Last Updated August 13, 2019

Law and Practice

Authors



Baker McKenzie S.A.S. has more than 6,000 lawyers and 77 offices worldwide. Led by Rodrigo Castillo Cottin, the firm's wealth management practice is highly renowned for its high level of expertise working with sophisticated clients in complex multi-jurisdictional reorganisation of assets and tax structures for family groups that lead the most important companies in the country. The firm develops global wealth management strategies that account for all of the applicable tax compliance requirements and commercial issues, which is a benefit given to clients that no other law firm in the country can offer. The firm is the only one with the infrastructure and international connection and co-ordination to offer an international coverage.

In Colombia, residents are subject to income tax on their worldwide income and capital gains, while non-residents are subject to income tax in Colombia only on sourced income and capital gains.

Sourced income is income arising from the rendering of services inside Colombian territory, the transfer of assets located in Colombian territory at the time the title transfer takes place and the exploitation of tangible or intangible assets located inside the country.

Concerning the indirect transfer of assets, income obtained by the transfer of entities or assets in Colombia through the transfer of shares, participations or rights in foreign entities may also be subject to income tax or capital gains.

Income and capital gains tax derived by non-residents is collected through withholding mechanisms, the filing of an income tax return or by a combination of these two. The applicable collection mechanism depends on the income tax characterisation and whether the appropriate withholding is applied, as explained below.

Income Tax

Income tax in Colombia is determined based on the taxpayer's taxable income or presumptive income tax.

Presumptive income tax is equivalent to a percentage of the taxpayer's net equity of the prior taxable year. Taxpayers are only required to pay income tax under this system when the presumptive income basis is higher than the ordinary income.

Presumptive income tax has an applicable rate of 1.5% for fiscal years (FYs) 2019 and 2020. As of 2021, the applicable rate will be 0%. In relation to individuals, the base of presumptive income of the taxpayer is compared only with the general basket income.

Residents

Resident entities

The income tax rate applicable to resident entities is 33% for FY 2019, 32% for FY 2020, 31% for FY 2021 and 30% from FY 2022 onwards.

Dividends paid to national entities are subject to income tax as follows.

  • Dividends distributed to national entities paid out of profits taxed at the corporate level are subject to dividend tax at a 7.5% rate.
  • Dividends distributed to national entities paid out of profits that are not taxed at the corporate level are taxed at the general income tax rate. In this case, the dividend tax of 7.5% indicated above is applied once this tax has been reduced. The effective tax rate for dividends paid out of profits that are not taxed at the corporate level is 38.03% for FY 2019, 37.10% for FY 2020, 36.18% for FY 2021 and 36.18% for FY 2020 onwards.

Resident individuals

Resident individuals are subject to a basket system, where income is characterised in different schedules. Taxable income is determined independently in each basket and the applicable rates are the following.

  • General basket: labour income, capital income and non-labour income (with progressive rates that range from 0 to 39%). The following exemptions, reliefs or deductions are available for resident individuals.
      1. Revenues not considered as taxable income: mandatory health and pension contributions, prepaid health insurance payments and voluntary contributions to the individual's savings scheme provided that (i) income does not exceed 2,500 tax units (approximately USD25,000 for 2019). Contributions do not exceed 25% of the annual earned income.
      2. Deductions: 10% of all labour payments made to individuals who are dependent to the taxpayer (eg, minors) and voluntary pension fund contributions and AFC accounts (accounts for housing purchases).
      3. Exempt income: income not exceeding 3,800 tax units (TU) and social security contributions not exceeding 30% of the annual labour income. The above-mentioned tax benefits are applicable as long as they do not exceed 40% of the total income received or 5,040 TU.
  • Pensions: pensions not exceeding 1,000 TU per month are exempt. Any amounts exceeding the mentioned amount will be subject to progressive rates that range from 0 to 39%.
  • Dividends: dividends paid to resident individuals by resident entities out of taxed profits at the corporate level are subject to income tax as follows.
      1. Dividends distributed to resident individuals paid out of profits taxed at the corporate level not exceeding 300 TU are subject to dividend tax at a 0% rate.
      2. Dividends distributed to resident individuals paid out of profits taxed at the corporate level exceeding 300 TU are subject to dividend tax at a 15% rate.
      3. Dividends paid out of untaxed profits at the corporate level are taxed at the general corporate income tax rate, depending on the period in which they are paid or accrued, in which case the income tax withholding of 15% is applied once this tax has been determined. The same rate applies to dividends received from foreign companies and entities.

