes of tenancy restitution may be initiated or continued without the authorisation of the bankruptcy judge, provided that the lessee develops its corporate purpose in the property, when the ground for restitution is the default in the payment of the rent.
It is common that compliance is guaranteed with lease insurance, a security deposit, a Term Deposit Certificate (CDT) or another kind of bank guarantee.
The lessee of a commercial property will be entitled to renewal of the agreement when the duration of the same is greater than two years and as long as the lessor has not stated any of the grounds for eviction.
To ensure termination, the lessor shall establish in the lease agreement the date of termination of the same and up to six months before that event, notify the lessor of the termination in writing, identifying any of the grounds for eviction.
The events that typically give the landlord the right to terminate the lease are (i) by the lessee, a breach of contract by the lessor, the inability to use the asset; (ii) by the lessor, and before the two years of validity of the agreement, the breach of the same by the lessee and the termination of duration of the agreement; after the expiration of such term, it may terminate the agreement when one of the grounds for eviction occurs.
A lessee who fails to comply with its obligations may be forced to leave, for which the lessor may initiate a tenancy restitution process. When the grounds to request the restitution are due to default in payment, the process is a single instance and its processing takes approximately 18 months.
Governmental or municipal authorities cannot terminate a lease agreement. However, and as a result of the declaration of public interest of the property, which is one of their faculties, the lessor, who is obligated to transfer the property object of the agreement to a public entity, will have to terminate the lease agreement. This type of process is regulated in the law in reference to indemnities that may take place, and the loss of profit may be taken into account for the determination of the value of the property and as a reference to calculate the value of the indemnity in favour of the lessee.
In the event that a final judicial ruling declares the forfeiture of a leased asset, the agreement will continue until the expiration of the term agreed, without prejudice to the legal and contractual provisions on early termination and as long as the lessee is considered a third party in good faith.
In Colombia, the most common structures are (i) the unit price methodology and (ii) the delegated administration.
The first one consists of defining the price of each of the variables that make up the costs, expenses and benefits that are generated in a project to establish the budget that allows the determination of whether it is viable.
The second one regulates the execution of a construction work under a single price modality at the expense and risk of the contracting party. In this scenario, the owner of the work sets a single price for the execution thereof, which must be complied with by the businessperson-developer, who may not request an increase in the price in the event that the materials or labour become depleted, or in the case of modifications to the construction project, unless a unit price was agreed upon for said modifications.
The allocation of responsibility is regulated in the law; notwithstanding the foregoing, risks may be transferred as long as this does not imply a waiver of future wilful misconduct or gross negligence. Some examples of such allocation are as follows:
For the case of new housing, the law sets forth that the developer or seller is bound to protect the pecuniary losses generated by defects of land, materials and construction, with its equity, bank guarantees, financial products or insurance policies, among others, according to the regulations issued for that purpose by the government.
There are different devices:
Regarding the previous legal tools, the limit is compliance with the law, public order, and diligence and care required from the developer by reason of its profession.
In general terms, the legal system foresees a series of legal provisions such as the penalty clause, which can have the function of a simple penalty and/or a means of advanced estimation of damages; the insurance agreement derived in a performance bond; and incentives for early termination, among others, which allow establishing a contractual regulation to manage the risk related to the construction project's schedule.
In Colombia it is normal to establish additional ways to ensure performance of the agreements. In the construction industry, the owners of the work request a series of guarantees such as performance bonds; quality guarantees for the work, good or service; advance payment bonds; and tort liability policies; and in some cases, depending on the purpose to be contracted, they perform a strict study of the economic and legal capacity of the contractor to determine its limit to be bound by.
The legal system does not have any restriction that prevents the contracting party from encumbering a property in order to ensure payment of the obligations it has with its contractor and/or designer. However, in the construction industry it is not usual that the parties agree to this kind of resource.
If a property is encumbered, the encumbrance may be cancelled prior to payment of the debt, with the registration of the statement made of the payment by the creditor and the relevant registration in the public registry of the cancellation of the encumbrance in the property registration folio that identifies the property.
The law imposes the requirement to obtain certificates of occupancy. In the case of housing, two certificates must be obtained to enable the properties to be inhabited: a technical certificate of occupancy issued by an individual and a certificate of occupancy permit issued by the competent municipal authority.
For the other uses, only the certificate of occupancy permit will be necessary.
As already mentioned, Law 1943 revokes from 1 January 2019 the provisions relating to the accrual of sales tax at a 5% rate on the first sale of housing units whose value exceeds 26,800 tax value units. Instead, it includes the national excise tax, already explained (also of indirect nature), for the alienation, under any title, of new or used properties whose value exceeds 26,800 tax value units, including the alienation made by assignment of trust rights or funds that are not listed in the stock market.
In Colombia, the document transferring the ownership right on properties must be registered; such registration entails the registration taxable event, the management and collection of which must be done by the departmental entities and not the municipal ones.
This tax is not caused in those acts or judgments that do not include a right economically appreciable in favour of one or more persons, when by legal mandate they must be referred for their registration by the competent officer. Likewise, the registration of acts, agreements or legal businesses made between public entities does not cause the registration tax.
Whenever the act, agreement or legal business refers to properties (whose domain is transferred), the registration value cannot be less than the cadastral appraisal, self-appraisal, auction or awarding value, as applicable, except, for example, in acts by which the properties are returned to the settlor or the constitution of the horizontal property regime, among others, which are considered acts without an allocated amount.
Finally, Regulatory Decree 650/1996 sets forth a special treatment for real estate transfers to standalone trust funds, namely in the execution of commercial trust agreements, providing that the taxable base of the referred tax is the trust commission agreed in the agreement and not the value of the property constituting the fiduciary assignment, either real or movable property.
