Article prepared to be featured in the upcoming issue of Global Tax Briefing, a CCH – Wolters Kluwer publication, as part of a collection of articles written entirely by members of the Latin American Tax and Legal Network (LATAXNET). LATAXNET, is a network of top tax and legal specialists all over Latin America. For more information about LATAXNET please go to www.lataxnet.net.

Temporary Settlement of Local Taxes Controversies

Congress Act 1328-2009, has authorized settlements of local taxes controversies, e.g., industry and commerce tax, property tax, registration tax, including any disputed penalties and interests. The settlement authorization is only available until January 15, 2010 and exclusively for tax controversies originated before December 31st, 2008, and already being disputed before the tax courts.

Pursuant to the settlement authorization, taxpayers wishing to terminate their tax controversies would benefit from a reduction of the assessed and disputed liability as follows:

  • If the tax controversy is before the lower tax court, the disputed tax liability would be reduced in 20%, while disputed penalties and interest would be wiped out.
  • If the tax controversy is before the lower tax court but the only disputed item is a penalty, the amount of the disputed penalty would be reduced in 20%.
  • If the tax controversy is before the highest tax court, or is before the lower tax court but is one of those controversies for which there is no appeal level available, the disputed tax liability would not be reduced, while disputed penalties and interest would be wiped out.

Income Tax Treaty Network Developments

Colombia has executed income tax treaties with Spain on March 2005, Chile on April 2007, Switzerland on October 2007, Canada on November 2008 and with Mexico on August 2009.

The treaty with Spain entered into force on October 2008. The Constitutional Court ruled the treaty with Chile constitutional (Ruling C-577-2009), clearing the way for its ratification and entry into force in the near future. Congress recently approved the treaty with Switzerland (Act 1344-2009), which prior to its ratification is now pending the required constitutional review. The treaties with Canada and Mexico are now pending both the approval from Congress and subsequent constitutional review, before the Government can proceed to ratify them.

The Government is currently negotiating income tax treaties with Belgium, Czech Republic, Germany, South Korea, Netherlands, India, and the United States of America.

To control income tax treaties application, the Colombian Tax Service has introduced two certificates that will be issued upon request by the taxpayer (Colombian Tax Service Resolution 3283-2009). To obtain the mentioned certificates, the interested party must follow the special procedure recently established by the Colombian Tax Service. These certificates are:

1. Fiscal residence certificate, certifying that the taxpayer was in fact a Colombian tax resident for the corresponding fiscal year.

2. Fiscal situation certificate, certifying the amount and nature of the item of income realized in Colombia and the taxes paid or withheld for the corresponding fiscal year. This document will confirm if the income is or will be subject to income tax and/or capital gains tax. This certificate can be requested directly by a non-Colombian resident.

On April 2007, Colombia and Panama entered into a tax treaty to avoid double income taxation on air transportation activities. On December 2008, Congress approved the treaty (Act 1265-2008), which was recently ruled constitutional by Colombian courts (Ruling C-466-2009), clearing the way for its ratification and entry into force in the near future. Colombia has executed similar tax treaties to avoid double income taxation on shipping and air transportation activities with several countries, such as: Argentina, Germany, Chile, Venezuela, Brazil and the United State of America.

Amortization of the Part of the Stock's Purchase Price Corresponding to Good Will

On July 23rd, 2009, Colombia's highest tax court ("Consejo de Estado") revoked a series of revenue rulings in which the Colombian Tax Service denied taxpayers the possibility 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.

Stock-For-Cash Reorganitazions

In Colombia, tax-free treatment is available for statutory mergers, statutory divisions, corporate transformations, and stock-for-cash reorganizations of "simplified stock corporations." However, 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 53516-2009).

Foreign Tax Credit Availability Under the Alternate Minimum Taxable Income System

The Colombian Tax Service issued a ruling (Ruling 65231-2009) authorizing income taxpayers to benefit from foreign tax credits even if they were subject to the alternate minimum taxable income system when calculating their income tax liability. Until this recent ruling the Colombian Tax Service's position was that the foreign tax credit was not available in those cases.

Legal Stability Agreements Status Update

Since their adoption through Congress 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. 

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. Lewin & Wills recently performed a study of the LSAs available in the public record (28 out of 49), 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, labor law and commercial and corporate laws.

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.

Footnote

* NOTICE: ©2009 Lewin & Wills. All rights reserved. "Colombia's Recent Tax Developments" is a summary of certain recent developments in Colombia's tax landscape. Please be advised that this summary is not intended to be a detailed and comprehensive description of the Colombian tax system and of the specific features of the topics discussed herein. This summary was prepared on October 20, 2009 by Lewin & Wills (Colombia) for informational purposes only and does not constitute legal advice. The statements contained herein reflect our 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. "Colombia's Recent Tax Developments" 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. The non-exclusive licensed reproduction of "Colombia's Recent Tax Developments" by CCH in its publication "Global Tax Briefing" has been authorized by Lewin & Wills and does not constitute a waiver of Lewin & Wills' copyrights on this material, or an authorization for further reproduction or retransmission, or use, of its contents by any recipients or readers of this material.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.