In Colombia, the concept of tax abuse has long been the subject of legal analysis and development. Historically, administrative and judicial authorities addressed tax abuse through various legal and doctrinal frameworks, including the theory of simulation, the principle of substance over form (under Article 228 of the Colombian Constitution), the business purpose doctrine, the principle of abuse of rights, the doctrine of fraud against the law, and the doctrine of a series of transactions.
The formal incorporation of this concept into legislation began with Law 1607 of 2012, which introduced a general anti-avoidance rule (GAAR) in Article 869 of the Colombian Tax Code (CTC). In its application of the GAAR, the Colombian tax authority has the power to recharacterise or reconfigure the true nature, structure, or features of a transaction or series of transactions that, while formally lawful, lack a genuine economic or commercial purpose and are primarily designed to obtain a tax benefit.
It is important to note that the Colombian tax authority’s recharacterisation capability is only applicable from a tax perspective and cannot extend to other areas of law.
Pursuant to the Colombian GAAR, a transaction or series of transactions are deemed “tax abuse” when they involve the use or implementation of one or more artificial legal acts or arrangements that lack a clear economic and/or commercial purpose and are primarily designed to obtain a tax benefit – regardless of any additional subjective intent of the parties involved in the transaction.
For the purposes of the GAAR’s application, a legal act or transaction is presumed to be artificial and lacking economic and/or commercial substance when the following requirements are met:
The transaction is executed in a manner that is economically and/or commercially unreasonable;
The transaction results in a significant tax benefit that is disproportionate to the economic or business risks assumed by the taxpayer; or
The formal structure of the transaction conceals the true intent of the parties involved, making the apparent legal arrangement misleading.
Furthermore, Colombian law and regulation defines a “tax benefit” as any alteration, distortion, or modification of the tax effects that would otherwise apply to one or more taxpayers or beneficial owners. This includes:
The elimination, reduction, or deferral of tax liabilities;
The increase of tax credits or fiscal losses; and
The extension of tax benefits or exemptions.
These examples help to clarify the scope of what constitutes a tax benefit.
In light of the above, the current legal definition of tax abuse provides a framework to facilitate the GAAR’s application and ensure legal certainty. This definition incorporates a combination of legal principles and doctrines present in Colombia’s legal system, including general principles of law, constitutional mandates, and doctrinal developments.
Colombia’s GAAR: special procedure provision, challenges, and penalties
To ensure the fair application of the GAAR, Article 869-1 of the CTC sets forth a special administrative procedure designed to safeguard taxpayer rights. Any administrative act invoking the GAAR must be thoroughly substantiated, including a detailed description of the facts, supporting evidence, and an analysis of the taxpayer’s defence arguments.
The GAAR special administrative procedure is aimed at eliminating any room for arbitrary or unfounded decisions by the Colombian tax authority and preventing the misuse of doctrines such as substance over form or abuse of rights, which in the past were sometimes invoked without sufficient legal grounds to recharacterise transactions and impose amendments to tax returns. The current regulations therefore strengthen tax legal certainty and limit discretionary actions by the authorities, ensuring that taxpayers are not subjected to unfair procedures or biased reasoning.
The mandatory application of the special GAAR procedure does not prevent the Colombian tax authority from simultaneously examining and addressing other unrelated issues within the same tax audit procedure for reasons of efficiency. This avoids duplicative proceedings and enhances the overall effectiveness of the tax authority.
Recent audit practice reveals challenges in the implementation of the GAAR. In some cases, the GAAR has been invoked by the Colombian tax authority to incorrectly challenge costs or expenses arising from nonexistent operations, which should have been addressed through standard audit procedures. Conversely, there are cases or transactions in which tax abuse is likely to arise, but the Colombian tax authority has refrained from applying the special GAAR procedure.
It is also important to mention that Colombian law establishes aggravated tax penalties applicable to tax abuse scenarios. Article 648 of the CTC sets forth a tax penalty equivalent to 160% of the difference in the tax amount due or balance in favour in cases of tax abuse. This is substantially higher than the 100% penalty for other sanctionable conduct. Hence, it is clear that the purpose of this provision is to deter taxpayers from tax abuse arrangements or transactions.
Under Article 434-B of the Colombian Criminal Code, tax abuse practices may also trigger criminal penalties when the taxpayer’s conduct falls within the factual scenarios or active behaviours established in that provision. Tax abuse matters thereby extend beyond the administrative sphere into criminal prosecution.
Recent Colombian court guidance on application of the GAAR
There have been several important recent developments in connection with the application of the GAAR. Although the GAAR was first enacted in 2012 and amended in 2016, only in recent rulings have the Colombian tax courts clarified and developed tax abuse concepts and criteria. Over the past two years, Colombian tax courts have articulated the following key notions:
Tax abuse requires the existence of a tax benefit in connection with a transaction lacking economic purpose and that is contrary to the intent of the tax provision invoked;
The tax abuse analysis must consider the operation as a whole, rather than as isolated acts; and
Simulated transactions are excluded from the GAAR framework and are therefore examined under the ordinary procedure, which offers fewer safeguards to taxpayers.
The third distinction is particularly significant, as it places taxpayers at a disadvantage by subjecting simulation cases to a less protective process.
Looking forward, it is expected that the courts and the tax authority will continue to refine the standards for applying the GAAR, further shaping the landscape of anti-abuse regulation in Colombia.
Key takeaways on Colombia’s regulatory framework regarding tax abuse
Colombia’s regulatory framework on tax abuse has evolved into a comprehensive system that combines legislative provisions, judicial interpretation, and administrative practice.
The GAAR, supported by reinforced procedures and aggravated sanctions under Article 648 of the CTC, reflects the state’s firm stance against abusive practices that undermine the fairness and integrity of the tax system. At the same time, the growing body of court cases and administrative doctrine has clarified key criteria for identifying abusive transactions, while also exposing challenges in the consistent application of the GAAR.
Given these developments, it is increasingly important for taxpayers to carefully assess the potential risks associated with the Colombian GAAR and the scrutiny of simulated transactions. Considering that tax returns in Colombia remain subject to review for extended periods – typically between three and five years – it is prudent for taxpayers to conduct a comprehensive anti-abuse analysis before executing any significant transactions.
Such an analysis should focus on determining whether the transaction could result in an undue tax benefit and on ensuring that its commercial purpose is clearly documented. By taking this preventive approach, taxpayers can better anticipate potential audits or administrative reviews and strengthen their position in the event of challenges by the Colombian tax authority.
