Before joining Avianca, Neuhauser was managing director covering Latin American airlines for Credit Suisse and worked as an investment banker for Deutsche Bank, Bank of America, and Merril Lynch. Avianca remains in Chapter 11 bankruptcy protection as it negotiates with creditors hoping to emerge with almost $2 billion USD in new financing.

“Adrian has intimate knowledge of Avianca, a proven track record in overseeing the company’s corporate restructuring and more than two decades of experience in the finance industry and working with transportation companies – all of which make him uniquely qualified to lead Avianca at this critical time said Avianca’s Chairman Roberto Kriete. “On behalf of the Board and major stakeholders, we are confident in Avianca’s path forward with Adrian at the helm, and we look forward to seeing the company reach new levels of success under his leadership.”

Former CEO Anko Van Der Werff will remain connected to Avianca for the time being, as an adviser and as a member of the board of directors. “It has been a great privilege to lead Avianca over the past two years. With global air travel resuming as COVID vaccines are rolled out and significant progress having been made in our corporate restructuring, we are at logical juncture to transition to a new leader who will guide Avianca into its next chapter. I am truly grateful for how everyone at Avianca came together as one team to navigate the effects of the global pandemic, which was the most difficult time in our industry’s history,” said Van Der Werff.

“I am proud of the long-term labor agreements and strengthened relationships with our pilots and other employee groups as well as the work completed to ensure Avianca has the right aircraft fleet to meet the future needs of the business. I will miss working alongside our team every day, but I have made a personal decision to return with my family to Europe. Adrian has made a tremendous impact since joining Avianca and his insights and experience will be instrumental in taking the company forward. I look forward to continuing to support Avianca as a member of the Board,” added Van Der Werff.

“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.

Adrian Rodriguez is a partner with Lewin & Wills. His areas of expertise include tax law, foreign investment,, foreign exchange, corporate law, and estate planning.

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.

1. 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.

1. 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:
   1. at least50% of the individual’s revenues are from a Colombian source; or,
   2. at least50% of the individual’s property is located in Colombia; or,
   3. 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.

1. 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:
   1. either individual’s spouse or permanent partner (not legally separated), or underage dependent children, are Colombian tax residents; or
   2. the individual is a resident of a listed tax haven jurisdiction; or
   3. 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
   4. 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.)?

1. 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.
2. 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.
3. 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.

Community Property

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?

1. 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.
2. 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.
3. 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.

Inheritance/Estate Planning

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?

• SAS
• SRL
• SA

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.

Below are the most relevant issues of the new Tax Reform:

WEALTH TAX

Taxpayers: Individuals and companies that are income tax taxpayers, as well as individuals that do not have a residence within Colombia and companies in relation to their wealth that is possessed directly or indirectly within the country are subject to the payment of this tax.

Furthermore, entities currently being liquidated, or that have signed restructuring agreements and individuals that are undergoing a bankruptcy process are exempt from the payment of this tax.

Taxable event: The possession of wealth (gross equity less debts) equal or greater than COP $1.000 million pesos as of January 1st, 2015, 2016 and 2017.

Tax base: Gross equity, determined as of January 1st 2015, 2016 and 2017, less the current debts held as of that moment.

If the tax base determined in years 2016 and 2017 is higher than the one determined in 2015, the tax base will be the 2015 wealth (gross equity less debts) increased by 25% of the inflation of the previous year to the one in which the tax is being paid. If the tax base determined in years 2016 and 2017 is lower than the one determined in 2015, the tax base will be the 2015 wealth (gross equity less debts) diminished by 25% of the inflation of the previous year to the one in which the tax is being paid.

Courtesy of Oscar Jiménez, whose contact information is provided below.

The taxable base can only be reduced with the exclusions expressly established by law. i.e. The net tax value of the investment (shares) in national entities as of, January 1 2015, 2016 and 2017.

