Colombia Taxation FUNDS AND FUND MANAGEMENT Taxation of funds. Investment funds. Foreign capital investment funds

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1 Colombia Taxation FUNDS AND FUND MANAGEMENT Taxation of funds Investment funds Investment funds and securities funds are not taxable in Colombia. These funds are deemed as non taxable as regards income tax. The remuneration received by the entity that manages the fund, trustee, or the stock commission company, for its activity constitutes taxable income for the entity on which withholding tax will be applied. The income from the fund, after due deduction of expenses on its account and the remuneration to the managing company, will be distributed among the subscribers or participants, in accordance as it was received by the fund. Income from funds will be taxable according to the tax status of the beneficiaries or participants. There is no registration tax or capital tax applicable for funds. Foreign capital investment funds Dividends and financial yields obtained in Colombia by a foreign capital investment fund are treated as follows: Taxation of dividends: Dividends distributed to funds by Colombian companies, which have not been taxed at corporate level in the distributing company, are subject to a final and definitive withholding income tax of 33 percent. This tax is withheld by the Colombian company at the time of paying dividends to the fund. The remaining dividends are free of withholding or any other taxes. Taxation of financial yields: At the time that the financial entities pay yields to the foreign capital investment fund a 7 percent withholding tax is deducted. The fund will determine the final tax on the financial yields paid abroad on a monthly basis.

2 2 Colombia Taxation When the financial entity paying the yields is an entity under the surveillance of the Colombian Financial Superintendence or the yields result from bonds issued in foreign debt operations, in either case with a redemption period not lower than five years, the applicable withholding tax rate will be 4 percent. The procedure used for this purpose is as follows: Total financial yields earned in the month Less: Less: Devaluation for the month Managing fees = Taxable financial yields Taxable financial yields x 33 percent (income tax rate) = Taxes accrued on monthly financial yields Less: 4 percent or 7 percent withholding tax applied by the financial entity = Taxes paid by means of withholding tax by the foreign capital investment fund. The remittance abroad of financial yields or dividends does not attract additional taxes. The capital gain in the sale of shares has the same tax treatment of the financial yields, this is, once added to other yields and determined the amount of the profit of the operations made by the fund, it will apply the respective withholding (in total, a 33 percent). Real estate investment funds Incomes derived from these types of funds and arising from the rentals of houses of social interest are income tax exempted over 10 years, following the construction date. 3.2 Taxation of resident unitholders/investors in a non-resident investment fund Colombian companies with investments in foreign investment funds are taxed on: distributed and non distributed revenue; distributed and not distributed earnings, and profits from sale of units;

3 3 Colombia Taxation The corporate income tax rate is 33 percent on net taxable profits (gross income minus costs and expenses). The tax Law 1370 of 2009 established the equity tax only for taxable year The taxable event is the net wealth owned on 1 January 2011, for taxpayers whose net equity is equal or greater than COP 3 billion (USD 1.5 million approximately). The tax rate is 2.4 percent for net equity between COP 3 billion (USD 1.5 million) and COP 5 billion (USD 2.5 million). For net equity greater than COP 5 billion, the tax rate will be of 4.8 percent. The tax to be paid can be divided in eight equal quotas payable during the years 2011, 2012, 2013, and The net equity value of the shares and stock shares held in Colombian entities and the first COP 319,215,000 (USD approximately) of the value of the taxpayer s house for living are excluded of the taxable base. 3.3 Taxation of resident unitholders/investors in a resident investment fund Investment funds The investment funds, the securities funds and the common funds are not subject to income and complementary taxes in Colombia. The investors and participants of these funds pay taxes in accordance with the following: Fiduciary mandate (encargo fiduciario): Payments made to the fund are not subject to withholding tax. When the trust company is paying to the investor or accruing to his/her account, it will have to apply the withholding tax rate that corresponds to the nature of the payment. In case the trust company pays interest or financial yields earned, the applicable withholding tax rate will be 4 percent or 7 percent. Trust (fideicomiso): Payments made to the trust are not subject to withholding tax. Payments made to the beneficiaries of the trust company will be subject to withholding tax at the time of payment or accrual, applying the rate which corresponds to the respective nature of the payment. Interest and financial yields distributed to beneficiaries of the trust are subject to the 4 percent or 7 percent withholding tax. In the event that at 31 December of the corresponding year the trust has not distributed financial yields to the beneficiaries, the trust company will be required to apply withholding tax at 4 percent or 7 percent on such undistributed yields and to report and pay it to the tax authorities.

