How Controlled Foreign Corporation Rules Look Around the World: Colombia and a Perspective of Latin America

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The Colombian CFC regime was enacted in 2016 (Law 1819). An entity in Colombia is considered a CFC if it is not a resident in the country and is controlled by one or more Colombian tax residents.

Colombia is not part of the OECD but is one of the Latin American countries that has done some work on adopting the recommendations of the OECD BEPS project to address taxation of digital business. Colombia is also part of the OECD Inclusive Framework.

Differently from other Latin American countries, the Colombian government is aware of the challenges that international taxation represents in the current world. Other Latin American countries are working their ways towards improving their legislation as shown in the chart that follows:

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Only seven Latin American countries have incorporated CFC or a set of similar rules to their legislation. Only two Latin American countries are OECD members, and 13 have joined the OECD Inclusive Framework. The Inclusive Framework is a group of 129 countries that is part of an effort by the OECD to incorporate recommendations from the BEPS project and work with non-OECD members to help them adopt policies to combat tax avoidance and improve their tax systems.

Shareholding requirement for the control determination in Colombia

In Colombia, the control requirement for a nonresident entity to be considered a CFC is at least 50 percent of vote, value, or the right to receive profits. If an entity is considered a CFC, a shareholder who holds at least 10 percent of the voting shares, or rights over the profits, must include in its taxable income the corresponding share of CFC income.

Applicability of the rules

CFC income is included in the tax base of the Colombian shareholder and taxed at the statutory corporate rate, as with any other item of income. There is no trigger rate test for the purposes of CFC rules. (A trigger rate is usually the minimum rate that is determined by law to make the rules applicable to a foreign corporation.)

Dividends or any other form of profit distribution are exempt from CFC taxation, though the calculation of dividends in Latin American countries is slightly different from the U.S. and Europe. The realization of profits from investments in other companies or investment vehicles is also exempt when those come from an active business.

In the Colombian regime income will generally be considered active if it has its origin in real economic activities carried by the CFC, its subsidiaries, or permanent establishments. Those activities have to be carried out in the jurisdiction where the CFC, subsidiaries, or permanent establishments have their tax residence or where they are located. In the case of subsidiaries or permanent establishments the real economic activities threshold is used to exempt CFC income from taxation in Colombia, when those subsidiaries or PEs are indirectly controlled by one or more Colombian tax residents.

Interests and financial yields are not considered passive income if the controlling entity is a financial institution subject to surveillance of the finance authority in Colombia or if the CFC is a financial institution that is not domiciled, located, or incorporated in a jurisdiction qualified as a non-cooperative jurisdiction or a low- or no-tax jurisdiction.

The Colombian tax system allows a credit for taxes paid by the CFC in the foreign jurisdiction. If the CFC distributes dividends and those were previously taxed as CFC income, those dividends are tax-exempt when distributed.

What is the type of income that is taxable: all income or just passive income?

Colombian taxpayers that are subject to CFC rules are not compelled to include assets and liabilities at the CFC level in their income tax returns, but they are compelled to include passive income (costs and expenses).

Any passive income received by a CFC is considered CFC income that is deemed to be received by the shareholder. The law includes a list of income items that are considered to constitute passive income including:

  • dividends or any other form of distribution of profits;
  • royalties;
  • income from the transfer of intangible assets or assets that generate passive income;
  • income from the transfer or lease of real estate;
  • income from the sale of certain movable assets;
  • interests or financial yields; and
  • income from the provision of certain services.

Conclusion

For Colombia, as well as for other countries in the world that are not capital exporters, one important question is whether CFC rules are necessary or are indirectly a requirement to be part of world organizations like the OECD (which Colombia is not a member) in order to be on the radar of larger economies. For capital exporting countries, it is sometimes important to include anti-tax avoidance measures in order to improve their tax systems while facilitating multinational companies’ ability to invest around the world.

That is not the case of Latin American countries where CFC rules have not been implemented and where there are no current efforts to change or adopt international tax rules. The reason for that may be that not all countries have enough resources to administer tax reforms that create more complexity and where the requirements to enforce the rules compared to the improvement of collection makes the adoption of such rules even less attractive.

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