Rate: The rate will vary, depending upon the nature of the taxpayer and its taxable base, as follows:

For entities – 2015:

For year 2015: Taxable base range in pesos: 0 – 2,000,000,000 Tax rate 0.20%. 2,000,000,000 – 3,000,000,000 Tax Rate 0.35%. 3,000,000,000 – 5,000,000,000 Tax rate 0.75%. Over 5,000,000,000 Tax Rate 1.15%.

For year 2016: Taxable base range in pesos: 0 – 2,000,000,000 Tax rate 0.15%. 2,000,000,000 – 3,000,000,000 Tax Rate 0.25%. 3,000,000,000 – 5,000,000,000 Tax rate 0.50%. Over 5,000,000,000 Tax Rate 1.00%.

For year 2017: Taxable base range in pesos: 0 – 2,000,000,000 Tax rate 0.05%. 2,000,000,000 – 3,000,000,000 Tax Rate 0.10%. 3,000,000,000 – 5,000,000,000 Tax rate 0.20%. Over 5,000,000,000 Tax Rate 0.40%.

For individuals – 2015:

For years 2015, 2016, 2017 and 2018:

For year 2017: Taxable base range in pesos: 0 – 2,000,000,000 Tax rate 0.125%. 2,000,000,000 – 3,000,000,000 Tax Rate 0.35%. 3,000,000,000 – 5,000,000,000 Tax rate 0.75%. Over 5,000,000,000 Tax Rate 1.50%.

The legal obligation to pay this tax arises, on January 1st, of each year.

Finally, the tax paid for wealth tax or for its complementary of fiscal normalization tax may not be deducted for income tax nor income tax for equality – CREE purposes, nor may these taxes be offset with any other taxes.

MODIFICATIONS MADE TO THE INCOME TAX FOR EQUALITY – CREE

• From 2016 on, the rate will be 9%

• Tax losses determined as of 2015 and on can be offset with the CREE tax due, as well as the minimum base excesses when the CREE tax due is determined upon this method.

• It is clarified that the tax credit for taxes paid abroad may also be used for CREE purposes.

• Neither the CREE tax due nor its surcharge, may be offset with balances in favor determined by taxpayers on their tax returns corresponding to different taxes.

CREE SURCHARGE

A surcharge to the CREE tax is created for years 2015, 2016, 2017 and 2018 for the CREE tax taxpayers. The taxable event of this surtax consists upon the possession of a net income greater than COP 800.000.000.

The tax rate of the CREE Surcharge will vary from year to year, as follows:

For 2015: Taxable base range in pesos 0 – 800,000,000 Tax rate 0%. Over 800,000,000 Tax rate 5.0%

For 2016: Taxable base range in pesos 0 – 800,000,000 Tax rate 0%. Over 800,000,000 Tax rate 6.0%

For 2017: Taxable base range in pesos 0 – 800,000,000 Tax rate 0%. Over 800,000,000 Tax rate 8.0%

For 2018: Taxable base range in pesos 0 – 800,000,000 Tax rate 0%. Over 800,000,000 Tax rate 9.0%

This surcharge will be subject to an advance payment of 100% of the value of the same, calculated on the tax base of the taxpayer whom assessed said tax on the immediately previous taxable year. This payment in advance must be paid in two yearly installments within the deadlines set forth by the National Government.

MODIFICATIONS MADE TO THE INCOME TAX

Residence for tax purposes: The nationals that meets the following requirements will not be deemed as Colombian Tax Residents:

• More than 50% of their annual income is foreign source income, and

• More than 50% of their assets are located abroad, in the jurisdiction on which they are domiciled in.

Tax rate for foreign entities: The income obtained by legal entities which cannot be attributed to a branch or permanent establishment in years 2015 – 2018, will be subject to the payment of the income tax at the following rates:

FY 2015 39%, FY 2016 40%, FY 2017 42% and FY 2018 43%.

