The Inward Investment and International Taxation Review: Colombia
Colombia has been the country in Latin America with one of the fastest growing economies and that is seen abroad as one of the best alternatives to invest in the region. Although Colombia has been hit hard by the effects of covid-19, its good pre-covid-19 economic health indicates that it should recover faster than other countries in the region.
Although Colombia is friendly to foreign investment and is making efforts to improve legal conditions for foreign investors, unfortunately tax regulations are not helping this purpose. Colombia has already had 10 major tax reforms in the past 20 years. The result is a much more complicated tax system with many new rules and much more control tools for the tax authorities; all these changes have created legal uncertainty and a very high tax burden for businesses.
Common forms of business organisation and their tax treatment
From a corporate perspective, there two alternatives to run a business in Colombia: (1) by incorporating a local legal entity; or (2) by creating a Colombian branch of a foreign entity. In general, when performing short period activities there is no need to adopt a corporate form in the country; when activities become permanent, a branch or a local entity has to be incorporated.
The most common corporate vehicles incorporated in Colombia are as follows.
Limited liability companies (LLCs)
LLCs are required to have at least two quota holders but no more than 25. Quota holders' liability is limited to the amount of their contributions, except for labour and tax purposes for which they are severally and jointly liable. They do not require an external auditor unless they meet the income or equity cap (approximately US$1.2 million of equity and US$730,000 of income for 2020). A board of directors is not mandatory.
Corporations are required to have at least five shareholders. Shareholders' liability is limited to the amount of their contribution. They are required to have an external auditor. A board of directors is also mandatory.
Simplified companies by shares (SAS)
This is the most popular investment vehicle. Its main characteristics are its flexibility and the simplicity of its incorporation process. SASs are also allowed to have a unique shareholder and indefinite duration. Unless the SAS meets the income or equity cap applicable for limited liability companies, it does not require an external auditor. A board of directors is not mandatory.
Branches are a business establishment incorporated by its home office in Colombia to carry out its corporate purpose. They do not have an independent legal personality. The home office is jointly and severally responsible for the liabilities of its branch.
Corporate trusts managed by a supervised financial entity
This non-corporate vehicle is fiscally transparent and, as a general rule, is not considered a taxpayer to the extent the beneficiary of the trust can be identified, in which case the profits of the trust will be taxed at the beneficiary level. It is of common use to manage investors' funds and use them as instructed by investors.
Foreign capital investment funds
Foreign capital investment funds are not taxpayers; foreign investors are considered taxpayers in Colombia for profits obtained in the country through the foreign capital investment fund. Every month the fund manager in Colombia will withhold the income tax on profits obtained at the special 14 per cent rate (25 per cent for payments to investors located in any of the listed low tax jurisdictions)2 which is the final tax for the foreign investors. A reduced 5 per cent withholding tax rate applies on profit obtained from private or public fixed income securities, or financial derivatives with an underlying asset that is a fixed income security.
Current rules oblige the fund manager to inform about foreign beneficial owners when required by tax authorities.
Direct taxation of businesses
i Tax on profits
Determination of taxable profit
The taxable profits (i.e., net taxable income) for the taxable year (i.e., from 1 January to 31 December) are calculated as follows: to any taxable ordinary or extraordinary income obtained by the taxpayer, deductible costs and expenses will be applied to obtain the taxable profit. As a general rule, accounting income, costs and expenses will be the base to calculate the taxable profit, unless special rules apply. The most common adjustments made for income tax purposes are: (1) accounting income from valuation of investments or other assets will not be considered for tax purposes; (2) depreciation periods, which may differ for accounting and tax purposes; and (3) provisions, which are not deductible for tax purposes (except for provision on commercial account receivables). Profits are taxed on an accrual basis.
The net taxable income may not be lower than the presumptive taxable income, which for the year 2020 is equal to 0.5 per cent of the taxpayer net equity of the previous year; from 2021, the applicable percentage will be zero.
The deduction of costs and expenses incurred abroad that relate to local-source income are limited to 15 per cent of the taxpayer's net income determined before subtracting said expenses.