Controlled foreign companies - CFC Regime

Colombian income taxpayers are obliged to include on their income tax return passive income realised through controlled foreign corporations (CFCs). A CFC's net profits from passive income must be recognised in proportions equivalent to the participation in the CFC's capital or profits on accrual basis and not on cash basis.

Non-residents

Non-resident entities

The income tax rate applicable to non-resident entities liable for filing an income tax return is 33% for FY 2019, 32% for FY 2020, 31% for FY 2021 and 30% from FY 2022 onwards.

Income tax derived by dividends paid to non-resident entities is collected through a withholding mechanism as explained below.

Non-resident individuals

The income tax rate applicable to non-resident individuals liable for filing an income tax return is 35%.

Income tax derived by dividends paid to non-resident entities is collected through a withholding mechanism as explained below.

Withholdings

Income tax withholdings applicable to payments made to foreign entities and/or individuals are as follows.

  • Direction or management fees paid directly or indirectly to parent companies or home offices: 33%.
  • Technical services, technical assistances or consulting services, rendered in Colombia and from abroad: 20%.
  • Interests, fees, rental income, royalties, exploitation of software, services and, in general, all personal services compensations deemed as Colombian source income: 20%.
  • Interests when loans are granted for one year or more: 15%.
  • Capital gains: 10%.
  • Dividends distributed from a Colombian entity to a foreign entity or non-resident individual are taxed as follows, and the tax is 100% collected through a withholding mechanism.
      1. Dividends distributed to foreign entities or foreign individuals paid out of profits taxed at the corporate level are subject to dividend tax at a 7.5% rate.
      2. Dividends distributed to foreign companies or foreign individuals paid out of profits that are not taxed at the corporate level are taxed at the general income tax rate. In this case, the dividend tax of 7.5% indicated above is applied once this tax has been reduced.

This dividend treatment may change if a double tax convention applies. Therefore, the dividend analysis should be carried out on a case-by-case basis.

Capital Gains

General aspects

Capital gains are defined as extraordinary gains that are not obtained by a taxpayer because of the activities that an individual carries out. The activities that trigger capital gains are specifically listed in the Colombian Tax Code:

  • gains from the direct or indirect sale of fixed assets that have been owned by the taxpayer for a term of two or more years;
  • profits obtained in the liquidation of legal entities, and that do not correspond to undistributed profits or reserves;
  • gains resulting from inheritances, legacies and donations (gifts);
  • prizes, awards, lotteries and gambling earnings; and
  • life insurance indemnities are taxed as capital gains, but only on the amount that exceeds 12,500 TU.

Distributions made by foreign trustees, private interest foundations or other similar fiduciary arrangements to Colombian tax residents are considered as gifts and as such are taxed as capital gains.

The tax rate applicable to capital gains is 10%. In the disposition of fixed assets, the capital gains treatment applies only if the assets have been held for two years or more. As an exception, gains from lotteries, draws and gambling are subject to a flat rate of 20%.

Generally, the taxable base is the assets' or rights' registered value as of December 31st of the previous year.

Exemptions

The following extraordinary income is considered as exempted for capital gains purposes:

  • deceased's urban property – 7,700 TU;
  • deceased's rural property excluding recreational housing – 7,700 TU;
  • value inherited by the deceased's surviving spouse and heirs – 3,490 TU;
  • assets or rights received by individuals not considered as heirs or surviving spouse – 20% of the assets or rights value;
  • assets or rights gifted or transferred by the deceased during their lifetime that were received gratuitously by a beneficiary – 20% of the assets or rights value without exceeding 2,292 TU; and
  • any books, clothing, personal belongings and furniture belonging to the deceased – 100% of the assets value.

Net Worth Tax

As of 1 January 2019, a net worth tax for FYs 2019 to 2021 is triggered on the possession of a net worth as of 1 January 2019 equal to or in excess of COP5,000,000,000.

This tax applies to individuals and foreign entities. In the case of resident individuals, this tax is based on worldwide assets and in the case of non-resident individuals and entities it is based on Colombia situs assets other than shares, accounts receivables and/or portfolio investments; for example, real estate, aircraft, yachts, boats, speedboats, art or oil mining titles.

