September 25, 2023

Colombia Taxes on Expat Residents, Investors, Non-Residents: Legal Analysis

Tax filing requirements and taxpaying obligations for expat residents, foreign investors, non-resident visitors and even citizens in Colombia raise many questions – which explains the demand for expert accountants and (sometimes) specialized tax lawyers here.

What’s more, Colombian tax regulations – like USA tax regulations – periodically change, such as the new requirement for USA citizens living in Colombia and classified as “taxable residents” in Colombia to file a “digital mechanism” for automated tax reporting with DIAN, Colombia’s national tax agency.

The U.S. and Colombia also are recent signatories to the new “FATCA” treaty, which requires USA citizens to report their Colombian bank and investment assets to the IRS. Colombian banks and brokerages likewise are required to report this information to the IRS.

Similarly, Colombians living in the USA and subject to Colombian taxes likewise must report their USA bank and investment assets to DIAN. Under a new tax-reform law (article 43 of law 1739 of 2014), Colombian tax residents are subject to declaring their assets held worldwide.

Because of these changes – and because of many other provisions in Colombian tax law that would be confusing to most any foreigner living here or doing business here – Medellin Herald sought the advice of local tax attorney Andres Durango, of Medellin Legal Partners, which specializes in tax, corporate, foreign investment and intellectual property/trademark law.

Durango and associate attorney Nubia Ocampo also provide tax advice to clients of Medellin-based Casacol, a real-estate investment advisor, developer, property manager and legal advisor (see “Investing in Business, Real Estate: Opening Doors to Profits, Visas”).

Full disclosure: My wife (a Colombia/USA dual citizen) and I (a USA citizen and permanent Colombian resident) have been using the services of another company, Contabler — a long-established, reputable tax accountant here in Medellin — for 10 years now.

The Contabler accountants here only speak Spanish, and only handle Colombia taxes. They don’t perform USA tax accounting services (for which we use a separate, U.S.-based tax accountant).

The Spanish-only language issue with Contabler isn’t a problem for either of us, as both my wife and I are bilingual (Spanish and English). We’ve always complied with all Colombian and USA tax laws and filing requirements — and we have always ensured prompt, accurate tax payments.

As a result, we’ve never had any problems with tax authorities, as we use expert tax accountants both in the USA and in Colombia to guide us through this complex process.

Nevertheless, translating IRS tax lingo into the lingo used by Colombia’s “DIAN” tax agency – and vice-versa – is a challenge for anyone (taxpayers and accountants alike) who isn’t simultaneously a USA and Colombian tax expert.

What’s more, it’s likely that most IRS and DIAN agents would struggle to understand the complexities of each-others’ mind-boggling tax laws and regulations.

So, unless there’s a strong suspicion of criminal behavior involving large sums — such as money-laundering and drug-dealing, for example – then it’s unlikely that IRS would share information with DIAN (or vice-versa) on most individual taxpayers, Durango explained.  

However, if there are glaring inconsistencies on a tax declaration, then it’s possible that DIAN could ask a taxpayer — or the taxpayer’s accountant — to provide further proof of a declaration, such as statements made on certain line-items for questionable deductions, or questionable income-and-expense claims.

This could mean providing to DIAN information that the taxpayer may already have reported to the IRS, Durango added.

Expats Working for Foreign Companies

A growing number of expats here in Medellin are working for foreign companies, just as I did (until recently). So, if you’re a foreigner living in Medellin but working for USA company, then that means USA taxes would be paid directly to IRS through your employer’s routine payroll deductions — just as if you were still living in the USA, rather than living and working here.

Your U.S. tax payments would be deductible (up to a certain point) against Colombian tax obligations, as specified by current Colombian tax regulations – although there’s no specific law yet that clarifies this point. Rather, there is only an exotic formula established in Article 254 of the Colombian Tax Statute that governs this provision, Durango explained.

In addition, if and when you start drawing U.S. Social Security (or other government retirement funds) — and if and when you start withdrawing from private retirement accounts (such as the popular “401k” plans in the U.S.) or other investment accounts — then you’ll also be subject to Colombian tax declarations (in addition to USA taxes, if you’re a U.S. citizen).

USA taxes paid on Social Security payments and USA taxes paid on USA investment-account withdrawals also would be deductible against Colombian tax obligations, under current regulations. However, depending on the amount of income received from foreign sources, you may or may not actually owe additional Colombian taxes.

You’ll also face Colombian taxes on any Colombia-derived income (if this hasn’t already been withheld from your paycheck from a Colombian company) and you’ll have to declare Colombian assets to DIAN as well.

In my case, that includes declaring my investments in a Colombian “voluntary pension” fund administered by “Proteccion,” one of Colombia’s top pension-fund administrators and investment advisors. My annual contributions to this fund help reduce my Colombian income tax liabilities.

‘Double-Tax Agreement’

However, neither the U.S. nor Colombia have enacted mirror-image “double tax agreement” (DTA) laws covering U.S. citizens residing in Colombia as well as Colombian citizens residing the USA.

This situation stands in contrast to the DTA laws between Colombia and several other nations including Canada, Mexico, Switzerland, Brazil, Spain, Germany, and Chile. Czech Republic, Portugal and India also would join this “DTA” list once certain court rulings in those countries have become final, Durango explained to Medellin Herald.

If on the other hand you’re a foreigner working for a Colombian company, then it’s likely that you’ll be paying taxes directly to DIAN via withholding tax  (“retencion en la fuente”)  – and then (in some cases) filing an annual tax declaration with DIAN as well as IRS.

Note: If you are a USA citizen, this means your world-wide income – including Colombia income — must be declared every year, no matter if such income is derived from a USA employer or a foreign employer.