Taxpayers are entitled to deduct the depreciation of assets that are used in their income-generating activity, following any methods acknowledged by the applicable international accounting standards. Accelerated depreciation is allowed if certain requirements are met. For tax purposes, there is maximum yearly depreciation percentage depending on the type of asset, as follows:
- buildings: 2.22 per cent;
- aqueduct, plants, netting, transportation routes: 2.5 per cent;
- air fleet and equipment: 3.33 per cent;
- railway fleet and equipment: 5 per cent;
- river fleet and equipment: 6.67 per cent;
- weaponry and surveillance equipment, electric equipment, transport fleet and equipment, machinery and equipment, furniture and fixtures: 10 per cent;
- scientific and medical equipment: 12.5 per cent; and
- packaging, packing and tools, computer equipment, data processing networks, communication equipment: 20 per cent.
Taxpayers are entitled to amortise all investments related to their income-generating activity; yearly amortisation cannot exceed 20 per cent of the cost of the intangible asset. Payments to related parties located abroad for the exploitation of an intangible asset formed in Colombia will not be deductible.
Colombian tax residents are taxed on their worldwide income. Permanent establishments of foreign companies or individuals are taxed in Colombia on their attributable worldwide income. Non-residents are taxed only on their Colombian-source income.
Capital and income
Capital gains tax is a complementary tax with its own taxable base. Capital gains include the sale of fixed assets (i.e., assets that are not habitually sold by the entity) held for more than two years. Capital gains are taxed at a 10 per cent rate and they can only be offset with capital losses or reduced by costs and deductions related to such gains.
Tax losses generated up to fiscal year 2016 can be carried forward with no time limitation or cap while losses generated from fiscal year 2017 can be carried forward and compensated with ordinary income of the following 12 years. Although tax losses are not transferred to shareholders or quota holders, they may survive mergers and spin-offs according to the portion corresponding to their participation in the net worth of the new, surviving or resulting entities and to the extent the corporate purposes of the new, surviving or resulting company and the company that originated the loss are the same. Statute of limitations for income tax return in which fiscal losses are assessed or compensated increases from three to five years.
The corporate income tax rate for fiscal year 2020 is 32 per cent; this rate will decrease to 31 per cent for the fiscal year 2021 and 30 per cent for the fiscal year 2022 and onwards.
From a national perspective, in general businesses file an annual income tax return that has deadlines in the second half of April and according to their tax identification number. There are also monthly withholding tax returns and bimonthly and quarterly valued added tax (VAT) returns. Taxpayers are also required to file electronic tax information with the national tax authorities on an annual basis.
Form a local perspective, businesses have to file the local industry and commerce tax return accrued in the industrial, commercial or services activities performed within the jurisdiction of the correspondent municipalities. The tax return, if filed on an annual basis (except for Bogotá, which has a special regime) requires a bimonthly return. Municipalities also require the submission of electronic tax information on an annual basis.
The tax return due dates' schedules are issued yearly for national and local duties.
Colombia has enacted 10 major tax reforms in the twenty-first century. The last reform was approved in Congress in December 2019, which in general has the same content as the one approved in December 2018 but that was declared unconstitutional by the Constitutional Court and with effect only for 2019. All the recent reforms were intended to increase collections and to improve anti-evasion and anti-avoidance rules. Because there have been so many changes in recent years, there is no case law regarding all changes and the position of tax authorities is always changing and oriented to protect collections; all this creates legal uncertainty. In Colombia, our tax authorities are lacking enough officials to be able to audit taxpayers in a timely and effective manner; this implies that the risk of being audited has been traditionally low, with a risk increase in recent times because of the improvement in the technological support in the auditing activities; in case of an audit, tax authorities always maintain that no-one leaves with 'empty hands', which means that when facing an audit, the risk of an official assessment is very high. As a recent member of the Organisation for Economic Co-operation and Development (OECD), Colombia will continue adopting all recommendations of this entity along with the special recommendations in base erosion and profit shifting (BEPS).
The national tax authority known as DIAN is in charge of all national taxes, such as income tax, VAT, equity tax and financial transaction tax. Each municipality and state has their own tax authority. There are 32 states and over 1,000 municipalities.
As a general rule, the statute of limitations for the tax authorities to initiate an audit expires within a three-year period counted from the due filing date of the related tax return. If the related return was not filed in a timely basis, the statute of limitations for an official tax audit expires within a three-year period counted as from the date of filing. If an income tax return reflects a tax loss, or the taxpayer is subject to transfer pricing rules, the statute of limitations for a tax audit expires after a five-year period counted as from the date of filing of the related return. If the tax return was not filed, the statute of limitations for the tax authorities to request the filing and impose penalties is a five-year period counted as form the due filing date of the related tax return.
