International Tax Lawyer Adrian Rodriguez Answers Critical Questions On Colombia’s Tax Law
Editor’s note: Adrian Rodriguez, partner with the international law firm Lewin & Wills, has graciously allowed Finance Colombia to reprint the answers he prepared for a professional symposium for the benefit of our readers. Mr. Rodriguez may be contacted at the above links. His information is also in the author’s notes at the end of this article.
“Pack Your Bags, We’re Moving: Pre-Immigration Planning for Foreigners Moving to the US” was the name of a panel on January 7th, 2016, in Miami organized by the Tax Law Section of the Florida Bar and the Florida Institute of Certified Public Accountants. The panelists’ discussion focused on key planning issues from the US and foreign perspectives in the showcased jurisdictions (Argentina, Brazil and Colombia) in preparation for a cross-border move.
What to do from the Colombian perspective? Traditional and legitimate tax planning strategies include, among others: anticipating the realization of income and gains, deferring expenses, investments and losses, carefully planning tax residency changes, and many other items that a taxpayer has to individually consider, securing the advice of qualified legal and tax counsel in the relevant jurisdictions, in an effort to harmonize, balance and control collateral effects in all of them.
The methodology proposed by the moderator, Mr. Hal J. Webb with the US law firm of Cantor & Webb, was a comparative Q&A session, and in this piece I want to share with you the questions and answers I prepared for my presentation, from the perspective of Colombia. My co-panelists were Ms. Valeria D’Alessandro with the Argentine law firm of Marval O’Farrell & Mairal, and Ms. Ana Claudia Akie Utumi with the Brazilian law firm TozziniFreire Advogados.
Important disclaimer: The answers to this questionnaire were furnished on December 14th, 2015, and were grounded in Colombian tax law and regulations in place as of that date. The answers herein were prepared as an academic tool for illustration purposes and to facilitate certain panel discussions, and are not intended to constitute legal or tax advice; therefore, any interested party should seek independent qualified tax advice from Colombian tax attorneys admitted to the practice of law in that jurisdiction. This document represents the author’s opinion, which may not necessarily coincide with my firm’s official position on the analyzed topics, and may not be shared or accepted by administrative or judicial authorities or any other person or authority in Colombia.
Colombian Residence and Taxation Generally
What are the main systems of [income, gains and property] taxation in Colombia for individuals (i.e., income tax, gift tax, inheritance tax, wealth tax, etc.)?
Unless otherwise provided, whether of a commercial or non-commercial nature, as a general rule all items of income and gain of individuals are subject to national level income and capital gains taxes. Gifts and inheritances are taxed under the capital gains tax regime.
Most items of income of a commercial nature of individuals, may also be subject to a municipal level turnover tax, such as an Industry & Commerce Tax.
For the last 20 years an individual’s property has been subject to a national-level four year wealth tax. First enacted as a “temporary” measure to increase revenues, the tax continues to be reinstated, with the most recent one in place from FY 2015 through 2018. This in addition to municipal level real estate taxes.
Under what circumstances would an individual be treated as a resident of Colombia for tax purposes?
As of the 2012 Tax Reform Act (“TRA”), enforceable beginning on January 1st, 2013, the following are the tax residency tests for both national and alien individuals.
- Duration of Stay (“DOS”) Test for Nationals and Aliens – Colombian national and alien individuals are deemed Colombian tax residents for any uninterrupted 183-day stay in the country within any 365-day period. In this case, the individual will be deemed a Colombian tax resident for the fiscal year in which the 183-day stay is completed.
Interrupted stays during one or more 365-day periods will be added up and upon completing 183 days, the individual will be deemed a Colombian tax resident for that fiscal year. In both cases the entry and departure dates will be computed as part of the stay period.
- Income Sourcing and Asset Location (“ISAL”) Tests for Nationals – Even if not a tax resident under the DOS Test, a Colombian national will be deemed a Colombian tax resident if the national meets one of the following criteria:
- at least50% of the individual’s revenues are from a Colombian source; or,
- at least50% of the individual’s property is located in Colombia; or,
- at least50% of the individual’s property is effectively managed from Colombia.