Asked to elaborate on these issues, Durango and associate attorney Nubia Ocampo told Medellin Herald the following:

Medellin Herald:  Have tax-filing requirements for foreigners in Colombia changed dramatically in recent years?

Durango/Ocampo:  For foreigners in Colombia who are USA citizens, they must comply with the FATCA-USA regulation, which aims to find income and assets held by USA persons in offshore accounts, either directly or indirectly through participation in foreign entities. This regulation ensures that this income and these assets are reported to the IRS.

Regarding the fiscal situation in Colombia, one must consider whether this person is a “taxable resident” in Colombia as defined by Article 10 of the Tax Code.

If you are a “nonresident alien” in Colombia, but you are earning income here, then you would be considered as a “taxable contributor.” Tax would be withheld from your salary, as “domestic-source income” earned in Colombia in accordance with the rates set out in Articles 406 to 419 of the Tributary Statute (Colombia Estatuto Tributario, or “ET”).

Depending on the tax retention system being used, you may or may not have to submit a separate declaration on income tax and supplementary tax to DIAN.

In the event that you are bound by employment contract here in Colombia, then two situations with different tax effects may occur: 1) you are classified as a foreign worker that is a resident in Colombia or 2) you are a “nonresident alien.” The residence criteria for foreigners is determined by your presence in the country, it noted in paragraph 1 of Article 20 of the ET.

Residence Criteria is not only determined by your presence in the country but via the following situations:

Article 10 of Decree 624/1989 (Colombia Tax Statute) establishes the different situations where a foreign citizen becomes a tax subject for DIAN:
1.    Staying continuously or non-continuously in Colombian jurisdiction for more than 183 calendar days during a 365 day period (1 year);  
2.    50% or more of your income comes from Colombian sources;
3.    50% or more of your assets are held in Colombian Territory;
4.    50% or more of your assets are managed from Colombian Territory;
5.    Having a tax residence in a jurisdiction declared as “tax haven” by the Colombian government.

In line with the above, when a foreign worker is a taxable resident in Colombia, then the worker will be governed by rules established under Colombian labor law. From a tax point of view, this means that the foreign worker will be taxed at the same rates and under the same procedures that apply to Colombian employees identified in the Tax Code. In that sense, the resident foreign worker is assumed to be a Colombian worker.

Now, if you are a foreign worker who is not a taxable resident in Colombia, then it is not appropriate to apply same the tax rules that apply to foreign residents or to domestic employees.

However, in the case of non-resident foreigners who come from a country that has signed the New York Convention or the Andean Community of Nations treaty, then these treaties that protect the rights of migrant workers apply.

In the case of a USA foreign national, the worker will be protected by the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families, in which case the tax rates and procedures for domestic and foreign residents shall apply, by express provision of that Convention.

Medellin Herald: Is it correct that all foreigners residing in Colombia now have to file a tax declaration with the DIAN each year – starting from their first year in Colombia – even though all their revenues come from an employer or business or a pension in the USA (or other country)?

Durango/Ocampo: Until 2012, a rule covering foreign residents in Colombia meant that these residents were only subject to Colombian income tax and complementary taxes on their foreign sources of income – and would declare equity owned abroad — starting from the fifth year of taxable continuous or discontinuous residence in Colombia.

Now, however, under current tax regulations, a nonresident alien must declare to DIAN their Colombian domestic-source income, as specified in Article 24 of the ET.

If the same income is taxed in the United States and also in Colombia, then this person can deduct from Colombian income taxes the taxes paid abroad on such income, according to the formula set out in Article 254 of the ET.

Starting from the moment a foreigner becomes a Colombian tax “resident,” according to the “criteria of permanence” as indicated in paragraph 1 of Article 10 of the ET, then the foreigner must declare income from worldwide sources as well as income and assets in Colombia.

Medellin Herald: Why is DIAN requiring that foreigners who are Colombia tax “residents” file the new “digital mechanism” form with DIAN?

Durango/Ocampo: With the understanding that this is a situation of a resident alien who is a Colombian taxable resident and therefore is subject to Colombian income tax and complementary taxes, then it must be noted that this resident alien’s tax declaration must disclose income from worldwide sources as well as assets owned in Colombia and worldwide.

Also, under Law 1739 of 2014 in Article 43, there is a new obligation applying to those paying Colombian income and supplementary taxes, which requires that such persons must report assets of any nature held abroad as of January 1 of each year.

To comply with this formal obligation, respondents now must do this “virtually” – meaning that it is now necessary for the taxpayer to request from DIAN a “digital mechanism” signature certificate.

Medellin Herald: For foreigners who invest in real estate or other business here — via a “Simplified Stock Company” (“SAS”) entity – must they declare to DIAN their financial holdings abroad?

Durango/Ocampo: The last paragraph of Article 9 of the Colombian Tax Code states: “Natural persons – [including] natural, national or foreign, who do not reside in [Colombia] and without causing illiquid succession of residence [estate tax] in the country at the time of death, are only subject to income tax and complementary tax regarding their income and capital gains from national sources.”

In that sense, if you are not a foreign tax resident in Colombia, but you nevertheless earn income from national sources — and all of that income was not subject to withholding tax — then you will be reporting Colombian income tax and complementary tax.

From this it follows that foreign individuals not resident in Colombia are not required to declare to DIAN:

a) when they are not income tax payers or complementary taxpayers. This situation applies when there is no Colombian domestic-source income; and

b) when the taxpayer is subject to withholding on income and complementary tax, as specified under Articles 407 to 411.

When a foreigner that isn’t a taxable resident in Colombia has assets in Colombia, but these assets don’t generate income, then this foreigner is not obliged to declare these assets.

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