Tax credit: Both the wording and the formula contained within the Colombian Tax Code was modified in regards to the manner by which the tax credit can be applied for income tax and CREE purposes on taxes paid abroad.

Minimum Simple Alternative Tax (IMAS) on employees: The threshold for the application of the IMAS was reduced. As a consequence, this tax will be applicable on individuals that are Colombian residents and that have obtained gross income lower than 2,800 UVT and a net equity lower than 12,000 UVT.

MECHANISMS TO FIGHT AGAINST TAX EVASION:

Complementary tax on the wealth tax for Fiscal Normalization

A complementary tax to the wealth tax is created for taxable years 2015, 2016 and 2017 for assets or non-existing liabilities located abroad which have not been informed by the taxpayer. In this sense, the following should be taken into account:

-By non-declared asset is understood as those assets which have not been included within the national tax returns of the taxpayers, even though they were obliged to do so.

-By non-existing liability is understood the amount declared on the national tax returns whose sole purpose consisted upon diminishing the tax burden of the taxpayer.

The tax base will be the equity value of the non-declared assets; if the assets are classified as goods, the tax base shall be determined by the acquisition value of said goods for the purpose of determining the fiscal cost of the same. The tax rate will be as follows:

FY 2015 10%, FY 2016 11,5% and FY 2017 13%

Annual return on foreign assets

As of taxable year 2015, taxpayers of income and complementary tax that own assets of any nature located abroad are liable to file an annual return on said assets.

TAX ON FINANCIAL TRANSACTIONS

The Tax Code was modified, establishing that the rate of this tax shall be of 4 x 1000 (0.04%), and will be diminished form year 2019 and on, as follows:

FY 2019 0.03%, FY 2020 0.02% and FY 2021 0.01%.

As of January 1st, 2022, this tax will be officially abolished. Furthermore, certain exemptions were established on this tax, as follows:

– Companies specializing in electronic deposits.

– Withdrawals made on savings accounts, electronic deposits or prepaid cards which do not exceed a monthly amount of 350 UVT. This exemption is only applicable to one account per holder.

-The disposition of resources for factoring operations made by investment funds, trusts or entities whose sole purpose consists of carrying out this type of operation.

OTHER ISSUES

In regards to the penalties imposed by the UGPP:

The term for the taxpayer obliged to pay payroll taxes to answer a special requirement is extended to three months. During this term, the taxpayer may pay or answer the special requirement. If this is not carried out within the six following months, an Official Liquidation or Penalty Resolution will be issued.

Tax, customs and exchange conciliation procedures:

The National and Customs Authority will now be able to make conciliations on processes on which there is a lawsuit for the annulment and reestablishment of the right, in which case they will be capable of conciliating the amount of penalties and interests.

Termination of administrative tax processes:

Those taxpayers which have been notified of a special requirement, official liquidation penalty, among others, can negotiate with the Tax Authority the total amount of the penalties, interests and updates, as long as the taxpayers amends its tax return and pays the 100% of the tax.

In regards to the payment of taxes, contributions, custom rates and penalties:

The taxpayers that have been subject to the imposition of penalties managed by entities qualified to raise these type of funds, and that are in default to pay the obligations corresponding to 2012 or previous taxable periods will have the right to apply for a special payment term, consisting upon the payment of the tax and the 20% of the penalties and default interests (if applied prior to May 31st, 2015) or the 40% of the penalties and interests (if applied after May 31st, 2015).

This benefit may also be applied to withholding agents that up to October 30, 2015 file their withholding tax returns in regards to taxable periods that are prior to January 1st, 2015, on which the inefficiency clause stated by the Colombian Tax Code was generated; these withholding agents will not be obliged to pay any out of date penalties nor default interests.

Tax credit on the VAT paid for the acquisition and importation of heavy machinery

The amount of the VAT paid on the acquisition and importation of heavy machinery for basic industries can be used as a tax credit on the income tax.

