Colombia has issued its list of tax havens – an act that will negatively impact the tax effects of doing business in Colombia from or through any of these tax haven jurisdictions.
The Tax Havens list was issued under Regulatory Decree 2193, dated October 7, 2013 ( RG) and triggers a number of related effects, which come into force on January 1, 2014.
There is a second list included in the RG that we refer to as the “Transitory List,” which sets out the jurisdictions with which Colombia is currently negotiating exchange of tax information agreements. Jurisdictions on the Transitory List are excluded from the related effects summarized below for the time being. Both lists will be reviewed annually as of the date of issuance of the RG.
The main negative tax effects of doing business in Colombia from/through a tax haven jurisdiction will be:
1. Portfolio investment proceeds will be subject to a 25 percent rate, rather than the reduced 14 percent rate applicable under the Colombian Tax Statute.
Comment: Consider effects of transition/migration of the investment vehicle to a non-Tax Haven listed jurisdiction.
2. Colombian taxpayer payments made to tax haven jurisdictions will be subject to a 33 percent withholding tax.
Comment: Payment of Colombian sourced income (as defined) related charges to non-residents that do not have a Colombian PE are normally subject to a 33 percent withholding tax. Payments related to the provision of technical, technical assistance or consulting services or related to royalty charges on software licensing (among others) are subject to a lower withholding tax rate of 10 percent and 26.4 percent respectively. Now that the Tax Haven list has been issued, the provisions contained in the Paragraph section of Article 408 of the Colombian Tax Statute start applying in practice. This Paragraph (enacted in 2003) provides that all taxable income related payments (i.e. Colombian sourced income) made to residents or incorporated entities in Tax Haven jurisdictions, are subject to a 33 percent withholding tax rate. As a result of the above, a review of current payments being made to Tax Haven entities in each corporate structure (whether related party or not) is strongly recommended to determine the withholding tax rate and guarantee the related deduction.
3. Transactions made by Colombian tax residents with tax haven residents will be subject to transfer pricing (TP) compliance provisions, whether or not such transactions were made with a “related party” (as defined by Colombian TP provisions.)
Comment: In order to take deductions, Colombian customer taxpayers receiving services or purchasing goods from third parties in tax havens will be required to prepare and keep additional TP documentation. Colombian provisions specifically require that, together with invoices, contracts and other supporting documentation, the taxpayer must keep (a) a basic functional and risk analysis of the tax haven payment beneficiary; and (b) a detail of the cost and expenses incurred by the tax haven resident providing the service in respect of the charge being made.
4. Transactions made with tax havens will fall under the scope of Colombian general anti-avoidance provisions.
Comment: At the time of re-characterization challenges from DIAN, the Colombian tax administration, the burden of proof to demonstrate a valid business purpose shifts from DIAN to the taxpayer if three out of five listed characteristics are met. One of such five characteristics is that there be a tax haven party participating in the transaction.
See the list of Colombia’s tax havens and the transitory list here.