This content is from: Local Insights

Colombia: New wealth tax difficulties

Recently enacted Law 1739 of 2014 (effective as of January 1 2015) introduced various changes to the Colombian tax system, including the creation of a wealth tax

Carlos Fradique-MéndezLucas Moreno
Recently enacted Law 1739 of 2014 (effective as of January 1 2015) introduced various changes to the Colombian tax system, including the creation of a wealth tax. This new wealth tax replaced prior net worth taxes which the Colombian Government has had systematically reintroduced every four years for the past 12 years or more.

Although similar in substance, this new wealth tax features poles-apart characteristics, one of the most noticeable being the criterion to determine the taxpayer status for foreign non-resident entities.

Foreign private equity fund investors may be required to assess and potentially pay this tax in Colombia if by January 1 2015, they hold a net worth (total assets minus total liabilities) in the country in excess of Col$1,000 million ($418.000), calculated on January 1 of each year subject to an annually maximum decreasing rate of 1.15% in 2015, one percent in 2016 and 0.40% in 2017. Foreign private equity investors who are individuals are subject to a fixed maximum rate of 1.5% for the years 2015 to 2018.

By treating foreign private equity fund investors as taxpayers, Law 1739 has resulted in several practical complexities.

Consider a case where the underlying assets of a given investment are stock in Colombian companies which under current rules could be subtracted from the tax basis of the wealth tax. The foreign investor will be required to file a wealth tax return in Colombia even if no tax is due.

Similarly, Colombian tax rules provide for standards to ascertain whether an asset should be deemed possessed in Colombian territory and yet, fail to provide for testable criteria to consider if a liability engaged by the foreign investor outside of Colombia could also be deemed to be somehow held in the country. In point of fact and as of today, there are no clear rules for an investor to attribute a foreign procured loan to a Colombian-held investment.

Colombian tax authorities have expressed their willingness to further elaborate on regulations and rulings on the actual implementation of the wealth tax on foreign non-resident entities. However, one question remains: when should foreign investors expect follow-up from the tax authorities, since due dates for filing wealth tax returns start on the coming May 12 2015 and end by May 25 2015, and this obligation comes along with other prior formal undertakings, such as obtaining a tax ID.

Carlos Fradique-Méndez and Lucas Moreno

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