4 4 Colombia Taxation The portion of financial earnings corresponding to internal inflation, paid by mutual investment funds, investment funds, and securities funds to individual investors are not taxable income. There is a debit tax called financial transaction tax (GMF, its acronym in Spanish) on any financial transaction which implies disposal of resources deposited on current or saving accounts or banking checks. The rate is 0.4 percent over the transaction amount. Pension and severance funds According to the Colombian legislation, contributions made to mandatory pension funds do not accrue income tax for the pension account holder. Regarding contributions or deposits made to voluntary pension funds, they do not accrue income tax for the pension account holder, if the following conditions are met: Contributions or deposits must be kept in the fund for at least five years. The sum of the payments to voluntary fund and to mandatory funds must not exceed 30 percent of the labor or fiscal income of the year. If the funds are withdrawn before five years, an income tax will be accrued for the fiscal year in which they are withdrawn, and a withholding tax will be applicable, unless the deposits are used to acquire real estate for housing. 3.4 Taxation of non-resident unitholders/ investors in a resident fund Non-resident unitholders in Colombia are liable to tax only on assets held in Colombia and on revenues of Colombian source. Items include: distributed revenue; non distributed revenue; distributed earnings; non distributed earnings; and profits from sale of units The income tax rate for non-residents unitholders or investors is 33 percent. Please also note what was mentioned as regards to the equity tax in section 3.2.

5 5 Colombia Taxation There is a debit tax called financial transaction tax (GMF, its acronym in Spanish) on any financial transaction which implies disposal of resources deposited on current or saving accounts or banking checks. The rate is 0.4 percent over the transaction amount. Foreign capital investment funds Non-domiciled investors are subject to withholding taxes on fund distributions, according to the rules stated above in Section Taxation of fund management/custodian companies All companies and national entities in Colombia are liable to income tax, on both their revenues of national and foreign source. So having the obligation to be domiciled in Colombia, fund managing companies revenues are liable to the income tax at a 33-percent rate. Please also note what was mentioned as regards to the equity tax in section 3.2. There is a debit tax called financial transaction tax (GMF, its acronym in Spanish) on any financial transaction which implies disposal of resources deposited on current or saving accounts or banking checks. The rate is 0.4 percent over the transaction amount. In the case of the managing companies of investment funds, any remuneration received from domiciled entities is subject to the 11 percent income tax selfwithholding 3.6 Entitlement to income According to Colombian legislation, income arises to the participant/investor once it is obtained by the fund. 3.7 Double taxation agreements (DTA) Colombia has double taxation treaties with other countries in the Andean Pact (Bolivia, Ecuador, and Peru). The tax rule provides for taxation in the country generally where the income is generated (source). The agreements entered into do not modify the tax treatment already explained. The treatment discussed with respect to foreign capital investment funds will not change regardless of the investor s country of origin.

6 6 Colombia Taxation A tax treaty with Spain is currently in force (since 23 October 2008); this tax treaty follows the OCDE Model of Tax Convention. General speaking this DTA includes rules regarding yields, dividends, and capital gains. The treaty between Colombia and Chile is in force since 1 January 2010, this treaty also follows the Model of Tax Convention set by the OCDE. The DTA includes rules regarding yields, dividends, and capital gains. There are three more tax treaties, between Colombia and Canada, between Colombia and Mexico, and between Colombia and Switzerland, which are pending of internal constitutional (legal) requirements in order to be applicable in Colombia. Currently the tax treaty between Colombia and the United States is in negotiation process. 3.8 Other tax-favored vehicles None 3.9 Transfer taxes, stamp duty, capital duty There are not stamp or transfer taxes on the purchase or sale of shares or bonds by Colombian or foreign funds. In any case the stamp tax rate upon taxed documents entered as of 1 January of 2010 is 0 percent. Please also note what was mentioned as regards to the equity tax in section Miscellaneous Financial transactions tax (GMF, by its acronym in Spanish): This tax accrues over financial transactions, which imply disposition or transfer of funds through current or saving accounts. The rate is 0.4 percent over each face transaction value. From 1 January 2007 onwards, 25 percent of this tax effectively paid in the taxable year is deductible for income tax purposes.

7 7 Colombia Taxation KPMG in Colombia Vicente Javier Torres KPMG Impuestos y Servicios Legales Ltda Calle 90 # 19C - 74 Ed. Blue Tower Bogota Colombia Tel. +57 (1) / Fax +57 (1) vjtorres@kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.