Snapshot: tax concerns for personal purchasers in Colombia

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Africa tax in brief - Lexology

Tax

Residence and domicile

How does an individual become taxable in your jurisdiction?

An individual is subject to income tax in Colombia owing to residence status or upon deriving Colombian source income.

 

Non-residents

Non-residents are subject to income tax only on source income and they are only required to report income or assets derived or located in Colombia.

 

Colombian source income refers to income from activities undertaken within Colombian territory and certain activities rendered from abroad.

 

Applicable law refers to this as the provision of services inside Colombian territory, the transfer of assets located in Colombian territory at the time the transfer takes place and the exploitation of tangible or intangible assets located inside the country.

 

If Colombian-sourced payments are not subject to income tax withholdings, non-residents are required to file an income tax return in Colombia. If income tax withholdings are applied, this will be the individual’s final tax liability in Colombia

 

Residents

An individual becomes a Colombian tax resident when he or she remains in the country, continuously or discontinuously, for more than 183 calendar days during a period of 365 days.

 

If the individual remains in the country continuously or discontinuously for 183 days during two consecutive fiscal years, the individual will become a tax resident after the second of the two consecutive years.

 

Colombian citizens are considered residents if their family members (ie, spouse or dependent children) are Colombian residents, if 50 per cent or more of the individual’s income is of a Colombian source, or if 50 per cent or more of the person’s assets are managed or held in Colombia. A Colombian citizen will also be considered a tax resident in Colombia if he or she resides in a tax haven.

 

Colombian citizens will not be deemed as tax residents in Colombia if 50 per cent or more of the individual‘s revenue is sourced in the jurisdiction of his or her domicile abroad and 50 per cent or more of his or her assets are managed or possessed in the country in the jurisdiction of his or her domicile.

 

 

Income

What, if any, taxes apply to an individual’s income?

Non-residents

Non-Colombian tax residents are taxed at a 35 per cent rate on their Colombian sourced income and are only required to report any earnings or assets generated or located in Colombia.

Dividends distributed to foreign individuals paid out of profits that are taxed at the corporate level are subject to dividend tax at a 10 per cent rate. Dividends distributed to foreign companies or foreign individuals paid out of profits that are not taxed at the corporate level are taxed at the general income tax rate (32 per cent for 2020, 31 per cent for 2021 and 30 per cent from 2022 onwards), in which case, the dividend tax of 10 per cent indicated above is applied once this tax has been reduced.

 

Residents

Colombian tax residents are subject to income tax in Colombia on a worldwide basis. Resident individuals’ income tax rates are determined according to income baskets. Losses can be offset only against the same type of income.

The rates for each type of income are as per the following table.

Labour income

0%-39% for residents

Pensions

0%-39% for residents

Capital income

0%-39% for residents

Non-labour income

0%-39% for residents

Dividends

Dividends paid to resident individuals by resident entities out of taxed profits at the corporate level are taxed as follows:

  • Payments up to 300 tax value units (UVTs) (approximately US$3,000): 0%
  • Payments exceeding 300 UVTs (approximately US$3,000): 10%

Dividends paid out of untaxed profits at the corporate level are taxed at the general corporate income tax rate depending on the period in which they are paid or accrued, in which case the income tax withholding of 10% is applied once this tax has been determined. The same rate applies for dividends received from foreign companies and entities.

The exemptions, reliefs and deductions available are outlined below.

Revenues not considered as income

Mandatory health and pension contributions made by employees.

Voluntary contributions to pension funds and AFC accounts (savings accounts for housing purchase) provided that:

  • income does not exceed 2,500 UVTs (approximately $24,000); and
  • contributions do not exceed 25% of the annual earned income

Deductions

Interest payments from loans destined for a housing purchase.

Payment of prepaid health services and health insurance payments.

10% of labour income paid to individuals who are dependent on the taxpayer (ie, children who have not reached legal age, children who have reached legal age but are receiving funding from their parents or the taxpayer to attend a recognised educational institution and children over 23 years of age who are dependent owing to physical or psychological incapability).

Exempt income

25% of the individual’s labour income. 

Voluntary contributions to pension funds and AFC accounts (savings accounts for housing purchase without exceeding 30% of the individual annual income and limited to 3,800 UVT’s (Approx. $37,000)

Pensions not exceeding 1000 Tax Units (Approximately $9,800) are exempted. Any amount exceeding this amount will be subject to tax.

 

The above-mentioned tax benefits may be applied as long as they do not exceed 40 per cent of any income received or 5,040 tax UVTs (approximately US$49,000).

Further considerations are that joint returns (husband and wife) are not acceptable under Colombian tax law, and the taxable period is annual and coincides with the calendar year.

One UVT is valued at 35,607 pesos (Approximately $9.6) for 2020.

Capital gains

What, if any, taxes apply to an individual’s capital gains?