If an individual is under one of the above ISAL tests, the individual can defeat the tax residency presumption if: 50% or more of her yearly income is sourced, or 50% and/or more of her property is located, in the other country in which the individual is domiciled. These criteria cannot be used to challenge tax residency under the DOS Test.
- Other Tests for Nationals – Even if not a tax resident under the DOS or ISAL Tests, a Colombian national will be deemed a Colombian tax resident if the national meets one of the following criteria:
- either individual’s spouse or permanent partner (not legally separated), or underage dependent children, are Colombian tax residents; or
- the individual is a resident of a listed tax haven jurisdiction; or
- if summoned by the Colombian Tax Service to show supporting evidence of their argued tax residency in a foreign jurisdiction, the individual does not produce said evidentiary support, i.e., a tax residency certification issued by the tax service of the foreign country; or
- diplomats, consular and foreign service Colombian officials, exempted by reason of their service in the foreign country.
What are the tax payment and reporting obligations for a resident of Colombia (income tax, gift tax, inheritance tax, wealth tax, etc.)?
- Income & Capital Gains Taxes – The income tax rate for individuals is assessed on a deemed net taxable income basis, under a regime in which depending on the economic activity of the individual, certain deductions and statutory allowances may be restricted. The statutory income tax rate for individuals vary depending on their income bracket from0% up to the highest rate of 33%. Gifts and inheritances are taxed under the Colombian capital gains tax regime at the general statutory tax rate of 10%. Income and capital gains taxes are reported on one joint return, filed in the third quarter of the year immediately following the reported fiscal year. Colombia’s statutory fiscal year goes from January 1st through December 31st of each year.
- Wealth Tax – Colombia’s most recent version of the 4 year “temporary” wealth tax is in place for the fiscal year 2015 through 2018. The tax is assessed and reported on a yearly basis on the individual’s net-worth as of January 1st of each fiscal year. The taxable base rules allow for certain statutory exclusions from the individual’s taxable net-worth, and defines a floor and a roof on the decrease and increase of the fiscal year 2016 through 2018 taxable net-worth, with respect to the fiscal year 2015 taxable net-worth.
- If because of the net-worth bracket on fiscal year 2015 the individual was not subject to the wealth tax, then the individual is not subject to the tax for the subsequent fiscal years 2016 through 2018.
The statutory wealth tax rate for individuals varies depending on their net-worth bracket from 0.125% up to the highest rate of 1.5%.
How is a non-resident taxed differently than a resident (income tax, gift tax, inheritance tax, wealth tax, etc.)?
As of the 2012 Tax Reform Act, while Colombian tax residents are taxed on worldwide income, capital gains and property, unless otherwise provided, non-residents are exclusively taxed only on their Colombian source income and gains, and on property located in Colombia.
Currently, alien tax residents, as opposed to the worldwide rule for national tax residents, are subject to wealth tax only on Colombian located property, unless they have been resident for more than five years, in which case their worldwide property would be subjected to this tax.
Before January 1st, 2013, i.e., before enforceability of the 2012 Tax Reform Act’s (TRE) new tax residency tests, tax resident aliens were subject to tax on their Colombian source income and gains, and on property located in Colombia, from the first day of becoming residents; and only as of the 5th year of residency, on their worldwide income, capital gains and property.
What are the main systems of [income, gains and property] taxation in Colombia with regard to companies incorporated or formed in Colombia?
Unless otherwise provided, as a general rule all items of income and gain of Colombian companies are subject to income and capital gains taxes. As part of Colombia’s tax regime on companies’ income, an additional CREE tax and surcharge is also currently applicable. Most items of income of a commercial nature of companies, also are subject to municipal level turnover tax, i.e., Industry & Commerce Tax.
How are the profits of such a company taxed?
The taxable profits of a company, i.e., accounting profits plus/minus tax adjustments/allowances, are subject to Colombian income tax, and CREE tax and a surcharge at a fiscal year 2015 aggregate tax rate of 39% (40% for fiscal year 2016).
In the case of companies, a 3-yr. “temporary” wealth tax is also in place for fiscal year 2015 through 2017. Municipal level real estate taxes are also applicable.
How are salary and dividends paid to a shareholder of such company taxed?
Salary and dividends paid to a shareholder are taxed under the individual’s income tax regime as described above. Nonetheless, bear in mind that Colombia currently has an integrated company-shareholder income tax system; therefore, only profits that were not taxed at the company level, will be taxed at the shareholder level upon distribution. This may change in the near future.