Although there are no regular routine audit cycles, the most common audits originate in: (1) a request for tax refunds; (2) tax losses carry-forward; (3) special tax benefits; and (4) complaints of third parties (i.e., a third party goes to tax authorities and gives information on possible acts of elusion or evasion).
Tax authorities do not issue advance tax rulings. Taxpayers may file questions to the tax authorities to obtain a general opinion on the tax treatment of an operation, but the tax authorities are not allowed to issue an opinion regarding a specific transaction or operation. Tax opinions are only binding to the tax authority and not for the taxpayers; this means that tax officials are obliged to apply the general tax opinion issued by tax authorities. Tax opinions issued by the tax authorities may be challenged by directly requesting the tax authority to reconsider the position or by filing an annulment suit before an administrative court.
There is no consolidated tax grouping in Colombia. Therefore, assets, losses, dividends, interests, etc., may not move tax-free within the group. Groups are only obliged to: (1) report the subordination or control status and register the group with the chambers of commerce where they are domiciled; and (2) prepare a consolidated financial statement.
ii Other relevant taxes
Value added tax (VAT)
The general rule is that the sale of all tangible movable goods (immovable assets such as real estate are not taxed) and the rendering of services are taxed at 19 per cent unless an exemption is available, or a different rate applies.
To the extent the goods and services are subject to VAT, the seller will be entitled to credit VAT paid to vendors. Imports are also taxed except where an exemption applies. While the general rate is 19 per cent, the 5 per cent rate applies to specific goods and services. The sale of movable goods that are fixed assets of the seller is not taxed with VAT.
The VAT paid upon the purchase of goods and services may be treated as tax credit and reduce the VAT to be paid in the proportion represented by the income derived from taxable and exempt operations regarding the income generated in the corresponding period (i.e., bimonthly or quarterly).
Although the VAT is paid by the final customer, the following taxpayers are responsible for its collection: (1) in the sale of tangible movable goods, the seller; (2) in the rendering of services, the service provider; and (3) on imports, the importer.
As a general rule, the taxable base is the amount of the transaction.
VAT withholding, direct collection by purchaser or services user is applicable, among others, when the services are rendered by foreign non-residents or non-domiciled entities to local beneficiaries, in which case these the local party is obliged to self-assess and withhold the total VAT accrued in the corresponding transaction. If the local party is not a withholding agent, the foreign seller or services provider will be considered as responsible for the VAT in the transaction and will have to file VAT return and pay the tax due. For some digital services, services providers may opt for the payment intermediary (i.e., credit card issuer, bank, etc.) to withhold the VAT.
Net worth tax
A new net worth tax was approved in 2018 and renewed in 2019 and applies in 2020 and 2021. The main characteristics of this tax are the following:
- taxable event: the possession of net equity – as calculated for tax purposes, which may differ from equity as calculated for accounting purposes – equal or greater than 5 billion Colombian pesos (approximately US$1.4 million), as of 1 January 2020;
- taxable base: the net equity described in (a); this base may not change from one year to the other in more than 25 per cent the inflation of the previous year as certified by DANE, which is the official national statistics entity; this means that the taxable base of 2020 is almost a fixed base for the two taxable years;
- taxpayers: individual that are fiscal residents in Colombia on the worldwide patrimony; foreign individuals on their patrimony in Colombia; foreign companies on their patrimony in Colombia, excluding shares, accounts receivables, portfolio investments and assets under financial lease agreements;
- rate: 1 per cent; and
- payment: the net worth tax is due each year in two equal payments.
Industry and commerce tax
Industry and commerce tax is levied on the performance of industrial, commercial or service activities within a municipal jurisdiction. As a general rule, exports are not subject to industry and trade tax. The tax rate may vary from zero to 1.38 per cent. The taxable rate is based on gross income. Regarding deductibility, 100 per cent of the industry and commerce tax that is effectively paid during the given taxable year is deductible for income tax purposes or 50 per cent of the tax effectively paid may be treated as a tax credit against the tax due; if the taxpayers chooses to apply the 50 per cent tax credit, the remaining 50 per cent will not be treated as a deducible expense.