Tax credit on the VAT paid for the acquisition and importation of capital goods

Two points of the amount paid on the acquisition or importation of capital goods subject to the payment of the VAT at the general rate can be used as a tax credit on the income tax return of the taxpayer.

Special withholding tax on interests payments for the development of APP projects

Payments made on interests to entities located abroad, originated on credits granted for the development of infrastructure programs that have a period of time equal or longer than 9 years, and that are developed under the Law 1508 of 2012, will be subject to a withholding tax of 5%.

Thin capitalization rules on factoring operations

Thin capitalization rules will not be applicable to the taxpayers that carry out factoring operations.

This publication contains general information only and it is not professional advice. Before making any decision or taking any action that may affect your business, or you personally, you should consult a qualified professional advisor. The author is not responsible for any loss whatsoever sustained by any person who relies on this publication.

(1) A Joint Capital Stock Corporation (“SA”), consisting of a corporate structure under which shareholders are liable up to the amount of their contribution. Its name must be followed by the letters S.A. It must be created with at least 5 shareholders.

Courtesy of Oscar Jiménez, whose contact information is provided below.

The management functions are carried out by the shareholders during their general meeting, the board of directors, and the legal representative of the corporate entity. Each capital share represents one vote, and has an equal value to the other shares of the company. Decisions must be taken by absolute majority.

(2) Under a Simplified Joint Capital Stock Corporation (SAS) in which shareholders are liable up to their contribution amount under a more flexible standard than the above mentioned “SA”. Its name must be followed by the letters S.A.S. and it must be created with at least one shareholder. As for what happens in the SA, the management functions are exercised by the shareholders during their general meeting, the board of directors (optional), and the legal representative.

Each capital share represents one vote, but shareholders can approve different kinds of shares with different voting capability in the company’s bylaws. Decisions must be taken by absolute majority, but shareholders can approve a different majority within the company´s bylaws.

(3) Under a Limited Liability Company (LLC), in which partners are liable up to the amount of their contributions. Its registered name must be accompanied by the word “Limitada” or the letters “Ltda.” It cannot have more than 25 partners and requires at least 2 partners. Management corresponds to the Partner meeting and the legal representative. Decisions require approval by an absolute majority.

Partners’ liability is limited to the amount of their contribution, with the exception of tax and labor liabilities. In these items, partners are jointly and severally responsible for unpaid debts. Capital is represented in quotas of equal value, which must be paid in full at the moment of incorporation or any time the capital of the company is increased. Assignment of quotas implies the reformation of the by-laws of the company.

(4) Finally, a foreign company may set up a branch office in Colombia, for which the head office must register with the local chamber of commerce and provide information on the type of business the branch will conduct in Colombia, its capital, location, expected duration, possible reasons for termination of business in Colombia, and the names of its manager-designate and auditor, who must be Colombian. Proof that the branch’s assigned capital has been paid must be provided. A notary public from the chosen domicile of the branch must authenticate a copy of the head office’s bylaws and statutes.

A branch is legally an extension of the head office and thus considered the same legal person under the Colombian law. Branches in Colombia are subject to the standard Colombian corporate income tax rate.

Accounting, Filing and Auditing Requirements

Official books must be maintained in accordance with commercial and tax rules. All SA’s and SAS’ under the control of the Superintendence must submit annual balance sheets and pay a supervisory fee of 0.05% of total assets. An SA also must employ a statutory auditor to carry out internal control functions, including reconciling monthly bank statements and authorizing company balance sheets. An SAS or LLC must appoint a statutory auditor only if its assets or income exceeds specified limits established by law.

Financial statements must be prepared annually. Colombia has accepted IFRS (International Financial Reporting Standards), which is expected to apply as of 2014, depending upon the group on which the taxpayer is classified; however, for tax purposes, there will be some differences between accounting books and tax books, as the IFRS will not be applicable for tax purposes until 4 years after IFRS is implemented.