For Colombian tax purposes, capital gains are those that are not obtained by a taxpayer because of the activities an individual ordinarily carries out. The activities that trigger capital gains are specifically listed in the Colombian Tax Code:

  • Gains from the direct or indirect sale of fixed assets that have been owned by the individual for a term of two or more years;
  • profits obtained by the individual in the liquidation of legal entities, and that do not correspond to undistributed profits or reserves;
  • gains resulting from estates, legacies and donations (gifts);
  • prizes, awards, lotteries and gambling earnings; and
  • ife Insurance indemnities are taxes as capital gains, only on the amount that exceeds 12,500 UVT’s (Approx. $120,000).

 

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

 

The applicable tax rate for capital gains is 10 per cent. As an exception, gains from lotteries, draws and gambling are subject to 20 per cent rate.

Lifetime gifts

What, if any, taxes apply if an individual makes lifetime gifts?

Following the death of the individual, the administrator of the estate is required to hold the estate assets under deposit. Once the inventory and appraisals of the estate are final, the administrator may sell the deceased assets to cover any debts our outstanding taxes or fees.

 

Once the estate has covered all obligations, the inheritance is distributed among all heirs. Such distribution is subject to capital gains tax at a 10 per cent rate. However, in some cases part of the inheritance may be considered as exempt income.

 

Inheritance

What, if any, taxes apply to an individual’s transfers on death and to his or her estate following death?

Following the death of the individual, the administrator of the estate is required to hold the estate assets under deposit. Once the inventory and appraisals of the estate are final, the administrator may sell the deceased assets to cover any debts our outstanding taxes or fees.

 

Once the estate has covered all obligations, the inheritance is distributed among all heirs. Such distribution is subject to capital gains tax at a 10 per cent rate. However, in some cases part of the inheritance may be considered as exempt income.

 

 

Real property

What, if any, taxes apply to an individual’s real property?

The following taxes apply to an individual’s real property.

 

Property tax

Real estate held by an individual is subject to taxation at a municipal level at an applicable rate of 0.5 per cent to 1.6 per cent based on the valuation of the real state assets made by the municipalities where the asset is located.

 

Transfer tax

There is no transfer tax in Colombia. However, the net gain on the sale of real state is taxed as income or capital gains. This tax depends on the holding period and the nature of the asset.

 

The sale of fixed assets that have been owned by the taxpayer for at least two years is subject to capital gains tax at a rate of 10 per cent. Otherwise, the gain is subject to an income tax progressive rate (0 to 39 per cent depending) and a non-resident individual is subject to a 35 per cent rate.

Non-cash assets

What, if any, taxes apply on the import or export, for personal use and enjoyment, of assets other than cash by an individual to your jurisdiction?

As a general rule, the import of assets or goods that are not expressly excluded are subject to custom duties (0 to 20 per cent) and VAT at a 19 per cent rate.

 

Other taxes

What, if any, other taxes may be particularly relevant to an individual?

The following taxes are relevant to individuals in Colombia.

 

Net Worth Tax

For the fiscal years 2020 to 2021, a net worth tax is triggered on the possession of a net worth equal to or in excess of 5 billion pesos.

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

The taxable base is the value of the taxpayer’s net equity on 1 January of fiscal years 2020 and 2021. The applicable tax rate is 1 per cent.

 

Normalisation Tax (Tax Amnesty)

Law 2010 of 2019 re-introduced a normalisation tax allowing taxpayers to report any omitted assets without having to pay income tax on the resulting equity increase, but instead by paying an additional 15 per cent tax on the omitted assets.

To benefit from the normalisation tax, the following rules should be observed:

  • Taxable base: Historical cost basis of the omitted assets.
  • Applicable rate: 15 per cent.
  • Repatriation of assets: Reported assets held abroad that are reinvested in Colombia are subject to a reduced taxable base of 50 per cent of the assets’ fair market value. Assets must be repatriated before 31 December 2020 and remain in Colombian for at least two years.

 

Foreign vehicles: Foreign trusts, private foundations, insurance policies with material savings components, investment funds or any other type of foreign fiduciary business must be reported considering the underlying asset’s cost basis.

The deadline for filing and payment of the normalisation tax is 25 September 2020. Assets reported under the normalisation tax must be included in all applicable tax return from fiscal year 2020 onwards.

 

VAT

VAT is levied on the import of goods into the country and rendering services when the direct user or recipient is located in Colombia. Certain goods and services are excluded from VAT. The general rate is 19 per cent.

 

Industry and Commerce Tax 

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

 

Financial Transactions Tax

A Financial Transactions Tax is triggered on any financial transaction whereby funds held by a Colombian entity or individual are transferred (eg, debits on bank accounts). The taxable base is the amounts being transferred. The applicable rate is 0.4 per cent and is withheld and collected by financial entities.

 

Income Tax Withholdings

As a means to collect income taxes in advance, Colombian law establishes a system of income tax withholdings that requires every person making payments to a taxpayer to withhold a certain percentage, depending on the tax being paid. For those who must file an income tax return, all amounts withheld or self-withheld are a prepayment of the final tax liability and as such are credited on their return.

Trusts and other holding vehicles

What, if any, taxes apply to trusts or other asset-holding vehicles in your jurisdiction, and how are such taxes imposed?