For mining industry and commerce, tax is not applicable to the extent the amount paid for royalties for the extraction of minerals is equal to or greater than the industry and trade tax calculated (which is usually the case).
Financial transaction tax
Financial transactions tax is levied on the performance of financial operations that result on the disposition of funds that are deposited in bank, savings or deposit accounts (including those with the Colombian Central Bank), and debits on accounting records to make payments or transfer funds to third parties.
The tax rate is 0.4 per cent. The taxable base is the value of each financial transaction.
With regard to accrual and collection, financial transactions tax accrues when the disposition of funds takes place as a result of the underlying transaction. The tax is collected via tax withholdings, by the entities that are subject to the surveillance of the Financial Superintendence, in which the relevant bank, savings or deposit account is held, or in which the accounting records related to the transfer of rights to third parties or the disposition of funds occur.
In terms of deductibility, 50 per cent of the financial transactions tax that is effectively paid during the given taxable year is deductible for income tax purposes.
Real estate tax
Real estate tax is levied on property located in urban, suburban or rural areas, whether constructed or not, at rates that range from 0.4 per cent to 3 per cent, depending on the kind of property. The taxable base is generally the official appraisal of the real estate, although in certain jurisdictions (such as Bogotá) the appraisal is done directly by the taxpayer.
The real estate tax paid during the given year on property that has a cause-and-effect relationship with the income-producing activity of the taxpayer is fully deductible for income tax purposes.
Tax residence and fiscal domicile
i Corporate residence
Legal entities incorporated in Colombia or with their main domicile in the country, or entities with the effective place of management in Colombia are considered tax residents. Although permanent establishments of foreign entities are not considered tax residents, they are subject to tax on their worldwide attributable income. Foreign non-domiciled entities are not considered tax residents.
ii Branch or permanent establishment
Since 2012, Colombia has local rules on permanent establishment (PE). These rules follow the OECD Model Tax Convention in its 2010 version, meaning that to determine whether a foreign entity has a PE in Colombia or not, the criteria of the OECD Model Convention will be followed. In addition, under Section 471 of the Colombian Commerce Code foreign companies doing business in Colombia, if they carry out permanent activities in Colombia, are required to incorporate a branch or a subsidiary (as explained in Section II); the branch will be treated as a PE for tax purposes.
Profit of the PE or branch for tax purposes will be attributed based on assets, functions, risks and personnel of the PE or branch.
In the case of double tax treaties signed by Colombia, PE and tie breaker rules of the treaty will apply. Unfortunately, Colombia has a short treaty network that comprises only 14 treaties signed and ten of them enforceable.
Tax incentives, special regimes and relief that may encourage inward investment
i Free-trade zones
Industrial goods and service users of a free-trade zone are subject to a special 20 per cent income tax rate. This special rate does not result on dividends being taxed at the shareholder level.
ii Investments in the tourist sector
Investments in new or remodelled hotels or in new theme parks or agricultural or ecotourism parks or in new nautical docks will be subject to a 9 per cent income tax rate; for small cities, investment has to be made within the following 10 years and the benefit is for twenty years; for big cities, investment has to be made within the following four years and the benefit is for 10 years. This benefit does not result on dividends being taxed at the shareholders level.
iii Holding company regimes
A new holding company regime was introduced in 2018 and renewed in 2019. Under this regime, dividends from abroad and profits in the sale of stakes of foreign subsidiaries are exempted for Colombian companies that have as a principal purpose the holding of securities, investment in shares in Colombia or abroad or the management of said investments. It has to be a company with a direct or indirect participation in at least 10 per cent of the capital of each entity for a period of at least 12 months.
The substance requirement is having at least three local employees, domicile in Colombia and proof that strategic decisions of investments are taken in Colombia.
The exemption is transmitted to foreign shareholders of the holding company, but not to Colombian shareholders. Distribution of the premium in the placement of shares to foreign shareholders is also tax exempt.
iv IP regimes
There are no special IP regimes in Colombia. Any benefits related with IP payments were eliminated following BEPS recommendations.
v State aid
There is no state aid in Colombia for specific sectors.
