Tax

Residence and domicile

How does an individual become taxable in your jurisdiction?

An individual is subject to income tax in Colombia if he or she has residence status or his or her income derives from a Colombian source.

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 within a period of 365 days.

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

A Colombian citizen is considered a tax resident if:

  • his or her family members (ie, spouse or dependent children) are Colombian residents;
  • 50 per cent or more of his or her income derives from a Colombian source;
  • 50 per cent or more of his or her assets are managed or held in Colombia; or
  • he or she has tax residence in a tax haven.

A Colombian citizen will not be deemed a tax resident in Colombia if his or her domicile is abroad and 50 per cent or more of his or her income is sourced from the jurisdiction of his or her domicile and 50 per cent or more of his or her assets are managed or held in the jurisdiction of his or her domicile.

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.

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.

Income

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

Non-Colombian tax residents are only required to declare earnings or assets generated or located in Colombia. Any Colombian income is taxed at a rate of 35 per cent.

Dividends distributed to foreign individuals paid out of profits that are taxed at the corporate level are subject to dividend tax at a rate of 7.5 per cent. 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; the 7.5 per cent dividend tax is applied once the general income tax has been deducted.

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 presented in the table below.

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): 15%

Dividends paid out of untaxed profits at the corporate level are taxed at the general corporate income tax rate depending on the period in which they are paid or accrued, in which case the income tax withholding of 15% is applied once this tax has been determined. The same rate applies 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 US$25,000); 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

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$55,000).

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 34,270 Colombian pesos for 2019.

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 as a result of the activities that he or she 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 taxpayer for two or more years;
  • profits obtained from the liquidation of legal entities that do not correspond to undistributed profits or reserves;
  • gains resulting from estates, legacies and donations (gifts);
  • prizes, awards, lotteries and gambling earnings; and
  • life insurance indemnities are taxed as capital gains only on the amount that exceeds 12,500 UVTs (approximately US$136,000).

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 tax rate applicable to capital gains is 10 per cent if a holding period of two years has been reached (except for gains resulting from estates, legacies and donations). As an exception, gains from lotteries, draws and gambling are subject to a flat rate of 20 per cent.

Lifetime gifts

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

The gift of Colombian situs assets is considered capital gains for the beneficiary and is subject to capital gains tax at a 10 per cent rate. The gift of foreign assets in favour of Colombia tax residents is also subject to capital gains tax at 10 per cent rate.

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 an 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’s assets to cover any debts, outstanding taxes and fees.

Once the estate has covered all obligations, the inheritance is distributed among all heirs. The distribution is subject to capital gains tax at a 10 per cent rate; however, in some cases part of the inheritance may be considered 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 estate assets made by the municipalities where the asset is located.

Transfer tax

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 a progressive income tax rate (zero to 39 per cent as shown above) and a non-resident individual is subject to a 35 per cent rate.

National consumption tax on real estate

A national consumption tax is triggered on the sale of immovable property, different from rural properties destined to agricultural activities, new or used, whose value exceeds 26,800 UVTs (approximately US$300,000). Some exceptions may apply (assignments of fiduciary rights or funds that are not listed on the stock exchange).

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 (zero to 20 per cent) and VAT at a rate of 19 per cent.

Other taxes

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

The following taxes are relevant to individuals in Colombia.

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 (livestock, certain fruits and vegetables, seeds and others) and services (catering services for companies, food preparation services and bar services) are excluded from VAT. The general rate is 19 per cent, but there are certain goods and services subject to a 5 per cent rate (coffee, corn for industrial use, agricultural machinery, pre-paid medicine plans, security services and temporal services).

Industry and commerce tax

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

Income tax withholding

As a means of collecting income taxes in advance, Colombian law has established 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.

Net worth tax

For the fiscal years 2019 to 2021, a net worth tax will be triggered on the possession of a net worth equal to or in excess of 5 billion Colombian pesos. This tax applies to individuals and foreign entities.

