Warning;This is only for those of you who have strong stomachs and plenty of patience.
Questions about "wealth" taxes (Impuesto a la Riqueza) are often asked on this forum. It is not an easy subject, but the following explanation in English from Ernst & Young is about the best I have ever seen.
So, the courageous amongst you....read on!
Source: Ernst & Young.
On 23 December 2014, Colombia's president signed and published a new tax reform bill amending the Colombian Tax Statute.
Tax reform
New wealth tax
The tax reform creates a new wealth tax. Under general terms, all individuals and legal entities in Colombia, who are deemed income taxpayers, including nonresidents (not expressly excluded by the law to pay this tax) are subject to this tax, provided their tax net equity (gross assets minus debts) as of 1 January 2015, is greater than COP 1,000,000,000 (approx. USD 388,800). In addition, unliquidated inheritances also are subject to this tax if the tax net equity threshold is met.
In accordance with the wording of the rule, those that do not meet the tax net equity threshold as of 1 January 2015, or are not considered income taxpayers, are not subject to the tax for 2015, 2016, and 2017 for corporations. Individuals also will not be subject to the tax for an additional year (2018). Portfolio foreign capital Investors and entities under a liquidation process, forced administrative liquidation, mandatory liquidation or which had entered into a restructuring agreement or those under an insolvency regime are not subject to this new tax.
For foreign nonresidents, the tax will be assessed on their equity held in Colombia directly or indirectly through branches and permanent establishments (PE) located in Colombia. Likewise, unliquidated inheritances of nonresidents in Colombia shall only be taxed on equity held in Colombia.
The entities conducting a spin off after December 23, 2014 and on or before 1 January 2015, will have to add the equity of the split entities to their own equity for 1 January 2015 (the accrual date). Likewise, individuals and legal entities that incorporate entities during the same period mentioned will have to add to their own equity to the incorporated entities equity in accordance with their participation in such vehicles.
The taxable basis will accrue (also for accounting purposes as expressed by the law) annually on 1 January 2015, 2016 and 2017 for corporations and 1 January 2015, 2016, 2017 and 2018 for individuals and unliquidated inheritances
.
The taxable basis is the gross equity minus debts as of each year. The reform protects the taxable basis from potential fluctuations of the equity (increase/decrease). The reform includes a limitation that assumes a formula with reference to the taxable basis as of 1 January 2015, bearing in mind the adjusted inflation with a 25% variation, as follows:
• When the taxable basis is higher in 2016, 2017 and 2018 (the last year applicable only for individuals and unliquidated inheritances), the lesser value between the taxable basis determined for the current year and the taxable basis assessed for 2015 with a 25% inflation increase, certified by (National Planning Department (DANE acronym in Spanish) for the previous year, will be the taxable basis.
• When the taxable basis is lower in 2016, 2017 and 2018 (the last year applicable only for individuals and unliquidated inheritances), the higher value between the taxable basis determined for the current year and the taxable basis assessed for 2015 with a 25% inflation decrease, certified by DANE for the previous year, will be the taxable basis.
For branches and PEs, the taxable basis will correspond to the attributed equity. For the latter, an attribution study shall be conducted in accordance with the arm's length principle, with functions, used assets, personnel involved and assumed risks being considered.
From the taxable basis, the following items can be deducted:
• The first 12,000 UVT (tax value unit) (for 2015: COP 345,004,000 (approx. USD 134,127) of the equity value of a residential home or apartment
• Net equity value of shares in domestic companies, even if held through a trust or collective investment fund, voluntary pension fund, voluntary pension insurance or individual life insurance
• Net equity value of real estate used and beneficial to mass transit public companies
• Net equity value of immovable fixed assets acquired or intended for the control and improvement of the environments by public entities of aqueduct and drainage
• Active credit operations, including financial yields, realized by foreign financial entities to tax residents
• International leasing operations, including financial yields, of assets located in Colombia
• The amount of the technical reserve of FOGAFIN (Guarantees fund of financial institutions) and FOGACOOP (Guarantees fund of cooperative entities)
• The amount of the net equity held abroad by foreigners with their residence in the foreign country
• Contributions of affiliates to the entities listed in Subsection 4 of Section 19 of the Colombian Tax Code - CTC (i.e. cooperatives, its associations, unions, etc.)
Certain insolvency strategies in order to avoid the payment of this tax (such as dissolution or liquidation of entities) shall be deemed as acts in which the special anti-avoidance rules apply, resulting in shareholders and partners being held jointly responsible.
Rates of wealth tax are as follows:
For legal entities
Range Rate for 2015 Rate for 2016 Rate for 2017 Applicable formula Sum set for 2015 Sum set for 2016 Sum set for 2017
>0 <2.000.000.000 0.20% 0.15% 0.05% Taxable basis * Rate – – –
>=2.000.000.000 <3.000.000.000 0.35% 0.25% 0.10% ((Taxable basis - $2.000.000.000) * Rate) + Sum set 4.000.000 3.000.000 1.000.000
>=3.000.000.000 <5.000.000.000 0.75% 0.50% 0.20% ((Taxable basis - $3.000.000.000) * Rate) + Sum set 7.500.000 5.500.000 2.000.000
>=5.000.000.000 and onwards 1.15% 1.00% 0.40% ((Taxable basis - $5.000.000.000) * Rate) + Sum set 22.500.000 15.500.000 6.000.000
For individuals for years 2015, 2016, 2017 and 2018
Range Rate Applicable formula
>0 <2.000.000.000 0.125% Taxable basis * rate
>=2.000.000.000 <3.000.000.000 0.35% ((Taxable basis - $2.000.000.000) * Rate) + $2.500.000
>=3.000.000.000 <5.000.000.000 0.75% ((Taxable basis - $3.000.000.000) * Rate) + $6.000.000
>=5.000.000.000 and onwards 1.50% ((Taxable basis - $5.000.000.000) * Rate) + $21.000.000
This tax may be offset against equity reserves without affecting profits and losses (P&L), including profits for both individual and consolidated balances.
The wealth tax shall not be deductible for income and CREE (income tax for equality) tax assessment.
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