Colombia: 2010 Colombian Corporate Taxation Overview1 (Part 1)

1.1. Income Tax Rate

As of January 1^st, 2008, the general statutory corporate income tax rate is 33%.² Unless otherwise provided, all Colombian and foreign entities subject to income tax in Colombia, including Colombian branches of foreign companies are subject to this 33% rate.³ The reduced statutory corporate income tax rate applicable to entities that qualify as "industrial users" in Colombian "Free Trade Zones" is 15%.⁴ Please bear in mind that there are statutory eligibility requirements in place for "industrial users⁵" wishing to benefit from the 15% reduced income tax rate. As of 2010, "industrial users" wishing to benefit form this 15% rate, must choose between using this benefit or the 30% FAID as Act 1370-2009 eliminated the concurrance of these two benefits.

1.2. Taxable Base and Income Tax Assessment Process

The Taxable Base is multiplied by the applicable statutory corporate income tax rate and the result is the Income Tax Liability, from which applicable Tax Credits are subtracted to find the Income Tax Charge.

The Taxable Base of the Colombian corporate income tax is the result from subtracting the taxpayer's specifically Exempt Items of Income from the greater of (i) the Net Taxable Income ("NTI") and (ii) the Alternate Minimum Taxable Income. The NTI results from the sum of all revenues realized by the taxpayer, minus the sum of all specifically Excluded Items of Income, minus the sum of all costs and expenses allowed as Deductions. The Alternate Minimum Taxable Income computation is explained in §1.3. below.

The regular income tax assessment process can be illustrated as follows:

1.3. Alternate Minimum Taxable Income ("AMTI")

The taxpayer's AMTI is equal to the taxpayer's Net-worth (i.e., all assets net of all liabilities and other allowable exclusions, e.g., shares in Colombian corporations) as of December 31^st of the year immediately preceding the taxable year, multiplied by 3%.⁶

If the AMTI is greater than the NTI, the difference between these two items generates a carry-forward against the taxpayer's NTI, which can be within the following five (5) taxable years.⁷

1.4. Capital Gains

Short-term Capital Gains are deemed as a regular item of income subject to income tax. Long-term Capital Gains, i.e., gains realized on the sale or exchange of certain assets owned for at least two (2) years, are subject to the Capital Gains Tax.⁸ The taxable base of the Capital Gains Tax is the result of the amount realized, minus the taxpayer's adjusted tax basis on the asset, plus any recaptured depreciation, amortization or deductions, as applicable.⁹ Capital gains can be offset with capital losses only.¹⁰ The capital gains tax rate is 33%.¹¹ Except for certain isolated cases,¹² the taxpayer's capital gains tax is assessed, filed and paid with the taxpayer's regular yearly income tax assessment.¹³ Colombian tax law authorizes tax authorities to challenge through an audit the amount realized in the sale or exchange of assets and reported by the taxpayer, when they find evidence that they have breached certain statutory thresholds that use criteria such as the asset's fair market value, the greater of it's cadastral appraisal or the owner's self-appraisal in the case of real estate, and the "intrinsic" value in the case of stock or quotas.¹⁴ There are special rules to determine capital gains in the sale or exchange of intangibles depending on whether the intangible is formed or acquired.¹⁵

1.5. Income Tax Deductions

Unless otherwise provided by the statute, all costs and expenses incurred by the taxpayer are deductible, provided that they are related, proportional and necessary to the taxpayer's income producing activity.¹⁶ Costs or expenses related to specifically Excluded and/or Exempted Items of Income are not deductible.¹⁷ Certain costs and expenses may be subject to limitations, depending on the facts and circumstances of each case, e.g., related party charges and commissions,¹⁸ among others. Special limitations apply to the deduction of expenses incurred outside Colombia (see §1.18. below).¹⁹