In the case of resident individuals, this tax is based on worldwide assets.

In the case of non-resident individuals and entities, it is based on Colombian situs assets other than shares, accounts receivables or portfolio investments - for example, real estate, aircraft, yachts, boats, speedboats, art or oil mining titles.

The taxable base is the value of the taxpayer’s net equity on 1 January of the fiscal years 2019, 2020 and 2021. The applicable tax rate is 1 per cent. It must also be taken into account that regardless of the fluctuations of the taxpayer’s net worth, the taxable base will be determined based on the net worth of the taxpayer on 1 January 2019 as follows:

  • If the taxable base determined for 2020 and 2021 is higher than that determined on 1 January 2019, the taxable base for any of those periods will be limited to the taxable base of 2019, increased by 25 per cent of the inflation of the previous year.
  • If the taxable base determined for 2020 and 2021 is lower than that determined on 1 January 2019, the taxable base for any of those periods should not be less than the taxable base of 2019, reduced by 25 per cent of the inflation of the previous year.

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

Normalisation tax (amnesty tax)

Law 1943 of 2018 established a new mechanism allowing taxpayers to include any omitted assets without having to pay income tax on the resulting equity increase, but instead paying an additional tax (at a rate of 13 per cent) on the omitted assets (normalisation tax). The deadline to file and pay the normalisation tax was 25 September 2019. To benefit from the normalisation tax the following requirements had to be observed:

  • the minimum taxable base had to be the historical cost basis of the foreign omitted assets;
  • if the reported assets held abroad were reinvested in the country, the taxable base had to be 50 per cent of the omitted assets’ fair market value - assets have to be repatriated before 31 December 2019 and must have been held in Colombia for at least two years; and
  • foreign private foundations, foreign trusts, insurance with a material savings component, investment funds or any other fiduciary business abroad must have been reported with consideration of the underlying assets cost basis.

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

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 have to include these 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), otherwise the 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 this contribution, he or she would be obliged to report these 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. As of fiscal year 2019, life insurance indemnities are taxed as capital gains only on the amounts that exceed 12,500 UVTs (approximately US$135,000).
  • 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 his or her own net worth. If the underlying assets of an irrevocable and discretionary foundation cannot be attributed to the beneficiaries, the latter must be reported by the settlor. This is 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 33 per cent rate for fiscal year 2019, 32 per cent 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 that they comply with the following conditions:

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

Entities that comply with the aforementioned requirements could be considered as entities of the special tax regime with the Colombian Tax Office’s (DIAN) approval.

Entities approved by DIAN as eligible for the special tax regime are subject to income tax at a 20 per cent rate. However, any income surplus is considered as exempt, provided that 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?

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

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

Exchange of information

Colombia has entered into several agreements for the exchange of tax information. For a list of countries with which Colombia has agreed to share information under the Common Reporting Standard, see the OECD website. According to the Colombian Tax Office, the United States and 36 other countries exchanged tax information on 29 September 2017. This rose to 62 countries in 2018.

Foreign Account Tax Compliance Act

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

Ultimate beneficial ownership

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

Rules against tax haven practices

The government enacted Decrees 1966 of 2014 and 2095 of 2014, which established the official list of the jurisdictions that are deemed as low-tax jurisdictions for Colombian tax purposes. Andorra, Antigua and Barbuda, the Cayman Islands, the British Virgin Islands, the Isle of Man, Hong Kong, Lebanon and the Bahamas, among others, were included in the official list.

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

Voluntary disclosure (normalisation tax)

As stated in question 8, Law 1943 of 2018 established the normalisation tax to allow taxpayers to include any omitted assets without having to pay income tax on the resulting equity increase, but instead paying an additional tax on the omitted assets.

The additional tax applied at a 13 per cent rate and had to be filed and paid by 25 September 2019. Normalised assets must be included in all applicable tax returns for fiscal year 2019 and onwards.