On 29 December 2016, Law 1819 of 2016 was passed introducing significant changes in the Colombian tax system for corporates and individuals. The law became effective 1 January 2017.
Amongst others, the Law introduces the following measures which may be relevant to wealth structuring solutions currently used by Colombian tax-resident high net worth individuals.
Controlled Foreign Corporations (“CFC”) Rules
The Law introduces new international tax transparency rules which could impact domestic corporates and resident individual taxpayers subject to income tax, holding directly or indirectly, a shareholding of 10% or more in a foreign CFC. CFCs are broadly defined in the Law and include corporations, trusts, collective funds, private foundations and other fiduciary arrangements with or without legal and/or fiscal personality.
The tax reform introduces a rebuttal presumption of “control” (i.e. the percentage of ownership becomes irrelevant for the analysis) in case the CFC (i) is domiciled, constituted or operates in a non-cooperating jurisdiction, (ii) is subject to low or nil taxation, or (iii) is subject to a preferential tax regime according to Colombian tax rules.
The income covered by the CFC rules - defined as “passive income” - includes amongst others, dividends, withdrawals, distributions and capital gains not generated by genuine economic activities carried out by the CFC or its subsidiaries. The “passive income” generated by the CFC may be, as a result of the planned tax reform, taxed directly at the level of the Colombian resident controlling taxpayer in the same tax year as the one where the CFC generated the “passive income”.
Tax Anti-Avoidance Rules
Under the revised tax anti-avoidance rules introduced by the Colombian Government, the local tax authorities could challenge, disregard and/or reclassify any transaction or series of them, which may constitute a tax abuse. Hence, the local tax authorities would be granted with extensive powers in order to establish the true nature, shape and specificities of one or group of transactions in order to establish a particular fiscal outcome different to the one established by the taxpayer.
A tax abusive measure is concretely defined as the use or implementation of one or several contractual artificial arrangements without economic or commercial purpose, aiming to obtain a fiscal advantage.
An artificial arrangement without economic or commercial purpose is defined as a legal transaction which (i) is executed under unreasonable economic and commercial terms, (ii) leads to a significant tax advantage which is not supported by the economic and business risks undertaken by the taxpayer and/or (iii) does not reflect accurately the actual intention of the parties.
Fiscal advantage is defined as any change in the tax consequences for a taxpayer leading to the (i) suppression, mitigation or deferral of the tax liability, (ii) increase of carried forward tax credits or fiscal losses and/or (iii) extension of tax benefits or exemptions.
Should the Colombian Tax Administration consider a transaction or series of them to constitute as tax abuse; the public officer in charge will issue an official tax resolution including the facts and evidences that support the tax challenge. Once duly notified, the taxpayer will have 3 months to respond to the Colombian Tax Administration with relevant proof to support his position.
Other relevant measures
New tax scales are approved for (i) Employment and pension income – marginal tax rate of 33%, (ii) Capital income – marginal tax rate of 35%, and (iii) Dividend income – marginal tax rate of 10%.
The presumptive income for Income Tax purposes is raised from 3% to 3.5% of the net wealth held by a taxpayer.
The Law establishes that the list of “black-listed” jurisdictions may be construed and updated by the Colombian government through a regulation. The main criteria to establish whether a jurisdiction is to be included in the list of “black-listed” jurisdictions include (i) nil or low taxation rates if compared to the ones applicable in Colombia, (ii) lack of effective exchange of tax information or existence of rules which limit its effectiveness, (iii) lack of transparency in the regulatory or administrative scheme, (iv) no local requirement for real economic activity and substance and/or (v) internationally recognized and standardized criteria applied to establish the existence of a non-cooperative or nil/low taxation jurisdiction.
As a consequence of the Tax Reform, many Colombian tax-resident high net worth individuals will need to re-assess their wealth structuring strategies. Many of those having invested through offshore structures will most certainly need to review these in order to preserve and ensure the tax efficiency of the structure.
In this context, international life assurance remains, if properly structured and substantiated, a robust, fully compliant and tax-efficient wealth planning solution that allows for tax deferral. In addition, life assurance may provide for additional advantages linked to, amongst others, an efficient and flexible succession planning or no taxation on payments made to Colombian resident beneficiaries.
If you have any questions or require further information regarding our solution for Colombian clients, please contact your usual Lombard International Assurance representative.
By Pablo Peciña Toña and Gonzalo García Pérez
 Ley No 1819 de 29 de diciembre de 2016 “Por medio de la cual se adopta una reforma tributaria estructural, se fortalecen los mecanismos para la lucha contra la evasión y la elusión fiscal, y se dictan otras disposiciones”.
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