It is important to bear in mind that the tax codes of Colombia's municipalities and districts are different (given their administrative autonomy, which is not sovereignty), which is why, to make any investment decision, it is important to verify the current standards in the territorial entity where it is to be executed. However, the general rules regarding the main local taxes that may affect the real estate activity are presented below.
The property lease where commercial establishments are constituted (as generally happens in commercial premises) entails a taxable event for industry and trade tax, since the landlord would be directly performing a service activity set out in the Code of Commerce and there is no exemption to be contemplated.
Unified property tax is also imposed on the property, borne by its owner or holder, and exemptions will proceed for those with a special treatment because of their physical and/or legal characteristics.
The execution of works subject to the issuance of urban planning licences is taxed with urban delineation tax. In some territorial entities, the taxable event is the issuance of any of such licences and in others it is the effective execution of the works subject to licensing (this latter being the criterion usually accepted by case law). The taxable base is usually the value of the work and the rate is traditionally equal to a percentage thereof.
In cases in which a territorial entity where the property is located executes a work plan, it is possible for it to resort to the so-called contribution by valorisation to fund it. The tax base of this contribution is the cost of the relevant public interest work and usually includes the surveys; the price of acquisition of the properties from individuals; the corresponding costs for expropriation, construction, inspection and financial expenses; and a prudential percentage for administration, collection and eventualities. The value that each owner or holder of properties located within the area of influence of the contribution must pay is determined based on factors quantifying the benefit he receives from the execution of the works (the higher the benefit, the higher the contribution).
The contribution, once notified and in force, is registered in the property registration folio. Any act involving the transfer of the domain right over the property is subject to the payment of such annotation; namely, it entails its effective payment.
Finally, when the municipal or district councils adopt administrative acts constituting urban planning actions authorising the owner of the properties intended for more profitable uses or an increase in the utilisation of the land enabling a greater built area, the so-called contribution on land added value is incurred.
The urban planning actions causing this contribution are:
There is a fourth taxable event for the contribution on land added value known as complementary, which is when territorial entities execute a public work plan in any of the land management instruments (Land Use Plans, partial plans, etc) and they do not use the valuation contribution, already explained, to fund them; they may determine the higher value acquired by the properties as a consequence of the execution of such plan.
The higher value generated per square metre is estimated as the difference between the new reference price (commercial value with the new standard) and the commercial price before the corresponding urban planning action. A rate ranging from 30% to 50% of the higher value per square metre is applied to this difference.
Once the administrative act to settle the interest in land added value is in force, its registration in the property registration folio of each property is ordered. Once again, any transfer of the domain right is subject to the effective payment of the same.
There is source withholding for payment made to a person who does not reside in the country or to a foreign entity without a registered office in Colombia, usually applying the rate corresponding to foreign payments, pursuant to Article 368-1 of the Tax Code.
The applicable rate to the withholding usually depends on the activity generating the income, but in cases where the activity does not have a determined special rate, Article 415 will be applicable, which refers to cases not provided by the law, corresponding to 15% of the payment or account deposit transferred abroad.
The exploitation of real estate by non-residents in Colombia – either foreign companies or entities without a registered office in the country, natural persons or unliquidated successions, as their lease – is taxed by one or more taxes, depending on whether the property is intended for housing or the development of a commercial, industrial or services activity.
The lease of the property for housing, when considered as capital income, is taxed only with income tax; when a foreign payment, this must be subject to a source withholding of 15% of the payment or account deposit made, pursuant to Article 408 of the Tax Code.
By VAT the applicable rate corresponds to 100% of the tax value, namely 19%. However, with legal concept No 42544/2017 by the Ministry of Finance, the lease of properties by natural persons and/or corporate bodies does not constitute commercial or services activity, such that industry and trade tax is not incurred, unless this is the corporate purpose of the corporate body performing it.
Property tax is incurred over real estate on January 1st of each fiscal year and is settled at the rate determined by the destination and use of the property. No source withholding is done for this tax, provided there is no economic operation entailing its taxable event.
The withheld amounts by way of lease must be paid to the Tax Authority by the tenant responsible for the rent to the natural person or foreign company without registered office in the country, through a monthly source withholding statement.
In the lease of real estate, no exemption is provided for income tax. With regard to VAT, the real estate lease service for housing is excluded and if they are leased for other purposes, this service is also excluded when it is provided for exhibitions and national craft shows, including artistic and cultural events; the rest are taxed with VAT.
Understanding the disposal of real estate as the transfer of the domain right free of charge (donation) or for other good and valuable consideration, to establish whether the applicable tax corresponds to the income tax or its supplementary windfall profit tax, it is necessary to differentiate, on the one hand, whether these are fixed assets owned for a period exceeding two years and, on the other hand, whether their disposal is made for other good and valuable consideration or free of charge.
For the event that the transfer consists of the disposal of other good and valuable consideration of real estate that has the capacity of fixed assets, the profit constitutes taxable net income to determine the income tax. Otherwise, if the real estate subject to sale is a fixed asset owned for a period exceeding two years then supplementary windfall profit tax is accrued, which taxes the profit obtained from the sale at 10%.
In the event that the transfer of the right of ownership of the property is made free of charge (donation), supplementary windfall profit tax is accrued – without differentiating, in this case, whether it is a fixed asset owned for a period exceeding two years – with a rate of 10%; its payment is the responsibility of the taxpayer that receives it.
In the event that the disposal of the property is made free of charge, Article 307, Numeral 4 of the Tax Code establishes an exemption of 20% of the property received in donation for the calculation of the windfall profit.
Article 137 of the Tax Code acknowledges the deduction for depreciation of depreciable properties, establishing a percentage limit per fiscal year, with regard to each of the groups of this type of property, which for constructions and buildings is 2.22%.