All right guys, it’s time someone blogged about this.
Perhaps someone else has written about this, but I am not aware of any ‘pro-Colombia’ blogger who has done a post on the recent tax laws that have come into effect and/or are being voted on within the Colombian government.
This issue has left a distinctively bad taste in my mouth over the past few months but it’s something worth passing on.
There are a number of components to this, but the first one is important, so I’ll put it in big letters so you can see it.
Are you in Colombia more than 183 days out of any 365 continuous days? You are taxed on your WORLDWIDE INCOME.
This is a rather new law, passed in 2012 and put into effect for tax year 2013.
Basically, it considers ‘tax residency’ as anyone who is in the country for more than 183 out of any 365 days, by physical presence. It does not exempt any types of visa.
I’ll say that again in case you missed it- the law does not exempt any special type of visa. If you are physically present in the country over the 183 day limit, you are taxed on your WORLDWIDE income, regardless of why you were there. You must report income from all your sources, fill out bunches of forms, and sign over portions of your wealth that may have had absolutely nothing to do with Colombia.
Here is the text of the law on ‘tributario’ (income tax). See Articulo 9 and 10 for what I’m talking about.
Specifically, here is a clip from Articulo 10, section 1. regarding what actions makes one a ‘resident’ for tax purposes in Colombia.
“1. Permanecer continua o discontinuamente en el país por más de ciento ochenta y tres (183) días calendario incluyendo días de entrada y salida del país, durante un periodo cualquiera de trescientos sesenta y cinco (365) dias calendario consecutivos, en el entendido que, cuando la permanencia continua o discontinua en el país recaiga sobre más de un año o periodo gravable, se considerará que la persona es residente a partir del segundo año o periodo gravable.”
Translated it says:
“1. Remain continuously or discontinuously in the country for more than one hundred eighty three (183) calendar days including days of arrival and departure, during any period of three hundred sixty five (365) consecutive calendar days, with the understanding that when continuous or discontinuous stay in the country overlaps more than one taxable year or period, it shall be deemed that the person is a resident from the second taxable year or period.”
There you have it folks.
Note: I even verified this law with a lawyer who works on immigration issues for expats in Colombia. He verified for me that the type of visa a person has is irrelevant. If you meet the physical presence test, you fall into the net.
I have also verified this with an expat investor in Colombia who has verified it with national government officials.
So this is not a small issue.
How this affects you…
1) Let’s say you come to Colombia, stay for 1 month and love it. You then decide to take 6 months of Spanish classes so you sign up for a student visa and enroll in classes at a local university. You stay those additional 6 months, totalling 7 months.
Boom. You’ve just been caught in the Colombian WORLDWIDE tax net. You are required to report AND pay income on all of your income worldwide, including the income of all of your offshore companies.
That is the new law. I sh*t you not.
2) Let’s say you hear of some hip new business incubator in Colombia that wants to fund your startup. You come down to Medellin or Bogotá and stay for a year building your business.
Snap. You’ve just been caught in the Colombian WORLDWIDE tax net. You are required to report and pay income on all of your income worldwide.
3) Let’s say your heart is big and you obtained a volunteer visa to remain in Colombia for a year helping the native peoples of La Guajira, on the north Colombia coast.
Thonk. Despite your best of intentions towards Colombia and breaking your back on behalf of it’s people, you’ve just been caught in the Colombian WORLDWIDE tax net. You are required to report and pay income on all of your income worldwide.
Did you have income from your condo in the US? Pay tax to Colombia.
Did you have income from your investment in Vietnam? Pay tax to Colombia.
Did you have income from dividends in your Singapore stock? Pay tax to Colombia.
I don’t know about you, but this kind of thing really rubs me the wrong way.
But that’s not all…
The Anti-Tax Haven Withholding Tax
If the worldwide income tax were not enough, a recent withholding tax of 33% is now required for any transaction between a Colombian citizen or company and any entity domiciled in jurisdictions that Colombia considers to be ‘tax havens’. The list includes places like Hong Kong, the British Virgin Islands, and others. There is also an ‘in-waiting’ list of countries who would be put on the list within one year if they don’t sign tax-information exchange agreements. Some of these countries include Panama, the United Arab Emirates, and others.
(If you can’t read Spanish, use the Google translator browser button to get an idea of what is being said.)
I get word from people in the know that much of the foreign investment that has been pouring into Colombia over the past 5-10 years have been from these ‘tax haven’ countries. There’s no telling what may happen to that capital now.
(By the way, ‘tax haven’ is just a label governments put on places they don’t like, in order to raise suspicion about them in a semantic twist… Governments in those places decide how they will operate, just as in non-tax-havens. There’s really nothing necessarily suspicious about them.)
Anyway, the effect of these laws will discourage the flow of money into Colombia by penalizing further those that do so. It will incentivize companies doing business with Colombia to keep their money further away from the actual Colombian economy.
If it turns out that a large portion of foreign investment has been via these countries, then you could see a huge slow-down in foreign investment in Colombia as a whole.
This will negatively effect the economy and also de-incentivizes internationally minded people from investing as well.
Oh, and we’re not even done yet…
The Wealth Tax
This last tax is one that I know the least about. But basically here’s how it works…
If you have too much money, the Colombian government isn’t really happy about that. They will simply take a percentage of your net wealth every year. And if your business has too many assets, the Colombian government isn’t really happy about it either.
Apparently there was even a motion on the table recently to reduce the threshold for the wealth tax to 750 million pesos (right now about $375,000 USD) on individuals AND on companies. But this motion was scrapped.
There still remains a significant wealth tax, according to the news source Reuters.
The concept of a ‘wealth tax’ is repulsively absurd to me. It’s like you’re paying rent on your own freakin’ assets.
But regardless of what I think, why would any company or individual keep his wealth in the country if that is how they are treated?
This provides more reason for investors to keep their capital OUTSIDE of Colombia, and not let it flow in.
All of these tax grabs should give any expat or investor pause, especially any internationally minded investor.
For me, I was previously considering Colombia as a place that I would spend time in year round, but these laws have got me significantly reconsidering. As one expat I know said, “Oh well, guess Colombia is a 6 month per year country for me now!”
Really it’s amazing how quickly the red carpet for investors has been retracted. These kinds of laws affect not just simple expats and travelers, but large institutional investors who control large amounts of money.
If you have come to Colombia over the past few years as a result of my writing or as a result of the positive press it has been receiving, you should definitely be aware of these laws and act accordingly.