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Colombia’s 2010 Tax Reform Act (March, 2010)
By:  Adrian Rodriguez, Partner Lewin y Wills – arodriguez@lewinywills.com

In this issue Colombian Tax Flash briefly discusses the changes introduced in Colombia’s 2010 tax reform act, the first of its kind since the last one enacted in 2006.

On December 30th, 2009, the Colombian Congress enacted the first tax reform act since 2006 (Tax Reform Act No. 1370-2009), adopting: (a) a new 2011 net-worth tax payable in installments from 2011 through 2014; (b) changes in the fixed assets investments deduction affecting all income taxpayers, including Free Trade Zones’ income taxpayers eligible for the reduced 15% income tax rate; and (c) a clarification to the current rule deeming related party debt as equity.

(a) New 2011 Net-worth Tax.

The 2010 tax reform act introduces a new “temporary” net-worth tax payable in installments from 2011 through 2014.  This tax is almost identical to its predecessor 1.2% net-worth tax currently in force through fiscal year 2010.

Taxpayers subject to the newly adopted net-worth tax would have to assess the tax on their net-worth as of January 1st, 2011.  If the taxpayer’s net-worth as of January 1st, 2011 were US$ 1,579,000 without exceeding US$ 2,631,999.99, the applicable rate would be 2.4%.  If the taxpayer’s net-worth exceeds US$ 2,632,000, the applicable rate would be 4.8%.  If the taxpayer’s net-worth does not exceed US$ 1,578,999.99, the taxpayer would not be subject to the 2011 net-worth tax (US dollars figures in this paragraph are approximate values using a COP$1,900 exchange rate).

It is worth highlighting that the taxable base is the taxpayer’s net-worth as of January 1st, 2011.  Therefore, whether the taxpayer’s net-worth on said date is within the taxable brackets will become crucial in determining whether the tax is applicable,

Although taxpayers subject to the 2011 net-worth tax would need to assess their net-worth tax liability on 2011 using their net-worth as of January 1st of that year, the tax would be payable in 8 installments.  The first 2 installments would be payable on 2011 while the remaining 6 installments would be payable from 2012 through 2014, 2 installments each year on the dates that the Government indicates on the corresponding regulations.

In addition to a number of taxpayers that the 2010 tax reform act considers not subject to the new 2011 net-worth tax, even if their net-worth is within the taxable brackets, there are certain assets that the taxpayer can deduct from the 2011 net-worth taxable base, e.g. stock in a Colombian corporation would be excluded while quotas in a Colombian SRL would not.  Therefore, qualified in country tax advice is recommended in order to accurately determine the extent of the effect that this tax will have in your case.  In addition, promptly seeking qualified in country advice could help you identify tax-planning alternatives to minimize the impact of the new 2011 net-worth tax.  Our recommendation is that you seek this advice early during 2010, affording more time to implement any tax planning alternatives, which may be harder to implement towards year-end. 

(b) FAID Reduction.

The 2010 tax reform act adopted a reduction of the popular Fixed Assets Investments Income Tax Deduction (“FAID”), from the previous 40% of the amount of the investment to the reduced 30% in place as of January 1st, 2010.

Subject to eligibility, as of January 1st, 2010, income taxpayers continue to be entitled to deduct 30% 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.

Pursuant to the amendments to the FAID adopted by the 2010 tax reform act, beginning January 1st, 2010, Free Trade Zones’ income taxpayers eligible for the reduced 15% income tax rate, are not entitled to benefit from the 30% FAID.  The Colombian Congress has curtailed concurrence of both benefits, as it considered such concurrence excessive.

 (c) Related Party Debt Deemed Equity.

The change to the old rule broadens 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 amendment enacted, 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 newly adopted 2011 net-worth tax.

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%.

It is advisable to evaluate the current debt/equity position with your related parties to determine whether this change may affect the future AMTI computation and the potential impact on the taxable base of the newly enacted 2011 net-worth tax..

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