Foreign Investment

Colombia allows foreign investment in all sectors of the economy, except for sectors related to national security and the disposal of hazardous waste products. Foreign investors generally are treated the same as local investors, but the law requires reciprocity (Colombian investors must similarly be allowed to operate in the sector in the country of origin of the foreign investor). Foreign investors generally are treated the same as local investors.

A foreign investor may own up to 100% of the capital of a Colombian company, although limits can be imposed in certain cases. Investment in the banking and insurance sectors requires prior authorization by the Financial Superintendence and may be subject to special capital requirements. Authorization or registration may be required in certain cases.

Exchange Controls

According to the Exchange Regime, the following operations must be channeled through the official exchange market (i.e., through financial institutions):

• Importing and exporting goods.
• Borrowing amounts from and paying interest to persons outside of Columbia.
• Receiving investments from and paying profits to persons outside of Columbia.
• Colombian persons investing abroad and receiving profits from abroad, unless the investment is made with funds that do not have to be channeled through the exchange market.
• Issuing securities and guarantees in foreign currency.
• Derivative operations (forwards, futures, options, swaps, floors, caps and collars).

The above mentioned operations must be made through a foreign market intermediary and/or through a settlement account. The Central Bank may provide special exceptions to the above requirements through general regulations.

BUSINESS TAXATION

Residence: A corporation is resident if it is organized under Colombian law or has its main domicile in Colombia or if its place of effective management are located in Colombia. When foreign companies conduct their corporate activities in Colombia through a fixed place of business, they are deemed to have a permanent establishment (PE) in Colombia. The Colombia-source profits earned by the PE will be subject to the income tax and the income tax for equality.

Taxpayers need to be registered before the Colombian Tax Authority, which will assign a Unique Tax Register (RUT). The RUT is the ID card for tax purposes of all corporations incorporated in Colombia.

Taxable Income and Rates: The corporate income tax rate is 25%, which applies to all Colombian entities and to foreign companies, including corporations and foreign branches. The rate does not apply to consortia, which generally are part of administrative contracts with government agencies; instead, the individual partners in the consortia pay tax. Companies located in free trade zones are subject to a special 15% corporate income tax rate.

To compensate for the reduction in the corporate income tax rate, the CREE (income tax for equality) is levied in addition to the corporate tax, at a rate of 9%. CREE taxpayers are exempt from the payroll fees on wages and other payments (about 9% of wages/salaries included in payroll) with respect to payroll for employees that earn 10 minimum wages or less per month.

Taxable income is defined as gross income less returns, rebates, discounts, all ordinary costs incurred in obtaining net income and all allowable deductions. Corporate taxpayers may deduct costs that are “necessary and proportionate to the activities performed” in computing taxable income.

Colombian companies and legal entities are subject to income tax on worldwide income. In contrast, branches of foreign corporations and PE are subject to income tax only on their Colombian source income. In general terms, the following is considered as Colombian-source income:

• Profits derived by Colombian companies;
• The transfer or exploitation of tangible and intangible goods located in Colombia;
• The transfer of goods produced in the country, regardless of the place of transfer;
• The rendering of services in Colombia; and
• The rendering of technical assistance and consulting services, and the execution of turnkey contracts, within or outside Colombia.

On the other hand, foreign source income includes any revenues arising from the transfer or exploitation of tangible and intangible goods located outside of Colombia, and the rendering of services abroad. Furthermore, income generated upon certain foreign loans is not deemed as local source income.

All expenses incurred in the normal course of business generally are deductible. Deductible expenses include normal business expenses, depreciation, losses, interest payments, wages and social security payments, industrial and commercial tax, the real estate tax and 50% of the financial transactions tax. Interest and financing payments made to other firms may be deducted in an amount that does not exceed the maximum loan interest rate established by the Superintendence of Finance.

