Colombian Tax Flash - September 2009

(1) Income Tax Treaties. –

Since the execution of the income tax treaty with

Spain that entered into force on October 2008, the

first of its kind in the Country, Colombia has executed similar

treaties, not yet in force, with Chile on April

2007, Switzerland on October 2007,

Canada on November 2008, and with

Mexico on August 2009. Currently, the Government

is negotiating income tax treaties with Belgium,

Czech Republic,

Germany, South Korea,

Netherlands, India, and the

United States of America.

Congress recently approved the income tax treaty with

Switzerland (Act 1344-2009), which prior

to its ratification is now pending the required constitutional

review from Colombia's Constitutional Court. The Constitutional

Court recently ruled declaring the income tax treaty with

Chile constitutional (Ruling C-577-2009),

clearing the way for its ratification and entry into force in the

near future. The treaties with Canada and

Mexico are now pending both the approval from

Congress and subsequent constitutional review from the Court,

before the Government can proceed to ratify them.

(2) 2010 Tax Reform Bill. –

On July 20th the Colombian Government introduced in

Congress the first tax reform bill since 2006 (Tax Reform Bill

No. 5-2009), proposing: (i) a new net-worth tax; (ii) changes

in the fixed assets investments deduction; and (iii) a

clarification to the current rule deeming related party debt as

equity.

(a) New 0.6% Net-worth Tax. The Tax Bill

introduces a new "temporary" net-worth tax for fiscal

years 2011 through 2014. This tax is almost identical to the

previous 1.2% net-worth tax currently in force through fiscal year

2010. The main differences between the proposed net-worth tax and

the current net-worth tax are: (i) the applicable rate, and (ii)

the shifting taxable base, among others.

The tax rate would drop 50% from 1.2% to 0.6%.

Instead of the current fixed taxable base (i.e., the

taxpayer's net-worth as of January 1st, 2007),

the taxable base for the new tax would be the taxpayer's

net-worth as of January 1st of each taxable year.

The tax reform bill also carves out the possibility to include

this new net-worth tax and its predecessor from future Legal

Stability Agreements ("LSAs")

executed between the taxpayers and the Government. Even though the

change would not be enforceable before it's enactment, it is

likely that the Government's LSAs team of negotiators

may already be rejecting the inclusion of any future net-worth

taxes in these agreements (see further below in this issue our

comments on the current status of

LSAs in Colombia).

(b) FAID Reduction. The Tax Bill proposes a

reduction of the popular Fixed Assets Investments Income Tax

Deduction ("FAID"), from the

current 40% of the amount of the investment to

30%, beginning January 1st, 2010.

Currently and subject to eligibility, income taxpayers are

entitled to deduct 40% of their investments in

tangible fixed assets used in their income producing activity. The

deduction is available for both purchased and manufactured (or

built) assets, and for both new and used

(second-hand) assets. Leased assets are eligible for this

incentive, provided that the taxpayer exercises the irrevocable

purchase option in the corresponding agreement. Certain rules and

restrictions apply.

(c) FAID Unavailability...