The following is the applicable tax treatment for both local trust and foreign trusts in Colombia.

 

Local trusts

Colombian tax law treats local trusts as flow-through entities for tax purposes. Thus, trusts must determine their profits annually and the beneficiaries must include such profits in their own income tax returns for that same year and pay the relevant taxes.

The title to the assets that an individual contributes to the trust fund must pass to the trust fund (exceptions apply, for example, for the guarantee trust) or otherwise such assets would have to be declared by the individual as part of his or her equity and thus be subject to net worth taxes.

Additionally, if the individual receives fiduciary rights over the trust fund because of said contribution, he or she would be obliged to report such rights for Colombian income tax purposes.

Whenever the settlor or any of the beneficiaries receive income from the trust, they must pay the relevant taxes in Colombia. Income tax regulations establish that the results of any activities of the trust and all equity increases must be reported in the income tax return of the beneficiaries.

Trusts are used in Colombia as an instrument to administer properties or businesses or to grant a warranty, considering that trustees are professional entities. In the case of successions, trusts are used to administer the estate of certain heirs until they can do so themselves.

 

Common law trusts or foreign foundations

There are no civil or commercial regulations regarding the establishment of common law trusts or foreign foundations in Colombia. However, common law trusts are recognised in the Colombian Tax Code. The following requirements must be observed:

 

Distributions made by a foreign trust or foundation

Colombian tax residents are subject to income tax based on their worldwide source income. Therefore, any distributions made by a foreign trust or foundation would be subject to income tax in Colombia at a 10 per cent rate.

 

Reporting of assets

Assets held by a trust or foundation (which is revocable and directed) are understood to be held directly by the settlor and must be reported for all tax purposes as part of her or his own net worth.

If the underlying assets of an irrevocable and discretionary foundation cannot be attributed to the beneficiaries, the settlor must report the trust or foundation interest as part of his or her equity. This, without any consideration of the trust or foundation’s irrevocable and discretionary character.

Charities

How are charities taxed in your jurisdiction?

As a general rule, non-profit corporations, foundations and associations are subject to the general tax regime and are subject to income tax at a 32 per cent rate for 2020, 31 per cent for 2021 and 30 per cent from 2022 onwards.

However, the Colombian Tax Code establishes that non-profit corporations, foundations and associations are subject to a special tax regime with respect to income tax and complementary taxes provided always that they comply with the following conditions:

  • they are incorporated according to Colombian law;
  • their main purpose and resources are destined to health, sports, formal education, culture, scientific or technological, ecological research, environmental protection or social development programmes;
  • such activities are of general interest;
  • their capital contribution or surpluses cannot be distributed; and
  • their surpluses are totally reinvested in the activity of its corporate purpose and such corporate purpose corresponds to the activities mentioned in the preceding clause.

 

Entities that comply with the aforementioned requirements may be considered as entities of the special tax regime, with the Colombian Tax Office’s approval.

Entities approved by the Colombian Tax Office as eligible for the special tax regime are subject to income tax at a 20 per cent. However, any income surplus is considered as exempt, if the funds are destined directly or indirectly for programmes that develop the entity’s social purpose and meritorious activities. Any excess benefits or surplus that are not reinvested in programmes that develop the entity’s social purpose are deemed as taxable for the next fiscal year.

Anti-avoidance and anti-abuse provisions

What anti-avoidance and anti-abuse tax provisions apply in the context of private client wealth management?

Colombia’s main anti-avoidance and anti-abuse provisions in the context of private wealth management are as follows.

 

Anti-abuse rule

Under article 869 of the Colombian Tax Code, the Colombian Tax Office may re-characterise or reconfigure any operation or series of operations that may be considered as abusive for tax purposes.

Conduct is considered abusive if:

  • The transaction is not reasonable from a commercial or economic point of view.
  • A high tax benefit is achieved but is inconsistent with the risks undertaken by the taxpayer.

 

 Although the transaction is structurally correct and allowed by applicable law the true intention of the parties is concealed.

 

Exchange of information

Colombia has also entered into several agreements for the exchange of tax information. For a list of countries with which Colombia has agreed to share information under the CRS, go to the OECD site.

 

Foreign Account Tax Compliance (FATCA)

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

 

Ultimate Beneficial Ownership

Taxpayers are required to identify and report to the Colombian Tax Office the ultimate beneficial owner based on the Laundering Assets Risk Management and Terrorism System (SARLAFT) standards. Reporting is required if an individual has direct or indirect ownership and control of more than 5 per cent of a resident entity, local trusts, and mutual funds or has direct or indirect control over the latter considering transfer pricing rules.

 

Voluntary Disclosure (Normalisation tax)

Law 2010 of 2019 re-introduced a mechanism allowing taxpayers to include any omitted assets without having to pay income tax on the resulting equity increase, but instead by paying an additional tax on the omitted assets.

The additional tax would apply at a 15 per cent rate if reported, liquidated and paid only in 25 September 2020. Normalised assets must be included in all applicable tax returns for fiscal year 2020 and onwards.

Law stated date

Correct on:

Give the date on which the information above is accurate.

9 November 2020