Colombia is harmonising its fiscal legislation with international tax law, in particular the guidelines developed and applied by members of the OECD. With the exception of regional integration agreements, there are no legislative, executive or judicial international bodies which regulate financial matters between countries. The methods used to determine the regulations to which international transactions are subjected are influenced by internal legislation and treaties to avoid double taxation. One of the first major changes introduced in Colombian tax law was article 28 of Law 788 of 2002, which added section XI to title 1 of the Tax Statute, establishing regulations on transfer prices. However, the key changes relating to international finance were made with the introduction of Law 1607 in 2012 and Law 1739 of 2014.
Law 1607 Of 2012
This law established, among other things, the following international rules:
- It altered the concept of tax residency for citizens;
- It established that corporate reorganisations (mergers and divisions) involving a foreign company should be carried out at market value, with a few exceptions. All contributions of intangible assets from companies or other foreign entities must be reported in the declaration of transfer prices, independently of the amount contributed;
- It introduced rules on thin capitalisation;
- It comprehensively modified the transfer pricing system in order to increase its efficiency;
- It updated the concept of national companies in order to specify that, for tax purposes, companies whose principal administrative site or operational headquarters are in Colombia, or which were founded in Colombia, are considered national;
- It introduced the concept of permanent establishment, outlining income tax for firms according to their income and other profits within Colombia;
- It modified the concept of a foreign company, specifying that companies and other entities designed in accordance with foreign laws and whose headquarters are abroad are not considered foreign.
The term applies simply to those that are not designated national companies; and
- It updated the mechanism for the recognition of taxes paid abroad on income from foreign sources and from dividends or companies domiciled abroad.
Law 1739 Of 2014
This law specified, among other things, the method which should be used to calculate the discount for taxes paid abroad. It clarified that, for tax purposes, Colombian nationals who spent less than 183 days in Colombia are not considered residents, provided that 50% or more of their annual income comes from the jurisdiction in which they are domiciled or that 50% or more of their assets are located in the jurisdiction in which they are domiciled.
It modified the income tax rates for foreign firms which are not attributable to a subsidiary or permanent establishment of said companies by providing the following tariffs: 39% in 2015, 40% in 2016, 42% in 2017 and 43% in 2018. It also established the so-called wealth tax and specified that in the case of nationals without residence in the country and foreign firms and entities with a permanent establishment or subsidiary in Colombia, the tax base will correspond to the assets attributed to the establishment or subsidiary with transfer price criteria.
To avoid double taxation, Colombia has agreements prioritising taxation in the country of residence. Agreements have been signed with Spain, Canada, Chile, India, Mexico, South Korea and Switzerland, while treaties with France, the Czech Republic and Portugal are in the process of internal ratification or awaiting promulgation. Furthermore, decision 578 of the Andean Community of Nations aims to prevent double taxation among the member countries.
OBG would like to thank BDO for its contribution to THE REPORT Colombia 2016
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