Are there community property laws in Colombia? If so, how do they apply for tax purposes?
Yes, Colombia’s Civil Family Law regulates community property. Nonetheless, Colombian tax law does not avail individuals with the possibility of joint income, capital gains, and property taxation, therefore each spouse files taxes separately.
Does each spouse have a current interest in the other spouse’s assets in the event of divorce or death of one of the spouses?
Yes, unless otherwise provided by civil family law, each spouse has a current interest in the other spouse’s property. Nonetheless, bear in mind that although the community property begins forming as of the date of the wedding (or otherwise legal formation of the union), the community as such is assessed only upon an event of liquidation of the community property.
Are there restrictions on gifts of community property made by an individual to someone who is not that individual’s spouse?
Except for the family dwelling, there are no restrictions on gifts of property eligible for community property. There are certain events in which the lawfulness of a gift to someone who is not that individual’s spouse can be challenged in the courts by the spouse, seeking an order to revert the property.
Can spouses elect to have separate property or enter into a prenuptial agreement or a post-nuptial agreement which specifies a particular marital property regime?
Yes, before marrying spouses can elect to have a separate property regime, or they can enter into a prenuptial agreement. Civil family law does not provide for a type of post-nuptial agreement, other than a post-nuptial election to have separate property.
Ownership of Foreign Companies
If an individual who was a resident of Colombia owned all or part of the shares of a foreign company, what are such a resident’s reporting requirements and tax payment obligations regarding: (a) profits earned by the company, (b) dividends paid by the company and (c) such resident’s ownership of the shares of the company?
- Colombia does not currently have an anti-deferral CFC regime in place. Therefore, undistributed profits earned by a foreign company are neither reportable by, nor taxable for, the Colombian tax resident shareholder.
- Whether taxed at the company’s level or not, dividends distributed by a foreign company to a Colombian tax resident shareholder are taxable in Colombia and should be reported by the tax payer in the corresponding income tax return. Bear in mind that Colombia has a domestic legislation direct and indirect foreign tax credit for dividends and profits from foreign companies, in addition to a network of tax treaties that introduce variations to the general dividend domestic taxation regime.
- Under the current tax residency test, whether national or alien, a Colombian tax resident is subject to Foreign Held Assets (“FHA”) reporting. Therefore, the shares of a foreign company held by a Colombian tax resident, are subject to tax reporting.
The most recent 2014 TRA adopted a special purpose FHA tax report form to file together with the income tax return, beginning with FY2014 filing on 2015; plus a penalty equal to 200% of the officially assessed liability on any unreported FHA, beginning on FY2018 after the sunset of the unreported assets regularization facilities therein granted for FY 2015, 2016 and 2017.
Would the reporting requirement and tax payment obligations discussed immediately above be different if the shares of such company were owned by a trust of which the resident was the settlor or sole transferor of property (or, if the shares of such company were owned by a private foundation of which the resident was the founder or sole transferor of property)?
Colombia does not currently have in place a transparency regime applicable to foreign trusts or private foundations. Therefore, the answer should not change and undistributed profits earned by a foreign company held through a foreign trust or private foundation, should be neither reportable by, nor taxable for, the Colombian tax resident beneficiary.
For the same reason, there is a difference in this case because even if the dividends are distributed to the trust or private foundation, such dividends should be neither reportable by, nor taxable for, the Colombian tax resident beneficiary. The difference in this case is that the reportable FHA rather than the shares of the foreign company or its dividends distributions, would be the beneficiary’s vested rights in the trust or private foundation and payments therefrom.
Is the transfer of money or other assets to a foreign company taxed or required to be reported in Colombia?
Cash and in-kind contributions from a Colombian tax resident to a foreign company not having a place of effective management in Colombia are deemed a taxable event for Colombian income and capital gains taxes. Both from the tax and the outbound international investments foreign exchange regulations, these events are reportable.
Is it common in Colombia for an individual to create a last will and testament?
Yes, in Colombia creating a last will and testament is a common event. Nonetheless, bear in mind that any provision therein against forced heirship, is deemed null and void.
Does Colombia have trust laws, and are trusts typically created in Colombia?