Capital gains taxation: Capital gains are taxed at a rate of 10%. Gains derived from the sale of assets held for at least two years and gains on the liquidation of a company that has been in existence for at least two years are considered capital gains. The incomes produced from lotteries, raffles, betting and similar, are subject to a 20% rate.

Double Taxation Relief

Tax credit: A foreign tax credit is available to prevent international double taxation. A taxpayer may credit the amount of foreign tax paid on foreign-source income, provided the foreign tax does not exceed the Colombian tax that would be due on the same income received from abroad. For the credit to apply, the taxpayer must be a company resident in Colombia, its foreign income must be taxable in Colombia and the income taxes paid abroad may not exceed the Colombian tax attributable to the income.

Double Taxation Treaties – DTT: Colombia has signed several DTT with different countries in order to prevent double taxation. Colombia has entered into this type of agreements with Switzerland, Canada, Ecuador, Peru, Mexico, South Korea, Spain, Chile and India, amongst others.

Anti-Avoidance Rules

Transfer pricing: Colombia’s transfer pricing rules use the arm’s length principle and apply to transactions between Colombian taxpayers and foreign related parties. Such transactions must be determined according to the prices and profit margins that would have been used in comparable transactions between independent parties. The transfer pricing rules also are used to determine assets and liabilities between related parties.

Parties are deemed to be related if there is any subordination or control or the parties are members of an entrepreneurial group within the meaning of the Tax Code and Commercial Code. Control can be individual or joint, without participation in the stock of the subordinated company or by a principal head office established abroad.

Taxpayers are required to maintain records of all transactions involving nonresident related parties for five years and must report to the tax authorities annually all transactions with such parties that meet certain thresholds. A taxpayer can obtain an advance pricing agreement from the tax authorities.

Thin capitalization: Thin capitalization rules are introduced as from 1 January 2013.Taxpayers can only deduct from the income tax, the interests arisen from debts, which total amount during the corresponding taxable period does not exceed the result of multiplying by three (3) the taxpayer’s net equity determined on December 31 of the immediately preceding fiscal year. Interest exceeding this amount is nondeductible. The rules apply to domestic and foreign loans and regardless of whether the loan is from a related or unrelated party.

Tax haven: The tax haven rules where incorporated in 2002, but only as of the time of the enactment of Decree 2193 of 2013 was possible to enforce those rules, considering that the tax haven rules where subject to the issuance of the list of tax havens by the Colombian Government. The regulation was enacted on October 7th, 2013. The Decree 1966 of 2014 sets forth a list of 37 countries deemed as tax havens for Colombia tax purposes.

In this sense, it should be noted that the application of the tax haven rules under the Colombian tax law gives way to different effects. As such, the payments or debits to an account that constitute as taxable income for the payee, and the latter is a resident or is located, constituted or functioning within a tax haven jurisdiction, will be subject to a withholding tax of 33%, the deductibility of the costs and expenses incurred abroad will be subject to the fulfillment of certain requirements and these operations will be subject to the transfer pricing regime.

General anti-avoidance rule: This rule introduces the substance over form principle. The rules allow the Colombian tax authorities to disregard (or re-characterize) a transaction in cases where abuse is present.

ADMINISTRATION

Filing and payment: “Major taxpayers” (which the tax authorities list each year) must file a tax return by a specified date. Major taxpayers must pay income tax in three installments, according with a due date provided by the National Government. The first installment cannot be lower than the 20% of the total income tax, 50% in the second and third installments.

All other companies must file a tax return between March and May of each year, depending on the last digits of their tax identification numbers, and they must pay their first installment at that time. Returns may be filed electronically.

Statute of limitations: The general statute of limitations for assessment purposes is two years from the last day of the period to file the tax return. The period is extended to five years if the return reports tax losses or the utilization of tax losses. The statute of limitations for the collection of tax is ten years.

Tax authorities: The Colombian tax authorities (DIAN) are responsible for the collection and enforcement of the tax laws.