The taxable base is the value of the taxpayer's net equity as of January 1st of FYs 2019, 2020 and 2021.

It must also be taken into account that regardless of the fluctuations of the taxpayer's net worth, the taxable base will be determined based on the net worth of the taxpayer as of 1 January 2019 as follows:

  • if the taxable base determined for 2020 and 2021 is higher than that determined for 2019, the taxable base for any of those periods will be limited to the taxable base of 2019 increased by 25% of the inflation of the previous period; and
  • if the taxable base determined for 2020 and 2021 is lower than that determined for 2019, the taxable base for any of those periods shall be reduced to the taxable base of 2019 increased by 25% of the inflation of the previous year.

Additionally, assets that are subject to the new Normalisation Tax (as explained below) introduced by Law 1943 of 2018 will also integrate the taxable base. However, if the assets are reported at fair market value and are reinvested in the country on a permanent basis, the value integrating the taxable base may be reduced by up to 50%.

Normalisation Tax - Amnesty Tax

Law 1943 of 2018 established a new mechanism allowing taxpayers to include any omitted assets without having to pay income tax on the resulting equity increase, but instead by paying an additional tax on the omitted assets (Normalisation Tax).

In order to benefit from the Normalisation Tax, the following requirements must be observed.

  • The minimum taxable base is the historical cost basis of the foreign omitted assets.
  • The additional tax would apply at a 13% rate if reported, liquidated and paid only on 25 September 2019.
  • If the reported assets held abroad are reinvested in the country, the taxable base shall be 50% of the omitted assets' fair market value. Assets would have to be repatriated before 31 December 2019 and must be held in Colombia for at least two years.
  • Foreign private foundations, foreign trust, insurances with a material savings component, investment funds or any other fiduciary business abroad must be reported considering the underlying assets cost basis.

The deadline to file and pay the Normalisation Tax is 25 September 2019.

Normalised assets must be included in all applicable tax returns for FY 2019 and onwards.

Other Taxes

The following taxes are also relevant to individual clients, estates and foundations.

Value-added Tax (VAT)

VAT is triggered on the import of goods into the country and rendering services when the direct user or recipient is located in Colombia. Certain goods (livestock, certain fruits and vegetables, seeds and others) and services (catering services for companies, food preparation services, bar services) are excluded from VAT. The general rate is 19%, but there are certain goods and services subject to a 5% rate (coffee, corn for industrial use, agricultural machinery, prepaid medicine plans, security services and temporal services).

Industry and Commerce Tax

A municipal tax is triggered on revenues derived from the performance of industrial, service and commercial activities within a Colombian municipality at an applicable rate of 0.7 to 1%. The tax is triggered on gross income, excluding revenues for exports, proceeds from the sale of fixed assets, refunds, subsidies and withholdings.

National consumption tax on real estate

A national consumption tax is triggered on the sale of immovable property, different from rural properties destined to agricultural activities, new or used, whose value exceeds 26,800 TU. Some exceptions may apply (assignments of fiduciary rights or funds that are not listed on the stock exchange).

This tax is not applicable to disposals of properties destined to the execution social housing projects. The applicable rate is 2% and the taxable base is the entire sale price.

Colombia has a tax reform every two years. This situation leads to great uncertainty and taxpayers are obliged to review their structure regularly. Due to a fear of future tax uncertainty, taxpayers usually consider implementing estate-planning structures located in jurisdictions with greater legal stability or connected with jurisdictions with an enforceable investment protection treaty with Colombia.

Transfer Tax

There is no transfer tax in Colombia; however, the net gain on the sale of assets is taxed as income or capital gains. The net gain on the sale of fixed assets (assets that are not transferred during taxpayers' ordinary course of business) held for two years or more is considered as a capital gain subject to capital gains tax at a rate of 10%. If the fixed asset is held for less than two years, the gain is treated as taxable income subject to income tax rates as follows: (i) for resident individuals, at income tax progressive rates (0%-39%); and (ii) for non-resident individuals, at 35%.

Transfer of Immovable Property

The transfer of immovable property is also subject to notary fees and registry taxes at 0.3% and 1.5% (including notary fees) of the purchase price, respectively.

As of 2019 a national consumption tax is triggered on the sale of immovable property, different from rural properties destined to agricultural activities, new or used, whose value exceeds 26,800 TU, including those made through assignments of fiduciary rights or funds that are not listed on the stock exchange.

