1. Income Tax on Companies

1.1 Corporate Residence

For Colombian Tax purposes, the place of incorporation of a company and not the place of its effective management, will determine whether it is resident in Colombia or elsewhere.

1.2 Income Tax Rate

As of January 1 , 2008, the general statutory corporate income tax rate is 33%1 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%2 rate. The reduced statutory corporate income tax rate applicable to entities that qualify as "industrial users" in Colombian "Free Trade Zones" is 15%3. Please bear in mind that there are statutory eligibility requirements in place for "industrial users"4 wishing to benefit from the 15% reduced income tax rate.

In 2010 a new regulation was enacted in order to encourage the formalization of businesses in Colombia. According to such regulation, as of 2011, small businesses (less than 50 employees and less than USD 1,3m5 in assets) that complete the registration procedure in the merchants' registry after December 29, 2010 are entitled to a progressive income tax rate6 as follows:

Additionally, payments made to such registered small business will not be subject to withholding for 5 years after the moment the small business is first registered in the merchant's registry.

In order to determine whether an entity can benefit from the progressivity on the income tax rate and from the no-withholding treatment, the individual facts and circumstances of each case should be carefully considered.

1.3. 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:

Gross Income

(sum of all items of income, including short-term capital gains)

[-] Excluded Items of Income

[=] Gross Taxable Income

[-] Allowed Deductions

[=] NTI or Alternate Minimum Taxable Income (if greater)

[-] Tax Loss Carry-forward (if applicable)

[-] Exempt Items of Income

[=] Taxable Base

[*] 33% Corporate Income Tax Rate (or 15% or progressive

[=] Income Tax Liability

[-] Tax Credits

[=] Income Tax Charge

1.4 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 of the year immediately preceding the taxable year, multiplied by 3%7.

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 years8.

According to a regulation enacted in 2010 small businesses should not be subject to AMTI during five years as of the moment they complete the registration procedure in the merchant´s registry. To benefit from this treatment, the registration should take place after December 29, 2010. Please note that to ascertain whether an entity can be covered by the "5-years no AMTI treatment", the individual facts and circumstances of each case should be carefully considered."

1.5 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 tothe Capital Gains Tax9. 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 applicable10. Capital gains can be offset with capital losses only11. The capital gains tax rate is 33%12. Except for certain isolated cases" the taxpayer's capital gains tax is assessed, filed and paid with the taxpayer's regular yearly income tax assessment13. 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 quotas14. 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

1.6 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 activity16. Costs or expenses related to specifically Excluded and/or Exempted Items of Income are not deductible17. Certain costs and expenses may be subject to limitations, depending on the facts and circumstances of each case, e.g., related party charges and commissions18, among others. Special limitations apply to the deduction of expenses incurred outside Colombia (see §1.20. below).19

1.7 Depreciation and Amortization

Tangible fixed assets' depreciation is deductible20. 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 term21. For tax purposes, regular methods used worldwide are commonly accepted in Colombia, e.g., straight-line method, declining balance method, etc22. 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 capitalized24 can be amortized through a minimum five (5) year period using any generally accepted amortization method.25

1.8 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 parties27. 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-length28. Parties domiciled in tax havens are deemed as related parties29, 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

1.9 Inflation Adjustments

The mandatory income tax inflation index adjustment system was revoked on 200632. Nevertheless, as of January 1 , 2007, income taxpayers can continue to use it to adjust the tax basis of fixed assets33. Such adjustment is not mandatory and will not have effect in the taxpayer's Profits and Losses statement.

1.10 Tax Loss Carry-forward

As of January 1, 2007 an evergreen tax loss carry-forward against the taxpayer's NTI is available34. The tax loss must arise from an income producing activity commonly taxable under the regular income taxation rules35. 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 There is no carry-back possibility.

Tax losses realized by December 31 , 2006 can be carried forward subject to: (i) an eight (8) year expiration term, and (ii) a cap equal to 25% of the tax loss37 in the year the loss was realized.38

Tax loss generated from the 30% Fixed Assets Investments special deduction can be carried forward without anytime limitation (see §1.12. below). Please bear in mind that the Fixed Assets Investment special deduction was eliminated in the 2011 tax reform currently in place.39

Except as provided for reorganizations, tax losses are not transferrable to share or quota holders, or to other taxpayers (see §1.10. below)40. In the case of taxfree mergers the above-mentioned general limitations continue to apply. Nonetheless, in this case part of the tax losses is transferable to the new or surviving entity41. For tax-free spin-offs a proportional part of the tax losses of the target entity are transferred to the resulting entity (ies)42. In order to qualify for the tax losses transfer under reorganization tax rules, the corporate purpose of the merging entities should be the same43. For spin-offs the corporate purpose of the target entity and of the resulting entities should also be the same44. 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 deductible45. The tax loss expiration term (when applicable) is not renewed by a reorganization event.46

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:

a. Loss generated by acts of god damaging taxpayer's assets;47

b. Loss generated in the sale of fixed assets;48

c. Loss generated in the sale of assets (fixed or current) between related parties, or a corporation and its shareholders - not deductible;49

d. Losses in the sale of stock- not deductible.50

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Footnotes

1 Tax code § 240

2 ibídem

3 Tax code § 240-1

4 Colombian Tax Service, Ruling 79604-2007, October 2, 2007.

5 The currency exchange rate used is USD $ 1 x COP $ 2.000

6 Act 1429-2010, § 4

7 Idem,§ 188 and 189

8 Idem,§ 189.

9 Idem,§ 300.

10 Idem, § 69 to 72.

11 Idem, § 311.

12 Idem, § 313.

13 These include the case of both short and long term capital gains realized on the sale or exchange of sock or quotas in Colombian companies by a non-resident alien ("NRA"). In this case the NRA most file an advanced income tax return reporting the transaction within the first month following the transaction. In this case, other Foreign Investment Control requirements apply. Tax Code, § 326. Decree 1242-2003. 12 Tax Code, § 5 and 596.

14 Idem, § 90.

15 Idem, § 74 and 75.

16 Idem, § 107.

17 Idem, § 177-1.

18 Idem, § 124-124-1.

19 Idem, § 122.

20 Idem § 128

21 Decree 3019-1989

22 Tax Code, § 134

23 Idem, § 140.

24 These include expenses for the installation, organization and development or cost of acquisition or exploitation of mines and oil and gas exploration costs.

25 Tax Code, § 143

26 Idem, § 260-261

27 Idem, 260-4 and 260-8.

28 Idem, § 260-4 and 260-8.

29 Idem, § 260-6.

30 The government must issue a tax havens list, which as of June, 2011 had not been issued.

31 Colombian Tax Service, Ruling 53175-2009, July 3, 2009.

32 Act 1111, 2006.

33 Tax Code, § 68.

34 Idem, § 147.

35 Idem

36 Idem

37 Idem

38 Act 1111-2006, § 5 and Circular 9-2007.

39 Act-1430-2011, § 1

40 Tax Code § 68

41 Idem

42 Idem

43 Idem

44 Idem

45 Idem

46 Idem

47 Tax Code § 148

48 Idem, § 149.

49 Idem, § 151.

50 Idem, § 153.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.