Hold Everything: The Colombian Tax Trap No One Is Talking About

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.

Here is the article from El Colombiano regarding Decree 2193 against ‘tax havens’.

(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.

Note: Obviously, you need to do your own due diligence, and what I have said above is not to be taken as legal or professional advice of any kind. Talk to your lawyer or accountant.

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.

  • Just because you have to file taxes regarding your worldwide income in Colombia does not mean you will have to pay taxes to Colombia, at least that’s how I understand it. I’m waiting for further guidance from my tax guy.

  • Joe

    Colombia is another USA puppet country. They are implementing the same fascist financial laws the USA is propagating around the world.
    Governments are broke and they are hunting money everywhere. Welcome to the new world. Check out http://armstrongeconomics.com. He blogs about this stuff every day.

  • disqus_vLhslGYam5

    Is it also true that if you qualify for over the 183 day rule, you also must submit information on your assets (i.e., autos and home) in the U.S.? If true, how is this taxed (i.e., property tax?) and what is the rate? Bobbie

    • Good question. You should probably consult a professional tax advisor for an official answer.

  • Rob Small

    wow Ryan … thanks … Im tossing my idea of moving between Chaing Mai and Medellin right now … I just prefer Spanish and went to Peru last Oct ….

    • Rob Small

      Hi Ryan, I was thinking exactly the same thing almost 3 years ago and I chose Chiang Mai and do not regret it. My analysis came to the following conclusions: Chiang Mai was about 25% cheaper ( I currently rent for 5000Baht a month = about 150 dollars US) and a whole lot safer (thanks to the Buddhist culture and strong tourist economy in Thailand). 3 months from now will mark 2 years and I now teach science and English at a real school as well as teach online via Italki (way better than BuddySchool, IMHO). I think I am reading your post very late but others may hopefully benefit from my response. Chiang Mai is very beautiful! My email is robinsmall144@gmail.com if anyone has more qurestions.

  • Good to be aware of this. But FYI, these rules are common in most countries, at least the one about taxation on worldwide income. There’s a comprehensive list in this wikipedia article: https://en.m.wikipedia.org/wiki/International_taxation

    And also keep in mind that even though Colombia might consider you tax resident, as long as you are tax resident elsewhere you will need to look at the relevant tax treaty between the countries to determine where you will pay tax. Often that will come down to where you have strongest economic ties, etc (in addition to where you usually live +++).

    And BTW, all US Citizens are tax resident in the US as well, no matter where they live.

  • Guru

    Another reason never to buy an over priced apartment in Colombia. Stay at a hotel it’s every bit as cheap as an apartment most have nicer gym’s and pools not to mention maid service security and a taxi at the door at all times. There is no reason to buy in Colombia you can’t sell and will have to give it away and all the realty gains you here about were wiped out with the weak peso. Its a nice place to visit stay in a hotel don’t pay someone’s expenses in over priced apt.

  • Sick_Pleasure

    I was seriously considering retiring in Colombia in hopes of living well on about $4,000. (Net after 20% US taxes). Well it looks like after Colombia’s taxes of 33%, even if I can deduct all US taxes paid, and a “wealth tax” of 0.75 on my retirement savings*, my effective tax rate will be >50%!

    W….T….F! Cost of living would have to be a whole heck of a lot lower to make up for that hit!

    *It’s possible that the wealth tax will not apply until you’ve lived in Colombia, so there might be a good case for leaving for 6 months and 1 day every 5 years, I have seen confusing information on the 5-year exclusion.

    • Alfred Jones

      Don’t worry. The 33% if you fall into that category is only on 75% of your earnings. Also I don’t think they tax pensions or social security.

  • Sick_Pleasure
  • Jim G

    Ryan nice article. Question, is your income taxed for the months that you are in Colombia or do they tax the entire year? For example if I’m here from October 2017 through June 2018, am I required to pay tax on my US income for only those 9 months, or would I pay the 15% tax on all of my 2017 and all of my 2018 income? I will also get the opinion of a lawyer and accountant here and do some more research myself, but in the meantime I wanted to see if you knew. Thanks!

  • Lee

    I am with Rob. I have lived in Ecuador for a number of years and had decided to move to Colombia. This all changed after I read and studied the tax ramifications. This is definitely a trap for the unwary and is a very good reason not to trust all of these internet posts about Colombia (and other countries) being great places to retire. If you are or want to be an expat, do your research thoroughly so you won’t get a nasty surprise along the way! Don’t rely on all of these ‘retirement’ articles that tout one place of the other. They only touch the surface! Good luck to you!

  • Sick_Pleasure

    Has anything changed between 2014and 2018?

  • Robert Gillies

    You know in Panama there is a place called Cerro Azul in the mountains about a 30 minute drive to the Tocumen airport. There is a community there of nice vacation style homes in a national park kind of setting. Anyway from Tocumen it is less than a one hour flight to Medellin. If you had a home in Cerro Azul you could spend half the year there and the other half of year in Medellin. As long as you didn’t stay in Colombia more than 180 days per calendar year you could avoid a negative tax situation in Colombia. In Panama if the value of your home is less than 120 thousand in the public register you would pay no property tax. The real value of your property could be a bit higher but if you can arrange it that in the public register it is under 120 thousand you should be fine. The other thing is that if you buy merchandise in Medellin to take back to Panama you can save all of your receipts and get a refund for the VAT you paid when you leave Colombia. When you enter Panama with merchandise you purchased outside the country they almost never check your luggage. Even if they do you are supposed to be allowed to bring in up the 2000 dollars worth for personal use. Panama does not tax foreign earned income and aside from that is very lax about collecting taxes in general. They have the income from the canal.

    • OverTheEdge789

      One thing I’ve wondered about is whether it’s easier… and more certain…. for a US citizen to get a second passport in Columbia as opposed to Panama. I know that a person can apply for Panamanian citizenship after 5 years of residency, but I’ve also read that the request for citizenship is frequently denied. Maybe in Columbia, they’re more willing to grant citizenship (I’m not sure).

  • OverTheEdge789

    The part about getting into the tax net if you stay 183 days isn’t so unreasonable…. a lot of other countries do it, and besides, the criteria are “black and white”. But the other two tax issues, like a country that Columbia wants to label a “tax haven”…?