Law 1819 includes measures affecting Colombia’s transfer pricing regime, and while the date of enactment was in late 2016, a regulatory decree that would establish when the new requirements would be effective has not been issued.
Among the measures in Law 1819, there are certain provisions that were influenced by the OECD’s base erosion and profit shifting (BEPS) project’s recommendations. For instance, with respect to the controlled foreign company (CFC) rules, the standards aim to address base erosion when there are foreign companies controlled by resident shareholders in Colombia or there are companies located in jurisdictions of low or zero taxation or when the location where the foreign company’s mainly passive income (e.g., dividends, royalties, interest, income from the alienation or leasing of real estate, or from the provision of services) derives from non-cooperative jurisdictions.
In the Colombian measures, CFCs are understood to be entities that are not Colombian tax residents and that comply with the requirements of subordination or economic linkage under Colombia’s transfer pricing regime. Such CFCs include investment vehicles (e.g.. corporations, independent assets, trusts, collective investment funds, other fiduciary businesses, private foundations) that are incorporated, domiciled or operating abroad—regardless of whether they have legal personality or are transparent for tax purposes.
The measures presume that Colombian tax residents always have control over CFCs that are domiciled, incorporated or operating in a non-cooperating or low- or no-tax jurisdiction or over entities subject to a preferential tax regime, regardless of their participation in such entities. For income tax purposes, a CFC’s taxable income and associated costs and deductions are considered to accrue to Colombian tax residents that control the CFC directly or indirectly, for the tax period in which the CFC accrues the income and costs (even when profits are not distributed) in proportion to their participation in the capital of the CFC or in its results (in which case, the foreign tax credit would apply).
Taxpayers subject to the CFC regime need to give special consideration to the tax rules for calculating income from a CFC, income on the dividends distributed by the controlled foreign entity on the sale of its shares, and the foreign tax credit claimed for foreign tax paid on the CFC’s income.
Read a June 2017 report prepared by the KPMG member firm in Colombia
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