Starting in January 2019, under Law 1943, Colombia finally changed a long time tradition of taxing only the direct sale of goods or shares located in Colombia and introduced rules to tax their indirect transfer as well. The rules are set to capture any type of change in legal ownership of such assets, irrespective of actual beneficial ownership changes.
The indirect tax applies over the sale of a vehicle that directly or indirectly owns assets in Colombia. The seller is subject to tax over the profit, which is treated as a capital gain and taxed at a 10% rate if the vehicle transferred was owned for two years or more, or at 33% if such vehicle was owned for less than two years. Curiously enough, the tax cost used to determine the profit is the tax cost that the direct owner in the Colombian assets had. In other words, if a US company has a tax cost in a Colombian company of $100 and its owner sells the shares of the US company, the tax cost the seller uses to determine the Colombian indirect tax is $100. Furthermore, that cost is retained by the purchaser even if the purchaser paid $200 for the shares of the US entity, which means there is no step up for the purchaser in light of the price paid for the vehicle acquired. This has created much concern when dealing with the acquisition of Colombian assets as part of broader transactions.
Further concern has been raised in relation to the use of treaties, an area that was not addressed by the new rules and which has created different views as to how they should be applied. For example, if a Spanish company sells shares in a Colombian entity, such an operation may be exempt from tax in Colombia under treaty provisions. However, if the Spanish vehicle is sold by its shareholder located in a non-treaty jurisdiction then the sale becomes taxable in Colombia under the indirect tax rule. Even under the Andean Pact treaty where taxation is set at source there is doubt given that the treaty does not address the indirect transfer of shares: if a Peruvian company sells a Colombian entity the operation is taxed; if the Peruvian company is sold, will Colombia forfeit its right to taxation under the treaty or move to tax at source too? Taxation also takes place in the case of internal reorganisations where beneficial ownership does not change. The only exceptions to indirect taxation depend on whether the seller is listed in a recognised stock exchange or if the value of the assets in Colombia represents less than 20% of the total assets of the seller.
In the context of transactions where Colombian assets are involved, both seller and purchaser should be aware of these rules, as there is a joint liability of the indirect tax between the seller and the Colombian entity where the assets lie, and between the seller and the purchaser.
Draft regulation is being discussed in order to harmonise the rules with existing treaties, recognising the tax cost paid for the Colombian assets and making the system more reasonable.
Until this occurs, care should be taken in relation to indirect transfers of Colombian assets, and close monitoring of upcoming regulation or guidance from the authorities should be maintained.