There are few incentives in the tax law and the trend is introducing more anti-avoidance rules. In addition, various differences in the accounting and fiscal treatment may apply, which results in an effective taxation on commercial profits much higher than the nominal income tax rate. Nevertheless, with a proper tax planning, any business in Colombia can manage to pay an effective rate on commercial profits equal to the nominal tax rate.
Withholding and taxation of non-local source income streams
i Withholding outward-bound payments (domestic law)
Regarding dividends, there are two taxation rules: (1) corporate tax will be paid by the company or will be levied on dividends; therefore, dividends paid out of profit that were taxed at corporate level will be considered as non-taxed dividends for the shareholders, while dividends paid out of profit that were not taxed at corporate level will be taxed when received by shareholders at the corporate rate and in the case of foreign shareholders, the tax will be paid via withholding tax; and (2) after applying the previous rule, on net dividend payments a dividend tax will apply and will be paid via withholding tax; for foreign shareholders, the withholding tax rate will be 10 per cent.
As a general rule, interest payments to foreign creditors for credits with a term higher than one year or for financial lease agreements are subject to a withholding tax of 15 per cent; for credit with a term lower than one year, the withholding tax rate is 20 per cent. A special rate of 1 per cent applies on financial lease agreement on ships, helicopters and aeroplanes; a special rate of 5 per cent applies on financing with a term higher than eight years to finance public infrastructure under the Private-Public Association scheme.
Payments for royalties, such as exploitation of any kind of industrial property of know-how, including software, regardless of the source of the income, are subject to a 20 per cent withholding tax.
Any other payments made to foreign residents that, according to law, are considered domestic-source income are subject to an income tax withholding of 20 per cent in the case of services in general and lease agreements, and 15 per cent on any other domestic-source income not listed and with no special rate. Benefits from technical assistance, technical services or consulting services are considered domestic-source income, even if services are rendered from abroad.
Payments for management services to a related party located abroad are subject to a 33 per cent withholding tax.
In general, in case of payments subject to withholding tax, tax withheld will be considered the final tax and the foreign resident will not have to file an income tax in the country; in the case of payments for other concepts not listed, subject to the 15 per cent withholding tax, tax withheld is not final and the foreign resident has to file income tax in Colombia and asses the tax due in which case the withholding tax will be credited against it.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
In general, payments considered non-domestic-source income are not subject to tax in Colombia (i.e., the payor does not have to apply withholding tax and the recipient does not have to file income tax in the country). These payments will be deductible to a limit equal to 15 per cent of the taxable income of the Colombian payor before subtracting the limited payment.
Payments related to the following foreign indebtedness, among others, are considered as non-Colombian source income and therefore are not subject to withholding taxes in the country: (1) short-term credits, up to six-month term, originated in the import of goods and in bank overdrafts; (2) credits for the financing or pre-financing of exports; and (3) credits obtained abroad by financial corporations and banks.
iii Double tax treaties
The double tax treaty network is very small. Currently, only ten double tax treaties are in force. There are four additional signed treaties that are pending Congress and Constitutional Court approvals. There is also the Andean Pact rule on double taxation for Andean Pact members (Bolivia, Colombia, Ecuador and Peru); these rules assign exclusive taxing rights to the source state for all types of income except for transport income, which is assigned to the residence state.
The following chart shows the most important tax reliefs derived from the double tax treaties:
|Spain||5% / 0% for shareholder with more than 20% of capital||10%. 0% for qualified entities||10%‡|
|Chile||7% / 0% for shareholder with more than 25% of capital||15%. 5% for qualified entities||10%‡|
|Switzerland||15% / 0% for shareholder with more than 20% of capital||10%. 0% for qualified entities||10%‡|
|Canada||15% / 5% for shareholder with more than 20% of capital||10% in all cases||10%‡|
|Mexico||Taxed in residence country||10%. 5% or 0% for qualified entities||10%‡|
|India||5%||10%. 0% for qualified entities||10%‡|
|South Korea||10% / 5% for shareholder with more than 20% of capital||10%. 0% for qualified entities||10%‡|
|Portugal||10%||10% in all cases||10%‡|
|Czech Republic||15% / 5% for shareholder with more than 25% of capital||10%. 0% for qualified entities||10%‡|
|France*||15% / 5% for shareholder with more than 20% of capital||10%. 0% for qualified entities||10%§|
|United Kingdom||15% / 5% for shareholder with more than 20% of capital||10%. 0% for qualified entities||10%§|
|United Arab Emirates*||15% / 5% for shareholder with more than 25% of capital||10%. 0% for qualified entities||10%‡|
|Italy*||15% / 5% for shareholder with more than 20% of capital||10%. 5% or 0% for qualified entities||10%§|
|Japan*||10% / 5% for shareholder with more than 20% of capital||10%. 0% for qualified entities||10%§|
* Not yet in force.