1.6. Depreciation and Amortization

Tangible fixed assets' depreciation is deductible.²⁰ The applicable depreciation term varies depending on the nature of the asset; twenty (20) years for real estate, ten (10) years for all other tangible fixed assets, except for motor vehicles and computers for which regulations establish a Five (5) year term.²¹ For tax purposes, regular methods used worldwide are commonly accepted in Colombia, e.g., straight-line method, declining balance method, etc.²² Unless specifically restricted, double and triple shift accelerated depreciation is also available and can be combined with the declining balance method when the asset needs to be depreciated in full in the first years of its useful life.²³

Certain assets, including acquired intangibles, and certain costs and expenses deemed as necessary investments for the taxpayer's income producing activity that must be capitalized,²⁴ can be amortized through a minimum five (5) year period using any generally accepted amortization method.²⁵

1.7. Transfer Pricing

Colombia has OECD-like transfer pricing rules that are applicable to all transactions between a Colombian party and a foreign related party.²⁶ A different set of rules applies to transactions between two Colombian related parties.²⁷ Under these rules, the Colombian party exceeding certain statutory net assets or revenues thresholds must keep and file with the tax authorities supporting documentation, and prepare a transfer pricing study showing whether the corresponding prices or profit margins are arm's-length.²⁸ Parties domiciled in tax havens are deemed as related parties.^{29 30} The Colombian transfer-pricing regime has a catalogue of situations where two parties are deemed related. This catalogue is complex and its application requires a detailed case-by-case analysis.

Sale or exchange of stock or quotas in Colombian companies by foreign holders to a related party located abroad is subject to transfer pricing rules.³¹

1.8. Inflation Adjustments

The mandatory income tax inflation index adjustment system was revoked on 2006.³² Nevertheless, as of January 1^st, 2007, income taxpayers can continue to use it to adjust the tax basis of fixed assets.³³ Such adjustment is not mandatory and will not have effect in the taxpayer's Profits and Losses statement.

1.9. Tax Loss Carry-forward

As of January 1^st, 2007 an evergreen tax loss carry-forward against the taxpayer's NTI is available.³⁴ The tax loss must arise from an income producing activity commonly taxable under the regular income taxation rules.³⁵ Should the tax loss lack such nexus, i.e., be related to a non-taxable or exempt income producing activity, the tax loss carry-forward would not be available.³⁶ The credited amount cannot be greater than the taxpayer's NTI on the year the carry-forward is credited, i.e., a tax loss carry-forward cannot generate further tax loss.³⁷ There is no carry-back possibility.

Tax losses realized by December 31^st, 2006 can be carried forward subject to: (i) an eight (8) year expiration term, and (ii) a cap equal to 25% of the tax loss in the year the loss was realized.³⁸

Tax loss generated from the 30% Fixed Assets Investments special deduction can be carried forward without any time limitation (see §1.11. below).

Except as provided for reorganizations, tax losses are not transferrable to share or quota holders, or to other taxpayers (see §1.10. below).³⁹ In the case of tax-free mergers the above-mentioned general limitations continue to apply. Nonetheless, in this case part of the tax losses are transferable to the new or surviving entity.⁴⁰ For tax-free spin-offs a proportional part of the tax losses of the target entity are transferred to the resulting entity(ies).⁴¹ In order to qualify for the tax losses transfer under reorganization tax rules, the corporate purpose of the merging entities should be the same.⁴² For spin-offs the corporate purpose of the target entity and of the resulting entities should also be the same.⁴³ The new, surviving or resulting entities will not be allowed to benefit from all of the tax losses accrued by the entities subject to the merger or to the spin-off. Only that part proportionally corresponding to their participation in the net-worth of the new, surviving or resulting entities, should be deductible.⁴⁴ The tax loss expiration term (when applicable) is not renewed by a reorganization event.⁴⁵

Colombian tax law limits (or in some cases sets special conditions) for the assessment and deduction of tax losses other than those generated by the net operating losses. We list some of these cases:

1.10. Tax-Free Reorganizations

Tax-free treatment is available for statutory mergers, statutory divisions, corporate transformations,⁵⁰ and cash-for-stock reorganizations of "simplified corporations." Although most tax attributes should survive in the head of the beneficiary corporation pursuant to a tax-free reorganization, due care should be given to the restriction on the use of tax losses (see §1.9. above). Except for the proportionality and the corporate purpose matching requirements for the transferability of tax losses, currently in Colombia there are no requirements of continuity of business or continuity of interest as a requirement to qualify for tax-free reorganization treatment.