Aside from a regime for certain types of fiduciary arrangements, Colombia does not have a body of rules regulating trusts, which are alien to our legislation. There are a couple of recent and isolated tax provisions dealing with trusts and private foundations, introduced by the 2012 and 2014 TRAs, limited to rights tax valuation for capital gains tax and unreported assets regularization tax. For the same reasons, Colombia is not a jurisdiction of choice for the creation of trusts.
How are trusts (and the beneficiaries of trusts) taxed in Colombia?
Trusts holding property located outside of Colombia or deriving income from non-Colombian sources, should not be subject to Colombian taxation; and only if the beneficiary of the trust is a Colombian tax resident, any payments from the trust to the Colombian tax resident beneficiary, would be reportable by the latter and subject to income or capital gains taxation in Colombia.
If the beneficiary and the settlor of the trust are a different individual or entity, the payments should be taxed as a capital gain subject to a 10% tax rate. If the settlor and the beneficiary are the same individual or entity, the payments should be taxed as a regular item of income that in the case of individuals and depending on the income bracket, can be taxed with a tax rate of up to 33%. Certain sectors of the Colombian tax community are of the opinion that even in the latter case, the payments should be taxed as a capital gain subject to a 10% tax rate; nonetheless, I am not in agreement with that position.
Trusts holding property located in Colombia or deriving income from Colombian sources, should be subject to Colombian taxation in accordance to the general rules for taxation of foreign entities.
Is there forced heirship in Colombia? Does it apply only to residents, or does it also apply to property located in Colombia that is owned by a nonresident?
Yes, Colombia has forced heirship rules that override any provisions to the contrary found in any valid last will and testament. These rules should apply to property located in Colombia, to the extent that there are Colombian heirs.
Can a resident of Colombia disinherit a child or spouse?
Yes, but only under strict rules and for very specific statutory causes. In Colombia, free “no-cause” disinheriting is not available.
Under what circumstances would a person be treated as being domiciled in Colombia?
The domicile of an individual is the place where this individual resides with the intent to stay there on a “permanent” basis. Among other circumstances, the current place of business, craft or profession, is deemed to be the regular domicile of an individual.
Home Country Companies
What types of companies can be formed in Colombia (i.e., S.A., Ltda., etc.)?
- “Sociedades Anonimas” (“SA”) – stock corporations
- “Sociedades Anonimas Simplificadas” (“SAS”) – mixed regime stock companies
- “Sociedades de Responsabilidad Limitada” (“Ltda” or “SRL”) – quota companies
- “Empresas Unipersonales” (“EU” )– sole proprietor companies
- “Sociedad en Comandita Simple” (“SCS”) – mixed liability quota companies
- “Sociedad en Comandita por Acciones” (“SCA”) – mixed liability stock companies
- “Sociedad Colectiva” (“CIA”) – joint and several liability companies
For each type of company, can that company have only one owner or must there be more than one owner?
Only SAS type companies and EU type companies are allowed to be sole proprietorships.
For each type of company, do all of the owners have limited liability, or does at least one owner have unlimited liability?
- SA– all
- SAS– all
- SRL– all
- EU– all
- SCS– some (i.e., at least one has unlimited liability)
- SCA– some (i.e., at least one has unlimited liability)
- CIA– none (i.e., all have unlimited liability).
In certain cases and circumstances the limited liability does not extend to tax and employment matters, or to fraud and abuse.
Which types of companies are used more frequently than others?
Can a company be merged into a different type of company without any tax consequences (i.e., S.A. merged into a Ltda. with the Ltda. surviving the merger)?
As a general corporate law rule, any company type can be merged into any other type of company, including an SRL with the latter surviving the merger. Nonetheless, mergers are deemed taxable events for both the participating entities and for their shareholders, unless certain requirements for tax-free treatment eligibility are met.
Leaving The Home Country
What is required for an individual to cease to be a resident of Colombia for tax purposes?
When an individual stops meeting all of the tax residency tests, the individual ceases to be a Colombian tax resident as of the fiscal year immediately following the date in which that circumstance occurs.
Are there any tax consequences for a resident of Colombia if such person becomes a nonresident (i.e., an exit tax)?
Although, certain exit strategies may entail taxable events, in Colombia currently there are no exit taxes for individuals.