Rulings: There is no ruling process in Colombia.

TAXES ON INDIVIDUALS

Residence: An individual is considered a Colombian resident for tax purposes if he/she stays in Colombia for more than 183 days during a 365-day period.

Taxable income and rates: A resident individual is taxed on its worldwide income; a nonresident is taxed only on Colombia-source income. A foreign resident individual will be taxed on worldwide income as from the first year he/she resides in the country.

As from 1 January 2013, a new national minimum alternative tax (IMAN) applies to individuals, which adjusts the income tax rate tables. Additionally, a simple minimum alternative tax (IMAS), which allows certain taxpayers to prepare their tax returns electronically.

Most income, including employment income, business income, investment income and capital gains, is subject to tax.

Interest paid to an authorized financial institution on a residential loan is deductible and is calculated in terms of an indexed accounting unit, up to 1,200 units annually. Taxpayer can deduct from its income tax donations done during the taxable year, as long as it fulfills the requirements set up for this deduction.

For Colombian residents and for foreign residents income tax rates are progressive. The maximum tax rate is thirty-three percent (33%) and is applicable to taxable income in excess of four thousand and one hundred (4.100) UVT. For Colombian individuals who are not residents and for non-resident foreign individuals the income tax rate is 33%.

Capital gains are taxed at a rate of 10%.

WITHHOLDING TAXES

Every payment made by a legal entity is subject to withholding tax at source. In the case of a resident recipient of such payments, the tax is in practice an advance payment of the recipient’s income tax liability and is creditable against the recipient’s total annual tax due. In the case of a nonresident recipient, the withholding tax is usually a final tax.

The withholding agent is responsible for issuing withholding certificates, filing returns and paying over the withheld amounts to the authorities within the following month. Withholding tax certificates are issued by the withholding agent to taxpayers that have been subject to withholding tax. For example, a corporation purchasing professional services from a consulting firm in Colombia will withhold tax on its gross payment for such services at the rate of 10%. At year-end, the withholding agent in Colombia will issue a certificate to the consulting firm reflecting the amount of tax withheld and paid to the tax authorities on its behalf. This certificate is the withholding tax certificate. The withholding agent is required to file a withholding tax return on a monthly basis with the Colombian tax authorities; these returns serve as the basis for issuing the withholding tax certificate.

Withholding tax returns must be filed and the tax paid on the dates set by the Tax Calendar. If tax is not withheld, or only partially withheld, or it is not paid over to the authorities, the withholding agent is charged a penalty plus interest on a monthly basis. Nonpayment of tax withheld may constitute a criminal offense. Below is a schedule of the basic withholding tax rates.

Payments made to a person or legal entity that is not domiciled or resident in Colombia, and that does not constitute as foreign source income will be subject to a withholding tax at the rate corresponding to the concept of the payment. Amongst others, the following withholding tax rates will be applicable, depending upon the reason of the payment:

Payment of Dividends: If the profits from which dividends are paid were taxed at the corporate level, no taxes will be triggered when remitting the dividends abroad, including remittances made by branches of foreign companies. Dividends paid to a foreign company or entity not domiciled in Colombia may be remitted abroad free of tax if the profits out of which the dividends are paid already have been taxed at the corporate level. Otherwise, income tax is imposed at the 33% corporate rate.

Profits remitted abroad by a branch of a foreign company that have not been subject to tax at the corporate level are subject to a 33% withholding tax.

Payment of Interests: Interest paid to a foreign entity or an individual is subject to a 33% withholding tax if the term of the loan does not exceed 12 months. The rate is 14% if the term of the loan exceeds 12 months.

Interest derived from the following is exempt from withholding tax: short-term import credits and overdrafts; credits to finance or pre-finance exports; credits obtained by a financial corporation or authorized bank; and credit for trade transactions obtained through a financial corporation or authorized bank.

