Article published on October 30th at bloombergtax.com
Autor: Juan Esteban Sanín Gómez
Over the past seven years, Colombia has adapted its tax system to meet the requirements to become a member of the Organisation for Economic Co-operation and Development (OECD). In doing so it has incorporated anti-abuse rules, controlled foreign corporation (CFC) rules, place of effective management provisions, permanent establishment provisions, taxation of dividend provisions, among other elements of well-developed tax systems, in order to increase the collection and payment of tax.
Other amendments to the Colombian tax code have been addressed not solely for the purpose of increasing tax collection, but to increase capital investment in the country and generate employment and economic progress. This is the case for the Colombian Holding Company (CHC) tax regime which was approved in the latest tax reform (Law 1943 of 2018 (in Spanish)) and which entered into effect on January 1, 2019.
Aims of CHC Regime
In the second quarter of 2018, when the latest tax reform was beginning to be discussed, the Colombian government sought a way to make Colombia a foreign investment hub and, by so doing, generate employment and reactivate the economy. This had to be done by creating a competitive environment (such as those of other jurisdictions that apply a territorial tax system to foreign share investments) that could provide the benefits and guarantees needed by investors, as well as compliance with international standards of prevention of abuse. The government’s aim was to transform Colombia into a global platform that could replicate, for Latin America, what jurisdictions such as Spain, the Netherlands or Luxembourg have achieved with their holding company regimes.
The CHC regime was created to serve domestic corporations that have, as one of their main activities, the holding of shares or stakes in foreign or domestic entities or corporations, and the administration of such assets, if the following conditions are met:
- having a direct or indirect participation in at least 10% of the capital of two or more foreign or domestic corporations or entities for a minimum period of 12 months; and
- having human and material substance that enables the company to undertake its work. The latter implies having at least three employees, a physical address in Colombia, and being able to prove that strategic decisions in respect of the assets held (and not only holding shareholders’ meetings) are taken in Colombia.
The CHC regime offers two main tax benefits for investors; a tax benefit on distributed dividends and a tax benefit on long-term capital gains tax (CG tax).
With regard to dividends, Colombian tax law states that those distributed by nonresident entities or corporations to a CHC will be exempt from taxation and shall be declared as exempt income. This allows CHCs to be relieved of a 33% income tax rate on dividends for the year 2019, 32% for 2020, 31% for 2021 and 30% from 2022.
However, dividends distributed by a CHC to a Colombian fiscal resident (natural person or corporation) will be levied with the Colombian dividend tax, which ranges from 7.5% to 15%, depending whether paid to a corporation or natural person.
Dividends distributed from a CHC to a nonresident natural person or corporation (except if these are a resident of low tax or non-cooperative tax jurisdictions) will be considered as foreign source income and therefore no taxation on dividends will be levied. On the contrary, since CHCs are not subject to tax on foreign dividends, no withholding tax on dividends (except when the distributing company has not been taxed on the distributed profits) will be levied even when they are distributed to CHCs by domestic corporations.
This, as Sebastián Rodríguez (La República, February 1, 2019) puts it, does not imply that CHCs are fully exempt from domestic source dividend taxation, and except if future regulation does so establish, they will be subject to tax in this matter.
Capital Gains Tax
In respect of CG tax, Colombian law states that the income derived from the sale or transfer of the shares or stakes that a CHC holds in nonresident entities or corporations shall be declared as exempt capital gains. In addition, the income derived from the sale or transfer of the shares in a CHC will be tax exempt, except for the value corresponding to the profits obtained by taxable activities in Colombia.
If the shareholders of the CHC are nonresident, the income derived from the sale or transfer of the shares in the company will be treated as foreign source income except for the portion of the profits attributable to taxable activities in Colombia. The latter will not apply if the CHC’s shareholders are resident in a non-cooperative or low tax jurisdiction.
Other Key Features
Other key features of the CHC tax regime are:
- CHCs are considered to be Colombian tax residents in regard to double taxation agreements signed by Colombia;
- CHCs will only be allowed to deduct expenses which directly relate to taxable Colombian income or to foreign income generated by permanent establishments;
- CHCs will be subject to CFC rules and will be able to apply the foreign tax credits;
- except for income derived from overseas dividends, CHCs will be subject to the territorial industry and commerce tax on the activities they perform on domestic operations.
The acquisition of CHC status is not automatic. Taxpayers must file an application in which they certify their compliance with all the legal requirements mentioned above. In case of non-compliance, the tax authorities can dismiss the application. Only a few cases are exempt from this process, such as public companies that own shares in corporations which are automatically deemed to have CHC status.
The adoption of the CHC tax regime is a great advance in Colombia’s tax regulation. However, according to some experts, such as José Manuel Castro (Castro Arango, José (Ed.) Comentarios a la Ley de Financiamiento. Universidad Externado de Colombia. 2019 p. 469), its adoption could trigger the business purpose rule and limitation of benefits provisions stated in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) as well as in the Global Forum on Transparency and Exchange of Information for Tax Purposes and the OECD’s and World Trade Organization’s soft law regarding harmful tax competition.
Other issues that could eventually have an indirect impact on the CHC tax regime are the decisions that have been adopted by the Court of Justice of the European Union (see T Danmark Case C-116/16 and Y Danmark C-117/16) regarding the concept of beneficial ownership and of anti-abuse provisions in the use of conduit companies, and especially concerning “dividend distributions made by a Danish resident company to an intermediate holding company resident in EU.”
The CHC tax regime grants multiple tax opportunities both for domestic and foreign investors. In addition to the tax benefits described above, it allows investors to access Colombia´s growing double taxation treaty network as well as its bilateral investment treaty network. Also, given the fact that Colombia is part of the Andean Nations Community, and that by Decision 578/2004 of the Andean Community double taxation between member countries is relieved, structuring a holding company in Colombia for investing in the Andean Region is certainly interesting from a tax planning perspective.
On October 16, 2019, the Colombian Constitutional Court declared law 1943/2018 unconstitutional because of a procedural error in its passage in Congress. The Court ruled that, despite this, the law would have effect until January 1, 2020, in order for the government to have time to amend the law and have it approved again by the legislative branch.
The government has announced that it will present the bill in the near future and will urge Congress to approve it so that measures such as the CHC regime will continue to exist after January 1, 2020.
Centro de Estudios Empresariales ISB
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