† Dividends paid with profits not taxed at corporate level are taxed when distributed, at the corporate income tax rate. Treaty relief is granted under special rules contained in the protocol or in Article 10 of each treaty; relief reduces the tax to zero per cent (Spain and Chile under certain conditions and Switzerland according to Article 10), 15 per cent (Canada, South Korea, India, France, United Kingdom and Italy) or 25 per cent (Czech Republic); no relief is granted in the case of Mexico, Portugal and United Arab Emirates.
‡ Includes technical services, technical assistance and consultancy.
§ Does not include technical services, technical assistance and consultancy.
iv Taxation on receipt
Tax credits are available in Colombia for income taxes charged abroad to taxpayers on foreign-source income, including dividends paid by foreign companies. However, such credits may not exceed the amount of tax that the foreign-source income would have paid in Colombia. The taxable income after tax credits may not be lower than 75 per cent of the presumptive taxable income.
There is a double credit on dividends: (1) tax credit for taxes paid at source on dividend distributions; and (2) indirect tax credit for taxes paid by the entity distributing dividends on profit obtained and from which dividends were paid; there is also the possibility to add another indirect credit for taxes paid on profits that were later distributed as dividends and are part of the profits later distributed by the entity distributing dividends to the Colombian shareholder. All credits are limited to the tax payable in Colombia on the dividends received.
The excess of foreign tax credit may be carried forward with no time limit, by applying the same limits mentioned for any year in which the tax credit is applied.
Taxation of funding structures
The most common funding alternatives for companies held by foreign investors are: (1) capital contributions; and (2) foreign indebtedness.
The cost of capital contributions is 0.7 per cent on the amount of capital contributed and 0.3 per cent on the part of the contributions qualified as premium in the placement of shares. Foreign indebtedness does not trigger any costs.
i Thin capitalisation
In general, interest paid on interest bearing indebtedness with related parties in Colombia or abroad will be deductible only on the part of the debt that does not exceed during the taxable year two times the patrimony of the entity as of 31 December of the previous year.
ii Deduction of finance costs
Finance costs, including interest, premiums, bank fees and bank commissions, are fully deductible for income tax purposes to the extent they were subject to income tax withholdings when applicable. When not subject to income tax withholding, the 15 per cent deduction limit applicable to costs and expenses incurred abroad that relate to local-source income is applicable.
iii Restrictions on payments
Companies and branches are required to set up a legal reserve with 10 per cent of the profits of each year until the legal reserve reaches 50 per cent of the subscribed capital (or assigned capital for branches). Each year, companies are required to distribute at least 50 per cent of the net profits, unless the shareholders' meeting, with the vote of at least 78 per cent of the shares, decides to the contrary. In the SAS, the legal reserve and the minimum distribution rules are not mandatory.
iv Return of capital
Equity capital can be repaid as a result of a winding-up process, capital reduction or reduction of the supplementary investment to the assigned capital (only available for branches). Capital reduction requires a previous authorisation of the Superintendence of Corporations and the Ministry of Social Protection. Capital returns are tax free.
Acquisition structures, restructuring and exit charges
Due to the rules on indirect sales, the controlled foreign corporation regime and the general anti-avoidance rules, any direct or indirect sale of a local business will be subject to tax in Colombia. Any profit obtained in the sale of a business will be subject to income tax at a rate of 32 per cent for 2020, 31 per cent for 2021 and 30 per cent from 2022. If the shares or assets sold were held for more than two years, the profit will be subject to capital gains tax at a rate of 10 per cent.
The sale of shares in Colombia is not subject to withholding taxes if the seller is a local entity; for a foreign entity selling to a local purchaser, there is a withholding tax of 15 per cent or 10 per cent if shares were held for more than two years by the seller.