1.11. 30 % Fixed Assets Investments Special Deduction

Subject to eligibility, the taxpayer can deduct 30% (Act 1370-2009 reduced the FAID benefit from 40% to the actual rate of 30%) of their investments in tangible fixed assets used in the taxpayer's income producing activity.⁵¹ The deduction is available for both purchased and manufactured (or built)⁵² assets and for both new and used (second-hand) assets.⁵³ Leased assets can be eligible for this incentive, provided that the leasing terms incorporate an irrevocable purchase option that is exercised by the taxpayer.⁵⁴ The taxpayer must take the deduction on the fiscal year of the investment.⁵⁵ The following rules apply:

The deduction is computed on the cost basis of the asset, whether acquired, manufactured or built. The basis should include the VAT paid in the asset's acquisition but only if the VAT is capitalized in observance to general applicable tax law.⁵⁹ Otherwise, the non-capitalized VAT should not increase the base to compute the deduction.⁶⁰ If the non-capitalized VAT is creditable against VAT or income tax, its creditability is not prevented by the use of this deduction.

Should the asset purchase agreement be cancelled, rescinded, vacated or annulled, the deduction is recaptured in full and computed as net taxable income for the taxpayer in the fiscal year of the contract's rescission.⁶¹ The deduction is also recaptured in full on leased property, whenever the taxpayer fails to exercise the irrevocable purchase option. In this event the lessor most report the lessee's omission to the Colombian Internal Revenue Service.⁶²

This deduction is an additional tax benefit that should not prevent the taxpayer from benefiting from other statutory deductions on this type of investments, such as depreciation (only under straight-line method) or amortization. If the taxpayer stops using the property on her income producing activity prior to its depreciation or amortization in full, the special deduction is recaptured in proportion to the remaining useful life (or amortization period) of the property.

1.12. Leasing Tax Treatment

Leased assets must be initially accounted for their value, both as an asset and a liability.⁶³ The lease payments' portion allocated to principal decreases the liability while the portion allocated to interest is a deductible expense.⁶⁴ Depreciation and amortization deductions are available, as applicable.⁶⁵

In the case of M&E leasing agreements executed by "Medium Size Companies"⁶⁶ where the lease term is thirty-six (36) months or more, or twenty-four (24) months or more in the case of motor vehicles and computers, or sixty (60) months or more in the case of real estate, the taxpayer cannot account an asset and a liability. Instead and provided that all the deductibility requirements are met, the full payment amount should be treated as a deduction.⁶⁷ The same rule is temporally available for leasing agreements entered by December 31^st, 2011 in certain infrastructure projects, provided that the lease term is twelve (12) years or more, among other requirements.⁶⁸

1.13. Certain Exempt Items of Income

Subject to eligibility and compliance by the taxpayer of the statutory requirements, income from the following activities is treated as an Exempt Item of Income:

The taxpayer must file the income tax return and pay the corresponding tax liability on the year immediately succeeding the fiscal year for which the return was prepared. Every year tax authorities issue a filing and payment schedule with specific deadlines that vary depending on the last number of the taxpayer's Tax Identification Number.⁷³ Usually, filing and payment dates are similar year after year.

For FY2009, all entities including corporations must file their income tax return on April 2010.⁷⁴ The taxpayer can pay the Income Tax Charge in two (2) 50% instalments.⁷⁵ The first instalment, on the filing date, and the second instalment on June 2010, observing the yearly payment schedule issued by the tax authorities.