In relation to real estate, a price lower than the cost basis, the cadastral appraisal or the self-appraisal is not accepted, without prejudice of a higher commercial value. When the price agreed by the parties differs significantly from the Fair Market Value (FMV), the Colombian Tax Office may reject it and determine an FMV according to the characteristics, conditions and status of the assets. A significant difference in the price occurs when the consideration differs by 15% or more from the FMV.

Estate Taxes

Inheritances, gifts and donations are subject to capital gains tax in Colombia at a 10% rate. The transfer of any real estate involved would also trigger registry tax (of approximately 1.5%).

Generally, the applicable taxable base shall be the assets' or rights' registered value as of December 31st of the previous year.

Regarding any real or perceived abuses/loopholes on tax laws, the Organisation for Economic Co-operation and Development (OECD) has praised Colombia for its high level of commitment to the international standard for transparency and exchange of information. After an assessment of the domestic legal framework by the OECD, Colombia obtained an overall rating of Compliant, due to its legal provisions on financial information and widening network of treaties on exchange of information.

On 25 May 2018, OECD countries agreed to invite Colombia to join the OECD as the 37th member of the organisation after being subject to in-depth reviews by 23 OECD committees and the introduction of major reforms seeking to align its legislation on taxation, anti-bribery, trade and labour issues, among others, to OECD standards. Colombia's main efforts for the achievement of tax transparency and global reporting are as follows.

Exchange of Information

Colombia has also entered into several agreements for the exchange of tax information. For a list of countries with which Colombia has agreed to share information under the Common Reporting Standard (CRS), go to the OECD website. In accordance to the Colombian Tax Office, USA and 36 other countries exchanged tax information on 29 September 2017 and 62 countries in 2018.

FATCA

In relation to the exchange of information, the Colombian and US government have an enforceable Intergovernmental Agreement Model 1 (IGA), within the framework of Law 1666 of 2013, which made the Foreign Account Tax Compliance Act (FATCA) mandatory for Colombian financial institutions and taxpayers. The IGA was implemented in 2015 by means of Resolution 60 of 2015 issued by the Colombian Tax Office.

Ultimate Beneficial Ownership

Financial entities are required to identify and report to the Colombian Tax Office the ultimate beneficial owner in accordance with the Laundering Assets Risk Management and Terrorism System (SARLAFT) standards. This, provided that a non-resident has direct or indirect ownership and control of more than 20% of a resident entity, local trusts and mutual funds. This information is not available to the public.

Rules Against Tax Haven Practices

The national government enacted Decrees 1966 of 2014 and 2095 of 2014, which established the official list of the jurisdictions that are deemed as low tax jurisdictions for Colombian tax purposes.

Andorra, Antigua and Barbuda, Cayman Islands, British Virgin Islands, Isle of Man, Hong Kong, Andorra, Lebanon and Bahamas, amongst others, were included in the official list.

The Colombian government may review and modify the list of low tax jurisdictions pursuant to the criteria contemplated in Article 260-7 of the Colombian Tax Code to determine if the current jurisdictions may be excluded or if there are additional jurisdictions to be included. This list has not been recently updated.

Voluntary Disclosure (Normalisation Tax)

Law 1943 of 2018 established a new mechanism allowing taxpayers to include any omitted assets without having to pay income tax on the resulting equity increase, but instead by paying an additional tax on the omitted assets (Normalisation Tax).

The additional tax would apply at a 13% rate if reported, liquidated and paid only on 25 September 2019. Normalised assets must be included in all applicable tax returns for FY 2019 and onwards.

Baker McKenzie S.A.S.

Ave Calle 82
No 10- 62 piso 7
Bogotá, D.C. 110221
Colombia

+57 1 634 1500

+57 1 376 2211

www.bakermckenzie.com
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Authors



Baker McKenzie S.A.S. has more than 6,000 lawyers and 77 offices worldwide. Led by Rodrigo Castillo Cottin, the firm's wealth management practice is highly renowned for its high level of expertise working with sophisticated clients in complex multi-jurisdictional reorganisation of assets and tax structures for family groups that lead the most important companies in the country. The firm develops global wealth management strategies that account for all of the applicable tax compliance requirements and commercial issues, which is a benefit given to clients that no other law firm in the country can offer. The firm is the only one with the infrastructure and international connection and co-ordination to offer an international coverage.

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