Mergers and spin-offs are tax-free transactions provided they comply with certain requirements. Considering that there is a wide range of mergers and spin-off operations worldwide, in order for the reorganisation to be tax free it must comply with the Colombian Commerce Code requirements.
International reorganisations are allowed. However, if the reorganisation results in a local entity being wound up, the new, resulting or surviving foreign entity may be required to set up a branch in Colombia.
Relocation is, from the commercial law perspective, not possible.
Anti-avoidance and other relevant legislation
i General anti-avoidance
Colombia has a general anti-avoidance rule that, to date, has not been applied by tax authorities. This rule allows tax authorities to recharacterise any transaction that is considered to be abusive.
Colombia currently has a list of low tax jurisdictions that are qualified as such following the criteria in the Tax Code. In the case of preferred tax regimes, there is no list and according to the tax authorities' position, taxpayers have to determine based on the criteria in the law if a regime qualifies as a preferred tax regime or not.
ii Controlled foreign corporations (CFCs)
Colombia has OECD-oriented CFC rules, according to which any passive income (i.e., in general dividends, interest and royalties) obtained by a directly or indirectly controlled foreign entity will be considered as received by the controlling individuals or entities if they hold more than 10 per cent of the controlled entity or have a benefit greater than 10 per cent in the controlled entity. Taxable income of the foreign controlled entity will be determined by applying the Colombian tax rules. CFC rules apply to any foreign controlled entity regardless of where it is located; in the case of entities located in low tax jurisdictions or in a preferred tax regime, they will be deemed to be controlled entities.
iii Transfer pricing
Colombian transfer pricing rules are OECD-oriented. These rules affect income tax and the determination of assets and liabilities. Transfer pricing rules are applicable for taxpayers engaging in cross-border transactions with foreign related parties.
In general, taxpayers exceeding thresholds (i.e., gross equity of the year over approximately US$990,000 or gross income over approximately US$600,000) for the year 2021 are required to comply with transfer pricing formal obligations. Formal obligations include: (1) the filing of transfer pricing informative returns for all transactions with related parties located abroad; and (2) preparing a transfer pricing study comprised by a master file and the local report for transactions worth more than approximately US$99,000 for the year 2020.
Regardless of the requirement to comply with formal obligations, all transactions with related parties located abroad have to be at arm's length.
iv Tax clearances and rulings
No tax clearances or rulings are required to acquire a local business.
Year in review
A new reform was enacted in Law 2010 of 2019 that came into force on 1 January 2020 and that was necessary to replace Law 1943 of 2018 that was declared unconstitutional during 2019 by the Constitutional Court. New Law 2010 of 2019 has very similar content to Law 1443 of 2018.
Usually, during the first semester, all work should have been focused on understanding the new rules and for the government to issue the decrees needed to apply the reform; however, because of the covid-19 crisis, the government spent most of their energy and time issuing extraordinary measures to counteract the negative effects of the pandemic, with the consequence that many of the necessary rules to duly apply Law 2010 have been taking more time than usual to be issued.
Extraordinary tax measures resulting from the covid-19 pandemic were focused on delaying formal compliance and decreasing VAT on the medical elements needed for the health emergency. There is, however, no special tax relief.
During the pandemic, we have seen more activity from DIAN, including sending letters to taxpayers regarding various matters and inviting them to amend tax returns and pay higher taxes. Virtual work has not been an obstacle for taxpayers, who feel that DIAN is more active than ever. On the contrary, the use of technology allows for a broader scope of taxpayers to be reached by DIAN's auditing activities.
Outlook and conclusions
Colombia is a country that is still offering excellent conditions for foreign investors. Unfortunately, the recent and common changes to tax rules made taxes one of the main obstacles to attracting foreign investment to the country. Hopefully, by following the recommendations of the OECD and once intended changes have been introduced to tax authorities, this will create a more friendly tax environment for inward investment; in any case, positive changes will be seen in the long term while negative aspects of taxation will still be there in the short term. Although the effects of the pandemic should accelerate positive changes to attract foreign investment, this is something we have not seen in the agenda of the Colombian government.
Unfortunately, the government has already announced that a tax reform bill will be presented to Congress during the first semester of 2021 with the purpose of increasing tax collections to pay new debts originating from the covid-19 crisis. The new reform will focus on elimiating tax benefits and will increase taxation of individuals.