There are special filing and payment schedules issued by the tax authorities for certain corporations in the list of "grand income taxpayers." For FY2010 all "grand income taxpayers" must file their return on April 2010. "grand income taxpayers" benefit from a five (5) instalments payment facility. For FY2009 these instalments are due on February, April (upon filing), June, August and October 2010.

Unpaid taxes are subject to daily interests⁷⁶ at a rate equal to the highest legally accepted three (3) month rate certified by the Financial Regulatory Agency.⁷⁷

Depending on the facts and circumstances of each case, other penalties apply for non-filing, late filing, or inaccurate filing, which may range from 5% up to 200% of the corresponding tax liability.⁷⁸

As of January 1^st, 2007, there is no remittance tax charge on dividends and branch profits distributed to non-resident alien entities or individuals.⁷⁹

Dividends or profits generated by December 31^st, 2006, were subject to the former 7% charge on dividends and branch profits. If such dividends or profits were reinvested in Colombia for a minimum five (5) year term, they were eligible for an exemption from this tax.⁸⁰

Company profits are only taxed at the company's level. Nevertheless, if the earnings and profits of the company exceed the tax profits subject to income tax at the company level, the excess would be subject to income tax at the share or quota holder level.⁸¹ If the shareholder is a foreign resident, the applicable rate is 33%. In the case of a Colombian branch of a foreign company, there should be no home office level taxation on the excess of the branch's earnings and profits over the tax profits subject to income tax in Colombia at the branch level.

When Colombian sourced income is remitted abroad to a beneficiary that is a non-resident alien individual or entity, the payment should be subject to a withholding tax.

1.18. Additional Limitations on Costs and Expenses Incurred Abroad by Colombian Taxpayers

In addition to the regular deductibility requirements, costs and expenses incurred abroad are subject to additional limitations.

Costs and expenses incurred abroad are deductible only to the extent that such deductions do not exceed 15% of the taxpayer's Net Taxable Income assessed without taking into account these deductible items.⁹² This 15% limitation does not apply whenever the payment abroad has been subjected to the corresponding statutory withholding tax, on certain commission payments, on interest and leasing payments that are deemed not from a Colombian source, and on payments on imported movable tangible property.⁹³

Payments to a home office or parent company abroad are only deductible if they were subject to withholding tax in Colombia and meet the transfer pricing arm's-length criteria. There are other limitations on interest payments to a related party abroad, among others, which need to be analyzed on a case-by-case basis.

Provided compliance of the statutory requirements and subject to certain limitations, Colombian companies with operations outside Colombia are eligible for both a direct and an indirect statutory FTC for taxes levied by the source country on non-Colombian source income and dividends, respectively.⁹⁴

Colombia's belated development of a network of OECD-like treaties has lead to the conclusion of income tax treaties with Spain,⁹⁵ Chile,⁹⁶ Canada, Mexico and Switzerland. Currently there are ongoing negotiations with Belgium, Czech Republic, Germany, South Korea, Netherlands, India, and the United States. The treaties with Spain and Chile are already enforceable. The treaties with Switzerland, Mexico and Canada are not yet enforceable because the ratification process has not yet concluded.

Colombia is a member of the Andean Pact. Therefore, it benefits from the Andean Pact tax Directive 578 to avoid double income taxation, enacted in 2004. With isolated exceptions, this tax Directive provides for exclusive source taxation among member countries⁹⁷.

In addition, Colombia currently has limited scope income tax treaties to avoid double taxation on sea and air transportation activities with Argentina,⁹⁸ Brazil,⁹⁹ Chile, France (air)¹⁰⁰, Germany,¹⁰¹ Italy, ¹⁰² Panama(air),¹⁰³ United States of America,¹⁰⁴ and Venezuela.¹⁰⁵