COLOMBIA: An Introduction to Private Wealth Law

COLOMBIA: An Introduction to Private Wealth Law

OVERVIEW OF HNW IN COLOMBIA  

Contributors: Felipe Aroca, Claudia Cuello, María Helena Jiménez, & Arlinn Cervantes

1. Introduction 

Colombia ranks 67th out of 190 economies in the World Bank's Doing Business report. In Latin America, Colombia ranks 4th, behind Chile, Mexico, and Puerto Rico. The Colombian gross domestic product (GDP) is expected to grow by 6.1% in 2022 and 2.1% in 2023. Therefore, Colombia is an attractive destination for investment in Latin America.

Colombia has been a member of the Organization for Economic Cooperation and Development (OECD) since 2020. It has signed 18 agreements to avoid double taxation and the country’s international tax policy is aligned with international standards.

Small and medium-sized enterprises (PYMES, for its acronym in Spanish) represent 90% of the productive sector. They generate 40% of GDP and more than 80% of national employment, according to the National Administrative Department of Statistics (DANE, for its acronym in Spanish). Nevertheless, the transition from the first family generation to the second family generation is one of the critical aspects to guarantee their permanence over time.

Finally, the Colombian legal system is mainly based on civil law. The regulation of family and inheritance law is specially regulated in the Colombian Civil Code. However, the courts rule about controversial topics, and judges must follow them. Consequently, special attention must be paid to judicial rulings on these matters.

2. Current Colombian tax environment 

Colombia has been using tax reforms as an economic instrument to increase revenue collection and funding of state needs. Colombia has approved approximately 12 tax reforms in the last 20 years. But the tax reforms have forced Colombian taxpayers to quickly adapt their planning schemes to new regulation rules.

Colombian tax residents and Colombian entities are subject to income tax on their Colombian and non-Colombian worldwide income. Colombian entities are subject to corporate income tax at a rate of 35% for the fiscal year 2022. However, Colombian tax residents are subject to progressive tax rates ranging from 0% to 39% for the fiscal year 2022.

On the other hand, non-tax residents are only subject to Colombian taxes exclusively on their Colombian-sourced income.

The dividends that have been taxed at the level of a Colombian entity are not subject to corporate income tax recapture when distributed to the shareholders. However, the distribution of the profit is subject to income tax on dividends at a 10% rate both for residents and non-resident recipients.

For the fiscal year 2022, there are tax incentives available for investments in the agricultural sector, energy sources, creative industries companies (Orange Economy), and social-interest and priority housing projects, among others. Additionally, there are special tax regimes such as (i) Free Trade Zones. (ii) Simple Taxation Regime to promote the formalisation of companies and employment. (iii) The Colombian Holding Companies (CHC) regime seeks to attract international investments to the country.

At last, it should be emphasised that in Colombia there is an exceptional collection tradition of taxing the possession of wealth, which is generally collected from individuals (also called a capital tax or equity tax). It is expected that this tax will reappear with the new government (August 7th, 2022).

3. Incoming Tax Reform 

The new government that will be in place for 2022 – 2026 has communicated its desire to promote a tax reform bill that seeks to improve macroeconomic figures through higher taxes and prevention of tax avoidance.

The announced tax bill suggests a potential reduction of the corporate income tax rate applicable for entities to 30%. However, the new government plans to increase the income tax rate for individuals and dividends. Also, capital gains may be increased from current 10% to 20% rate as from taxable year 2023.

For individuals, it is important to note the possible reduction of exempt income limit and deductions limit. The current annual limit is 5,040 UVT (approx. USD 44,400) and is intended to be reduced to approximately 1,260 UVT (approx. USD 11,100).

Moreover, the tax bill intends to eliminate tax benefits for oil mining companies, free trade zones, and others. But details are still to be confirmed.

Finally, the new government suggests the creation of new taxes. A new wealth tax may apply to individuals with a net worth of more than USD 464,000, with rates ranging from 0.25% to 1%. Additionally, there will be new healthy taxes on the consumption of sugary drinks and ultra-processed foods, to discourage the purchase of certain products to improve public health behaviours.