Royalties: Royalties paid for the exploitation of intellectual property and other intangible assets is subject to a 33% withholding tax. Royalties derived from the exploitation of software are subject to the 33% rate, but only on 80% of their amount (a total amount of 26.4% on the payment).

INDIRECT TAXES

Value added tax: VAT is imposed on the sale of goods and the provision of services in Colombia and on imports. The standard VAT rate is 16%, with lower rates of 5% and 0%. Certain goods and services are exempt or zero-rated, depending upon the nature of the good or service rendered.

As a general rule, VAT is computed in bimonthly periods using the subtraction method, crediting taxes paid on purchases against tax liabilities arising from sales. Special rules apply to small taxpayers.

The basis for calculating VAT is the total value of the transaction, whether it is financed or not, including the expenses of financing, accessories, transportation and installation, insurance, warranties, and commissions. VAT imposed on the importation of goods is calculated based on the customs value as per the applicable regulations, plus the corresponding customs duties.

Registration tax: Registration with the Chamber of Commerce or the Registry of Public Deeds, of legal acts, contracts and other legal documents is subject to registration tax, where a private legal entity or an individual is a party or beneficiary. If a document or act is subject to registration with both the Chamber of Commerce and the Registry of Public Deeds, the registration tax will be triggered only on registration with the latter. Furthermore, if a document or act is subject both to stamp tax and registration tax, the stamp tax will not be imposed.

The basis for the calculating the registration tax is the amount established in the document, act or contract. In the case of incorporation or changes affecting a corporation, the tax base is the subscribed capital of the corporation. In the case of immovable goods, the tax base is the appraised value of the property.

The applicable rate is determined by the local authorities within a range from 0.5% to 1% in the case of acts or documents to be registered with the Registry of Public Deeds and from 0.3% to 0.7% in the case of acts or documents to be registered with the Chamber of Commerce.

Real estate tax: The municipalities levy an annual real estate tax on the owner or occupier of land. The rate depends on the use made of the property and the tax generally is deductible for corporate income tax purposes.

Consumption tax: The taxable event for consumption tax purposes is the sale to a final consumer or import by the final consumer. The tax applies to mobile phone services at a rate of 4%, the sale of certain movable property and food/beverages prepared in restaurants, etc. at a rate of 8%.

OTHER TAXES

Financial transactions tax: A 0.4% financial transactions tax is imposed on disposition of funds from current and savings accounts, including accounts with the central bank, amongst others. Pursuant to article 1 of Law 1694 of 2013, from year 2015 on, the progressive removal of the levy on financial transaction is established, as follows: 0.2% for years 2015 and 2016; 0.1% for years 2016 and 2017 and 0% for 2018 on.

There are certain exemptions established by the Tax Code.

Municipal industry and trade tax: Industry and commerce tax is levied by the municipalities on all commercial, industrial and services activities performed within a municipality, whether directly or indirectly, by individuals, corporations and other legal entities.

Each municipality or district can define its own applicable tax rate, as long as such rate falls within the following ranges provided by Law: In Bogotá: 0.2% – 3%. Other municipalities and districts (industrial activities): 0.2% – 0.7%. Other municipalities and districts (commercial activities): 0.2% – 1%.

The Industry and Commerce Tax paid throughout the fiscal year is fully (100%) deductible for income tax purposes.

Oscar Jiménez received his Colombia law J.D. from Universidad del Rosario (2004) and LL.M degrees from Universidad del Rosario in Colombia in Colombian taxation (2006), Universidad del Externado in Colombia in custom law (2007) and University of Florida in the United States of America in international taxation (2009). Finally, he did a Master in Business Administration (MBA) in Universidad de los Andes (2013). He has experience in the fields of Business Tax, International Tax, Tax Management Consulting and M&A. ojimenez@deloitte.com

This publication contains general information only and it is not professional advice. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The author is not responsible for any loss whatsoever sustained by any person who relies on this publication.