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Advances in Colombia’s rapidly-growing income tax treaty network; the introduction of the first tax reform bill since 2006; a revenue ruling by the Colombian Tax Service addressing the tax effects for shareholders in stock-for-cash reorganizations; and a recent tax court decision opening the door in certain cases for the amortization of the part of the stock’s purchase price corresponding to good will; are some of Colombia’s recent tax developments featured in this issue. In addition, we briefly present the conclusions of a recent study performed by Lewin & Wills on the status of Legal Stability Agreements in Colombia. Don’t forget our recommendations on these topics found at the end of this issue.
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(1) Income Tax Treaties. –
Since the execution of the income tax treaty with Spain that entered into force on October 2008, the first of its kind in the Country, Colombia has executed similar treaties, not yet in force, with Chile on April 2007, Switzerland on October 2007, Canada on November 2008, and with Mexico on August 2009. Currently, the Government is negotiating income tax treaties with Belgium, Czech Republic, Germany, South Korea, Netherlands, India, and the United States of America.
Congress recently approved the income tax treaty with Switzerland (Act 1344-2009), which prior to its ratification is now pending the required constitutional review from Colombia’s Constitutional Court. The Constitutional Court recently ruled declaring the income tax treaty with Chile constitutional (Ruling C-577-2009), clearing the way for its ratification and entry into force in the near future. The treaties with Canada and Mexico are now pending both the approval from Congress and subsequent constitutional review from the Court, before the Government can proceed to ratify them.
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(2) 2010 Tax Reform Bill. –
On July 20th the Colombian Government introduced in Congress the first tax reform bill since 2006 (Tax Reform Bill No. 5-2009), proposing: (i) a new net-worth tax; (ii) changes in the fixed assets investments deduction; and (iii) a clarification to the current rule deeming related party debt as equity.
(a) New 0.6% Net-worth Tax. The Tax Bill introduces a new “temporary” net-worth tax for fiscal years 2011 through 2014. This tax is almost identical to the previous 1.2% net-worth tax currently in force through fiscal year 2010. The main differences between the proposed net-worth tax and the current net-worth tax are: (i) the applicable rate, and (ii) the shifting taxable base, among others.
The tax rate would drop 50% from 1.2% to 0.6%. Instead of the current fixed taxable base (i.e., the taxpayer’s net-worth as of January 1st, 2007), the taxable base for the new tax would be the taxpayer’s net-worth as of January 1st of each taxable year.
The tax reform bill also carves out the possibility to include this new net-worth tax and its predecessor from future Legal Stability Agreements (“LSAs”) executed between the taxpayers and the Government. Even though the change would not be enforceable before it’s enactment, it is likely that the Government’s LSAs team of negotiators may already be rejecting the inclusion of any future net-worth taxes in these agreements (see further below in this issue our comments on the current status of LSAs in Colombia).
(b) FAID Reduction. The Tax Bill proposes a reduction of the popular Fixed Assets Investments Income Tax Deduction (“FAID”), from the current 40% of the amount of the investment to 30%, beginning January 1st, 2010.
Currently and subject to eligibility, income taxpayers are entitled to deduct 40% of their investments in tangible fixed assets used in their income producing activity. The deduction is available for both purchased and manufactured (or built) assets, and for both new and used (second-hand) assets. Leased assets are eligible for this incentive, provided that the taxpayer exercises the irrevocable purchase option in the corresponding agreement. Certain rules and restrictions apply.
(c) FAID Unavailability for Certain Taxpayers. The Government is also proposing in the Tax Bill that, beginning January 1st, 2010, Free Trade Zones’ income taxpayers eligible for the reduced 15% income tax rate, would not be entitled to the 30% FAID. The Government is seeking to curtail concurrence of both benefits, as it considers it excessive.
(d) Related Party Debt Deemed Equity. Although this is not a new measure, the proposed amendment to the current rule is broadening its scope to clarify its applicability and match it with the affiliated and related party standards currently in place for transfer pricing purposes.
Pursuant to the proposed amendment, all related party debt would be deemed as equity for tax purposes. In certain cases, this could result in a direct increase of the taxable base for both the Alternate Minimum Taxable Income (“AMTI”) computation, and the future net-worth tax if enacted.
Most taxpayer’s income tax is assessed taking into account the greater between the AMTI and the taxpayer’s regular net taxable income. The AMTI is assessed using the taxpayer’s net-worth as of December 31st of the year immediately preceding the taxable year (excluding certain items, e.g., shares in Colombian corporations), multiplied by 3%.
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(3) Stock-for-Cash Reorganizations. –
In Colombia, tax-free treatment is available for statutory mergers, statutory divisions, corporate transformations, and stock-for-cash reorganizations of “simplified stock corporations.”
The Colombian Tax Service has recently adopted the position that in the case of stock-for-cash reorganizations of “simplified stock companies,” the tax-free reorganization treatment granted by the Colombian Tax Statute, exclusively benefits the company level and not the share or quota holder level (Revenue Ruling 53516-08-05-2009). Please note that this revenue ruling is exclusively referring to the stock-for-cash reorganizations of “simplified stock companies.” Therefore, in tax-free reorganizations of “simplified stock companies,” careful planning is required to prevent any negative tax impact at the share or quota holder level.
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(4) Amortization of the Part of the Stock’s Purchase Price Corresponding to Good Will. –
Colombia’s highest tax court (Consejo de Estado, S.C.A., Secc. 4) recently ruled revoking a number of revenue rulings in which the Colombian Tax Service was denying the possibility for taxpayers to amortize the part of the purchase price corresponding to good will in the acquisition of stock.
According to the revenue rulings revoked, the Colombian Tax Service had adopted the position that in a stock (or quotas) purchase deal, the part of the purchase price that exceeds book value (“intrinsic value”) and that under Colombian GAAP can be treated as a payment for goodwill, is part of the tax basis in the stock and not amortizable as an intangible. The Court has revoked these rulings adopting the position that in certain cases such portion of the stock’s purchase price could be amortized in no less than 5 years and no more than 20 years. This possibility exclusively applies to the cases in which the purchaser already has or is acquiring a controlling interest, and the seller and the purchaser are not related parties.
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(5) The Current Status of Legal Stability Agreements in Colombia. –
Since their adoption through Act 963-2005, Legal Stability Agreements (“LSAs”) have become important tools for eligible investors and companies in Colombia seeking to prevent future changes in selected features of the Colombian legal and tax framework, that they consider key to their investments and business activities in the country. Those who executed LSAs prior to the 2006 extension of the current net-worth tax, were likely able to avoid application of the tax extension. Probably this is why the Government is seeking through the introduced above-mentioned Tax Bill, to carve out the possibility to include the new net-worth tax in future LSAs.
To this date 124 requests for the negotiation and execution of LSAs have been filed with the Government. Out of these 124 requests, the Government has executed 49 LSAs, out of which 28 are a matter of public record. Lewin & Wills recently performed a study of these 28 LSAs available in the public record, finding, among other interesting facts, that approximately 70% of the legal or regulatory provisions for which investors and companies sought “stabilization” were of a tax nature (350 different provisions), while the remaining 30% were related to foreign trade law (90 provisions), labor law (50 provisions), and commercial and corporate laws (22 provisions).
Among the tax provisions frequently included in LSAs, we find those relating to: (i) foreign source items of income; (ii) taxpayer’s current income tax assessment methodology; (iii) contributions to capital that are deemed as not taxable for the share or quota holders; (iv) a number of allowances and deductions, including but not limited to the deductibility of local level taxes paid by the income taxpayer, the deductibility of expenses abroad, and the Fixed Assets Investments Income Tax Deduction; (v) the reduced 15% income tax rate for certain eligible Free Trade Zones’ income taxpayers; and (vi) the revocation of the 7% remittance tax for payments to foreign beneficiaries.
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Recommendations
These are some recommendations we have in respect of the above-discussed issues:
* Income tax treaties are important tax-planning tools and current developments in this field could determine many of your upcoming decisions in your investments and business activities in Colombia. We at Lewin & Wills can help you navigate through this network and the network of Bilateral Investment Treaties that could represent many advantages if timely considered.
* It is important to keep current about the advances and changes of the current Tax Bill being discussed in Congress and to analyze how the proposed initiatives can affect your investments and business activities in Colombia. You should consider whether future investments in tangible fixed assets should be made during 2009 to secure the 40% FAID benefit, in case it is reduced as a result of the current Tax Bill or even made unavailable in the case of Free Trade Zones’ income taxpayers entitled to the reduced 15% tax rate. We at Lewin & Wills can help you with this analysis.
* In a corporate reorganization in Colombia, it is important to consider in advance its potential tax effects and whether the statutory tax-free treatment would be available. We at Lewin & Wills can help you in trying to prevent, to the extent possible, any negative tax impact that could be triggered by the reorganization.
* When purchasing stock (or quotas) in a company, it is important to consider in advance its potential tax effects and whether part of the purchase price could be originated in good will of the company in order to determine if the purchaser could recover it through amortization instead of having to capitalize it. We at Lewin & Wills can help you in analyzing whether the amortization treatment would be available and how to take advantage of the recent ruling of the Tax Court.
* If you are considering entering into a Legal Stability Agreement with the Colombian Government, you should carefully consider the provisions that are key to your investments and business activities in Colombia, and be aware of what provisions has the Government agreed to “stabilize” in precedent agreements. We at Lewin & Wills can help you with these analyses.
Colombian Corporate Taxation Overview 2009
At Lewin & Wills we are currently working on a revised version of our publication “Colombian Corporate Taxation Overview 2009 ,”a summary of certain general aspects of the Colombian income tax, VAT and other selected national and local levels taxes on Colombian companies, and of certain general aspects of the Colombian welfare contributions and customs regime.
This revised version will soon be available. If you would like to be included in the distribution list, please contact our colleague Juan P. Wills at jwills@lewinywills.com to that effect, including your name and contact information.
Colombian_Tax_Flash® is being sent to clients, friends and colleagues of Lewin & Wills worldwide, and contains a legal alert and marketing information. If you do not wish to receive this briefing in the future, please e-mail us at Colombian_Tax_Flash@lewinywills.com writing the words “Stop Flash” in the subject.
NOTICE: ©2009 Lewin & Wills. All rights reserved. Colombian_Tax_Flash® is a periodical publication that discusses certain recent tax developments in Colombia. Please be advised that this summary is not intended to be a detailed and comprehensive description of the topics discussed herein. This publication is prepared by Lewin & Wills The statements contained herein reflect the author’s interpretation of current tax rules and may not be shared or accepted by the Colombian Tax Service or by the Colombian Courts or by other persons or authorities. The information contained herein is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon it without seeking qualified advice from professional tax advisers admitted in Colombia. This publication was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any taxes or tax penalties that may be imposed on such person in Colombia or any other jurisdiction. Prior results do not guarantee a similar outcome. Colombian_Tax_Flash® is copyrighted material. The use, reproduction or retransmission by any means in whole or in part of its contents is prohibited without the prior written consent of one of the partners of Lewin & Wills. (Colombia) for informational purposes only and does not constitute legal advice.
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