Given the increase in tourism activity in Colombia, investing in real estate could be an attractive option for investors. In this blog we will navigate some tax-related implications associated with this investment when made by individuals.
But in order to fully understand this, there are a few terms that are needed to be understood. The list may come across as overwhelming, but in order to fully understand the implications it has to be done first and pushed out of the way.
The precise terms needed are:
National Tax Statute: Book where the tax regulation is compiled. Herein referred to as ET and can be looked into here.
Gross equity (Art. 261 ET): Corresponds to the assets and rights in money that the taxpayer owns. It may include, without limitation: property, machinery, inventory, investments, accounts receivable, patents, trademarks, mining records, or any other type of good or right.
Liquid equity: Corresponds to gross equity once debts owed by the taxpayer that are in force on the same date on which the gross equity is calculated are deducted.
Attributed equity: Individuals without residence in Colombia but with Permanent Establishment, attending the study for the attribution of income and occasional earnings prepared under the principle of full competition (or “Arm’s Length” in English).
Equity value of real estate: For individuals not obliged to keep accounting, they may choose the highest value between acquisition cost (See Art. 60 and paragraph 2 of Art. 69 ET), tax cost (Art. 70 ET), self-assessment (Article 72 ET)
Permanent Establishment: As a general rule, it will be understood as the fixed place of business located in the country through which a foreigner, individual or company, without residence in Colombia performs all or part of its activity. It may be a permanent establishment: the branch of foreign companies, agencies, offices, factories, workshops, mines, quarries, oil and gas wells, or any other place of extraction or exploitation of natural resources. The foregoing may have a different context when the concept is analyzed in the light of a treaty to avoid double taxation.
National source income: Article 24 of the ET establishes the general rule to define what an income is from a national source. However, the tax rule specifically clarifies that “Revenue from a national source includes, among others, the following: Capital income from real estate located in the country, such as leases or censuses; profits from the sale of real estate ”.
Fiscal residence: Acquired by foreigners residing in Colombia for 183 days, continuous or discontinuous, during a period of 365 consecutive calendar days. When the permanence falls on more than one year or taxable period, it will be considered resident for the second taxable year.
Fiscal residence by possession of assets or income generation: Acquired only by Colombian nationals not residing in the country when 50% of their income is from a national source, 50% of their global assets are deemed to be owned in Colombia, or 50% of their assets are managed in the country (Single Regulatory Decree 1625 of 2016 article 1.2.1.3.2. and 1.2.1.3.3.)
UVT: “Unit of Tax Value”. This unit of measure allows unifying standards and defining limits in tax matters. In 2019 the value in COP of the UVT was $34,270 and in 2020 it is $35,607
Complementary tax of normalization tax: Temporary tax to regularize assets omitted in the declarations of the residents.
Now that this is out of the way, we can get into the focus points of the article. The taxes that a real estate investor may be subject to are as follows:-
Income tax
Tax residents who meet any of the following conditions will declare income:
- Gross equity exceeding 4,500 UVT: that is, an equivalent value at the end of the fiscal year of $154,215,000 in 2019 and $160,231,500 in 2020.
- The taxpayer who exceeds 1,400 UVT in at least one of the following control operations will also be required to declare: total income, consumption with credit cards, purchases and consumables with other payment methods, or total accumulated by bank consignments.
1,400 UVT equals COP$47,978,000 in 2019 and COP$49,850,000 in 2020.
This tax will be paid under the following modalities:
- Withholding tax: Applies to residents for a fee of 3.5% on the agreed fee if it exceeds 27 UVT. For non-tax residents, the rate will be 20% of the total payment, or the one defined in the agreement to avoid double taxation.
- Declaration and payment: Tax residents will declare income, at a variable rate of 0 to 39% depending on the level of income reached. Withholdings at the source may be taken as the lowest value to be paid on the tax charged.
Wealth tax
It is a temporary tax, defined for the years 2020 and 2021, for those taxpayers whose liquid assets as of January 1, 2020 are equal to or greater than 5,000 million pesos. Its rate is 1% on the established taxable base.
The tax is settled on liquid assets, excluding the following:
- The first 13,500 UVT ($462,645,000 in 2019 and $480,694,500 in 2020) of the equity value of the home or apartment of the natural person. This exclusion does not apply to recreational properties, second homes or other property that does not meet the condition of habitual housing.
- 50% of the equity value of the assets subject to a complementary tax of normalization tax and that have been repatriated to Colombia and invested with a vocation of permanence in the country, under the conditions established in number 2 and 3 and paragraph 1 of the Article 295-2 of the ET
- In the case of natural persons without residence with Permanent Establishment, the taxable base will correspond to the assets attributed to the establishment.
- The other conditions provided for in paragraph 2 of Article 295-2 of the ET.
Sales tax (VAT)
Regarding VAT in real estate transactions, we must say that:
- The sale of real estate is not taxed with VAT (Art. 424 ET).
- Leases of real estate for housing or spaces for exhibitions and craft shows, are excluded from VAT (Art. 476 ET)
- Leases of real estate of a commercial nature or for use other than those mentioned in the first two points are taxed at VAT at a rate of 19%
- Every resident will be responsible for VAT and therefore, must be billed including this tax if he incurs in at least one of the following situations:
- Being a customs user: export or import goods and services.
- Have more than one business, office, headquarters, local or business establishment where the activity is carried out.
- In the case of being a single establishment, office, headquarters, local or business, the activity is carried out under a franchise, concession, royalty, authorization or any other system that involves the exploitation of intangibles.
- Total invoiced income or bank consignments, associated with activities taxed with VAT, exceed 3,500 UVT ($119,945,000 in 2019 or $124,624,500 in 2020)
- When, in the immediately preceding year, contracts of activities subject to VAT with a value greater than 3,500 UVT have been concluded. In the event that a single contract exceeds the value of 3,500 UVT, it will be prior to signing the contract, that the resident has registered as “responsible for VAT”.
The first two points refer to the VAT paid in expenses associated with the sale or purchase of real estate, as well as to manage the leasing activity of the property, will be greater value of the operation.
Tax of industry and commerce
This is a municipal tax, for which an individual will pay on a mandatory basis to each of the municipalities where the property is located, on the income obtained from the sale of real estate for consideration.
In reference to the income obtained from the lease of these properties, an individual will not be obliged to pay this tax, since said activity (lease of real estate) is not considered of a commercial nature and therefore not taxed with the tax. On the other hand, when the leasing activity is carried out by a company, there will be an obligation to pay this tax.
The tax rate will be defined in each of the tax agreements established by the municipalities.
It is important to note that for the realization of real estate activities with more than five properties of type “urban housing” an operation record must be obtained before the competent administrative authority (Decree 820 of 2003).
Consumption tax
This tax was applied to effective sales in 2019 exclusively and its rate was 2% of the value of the sale. By 2020 it is no longer in force.
Unified Tax
It is a form of declaration and tax collection that unifies in a single taxation and payment of income tax, sales tax and industry and commerce tax.
This taxation option can be taken by individuals who carry out asset leasing activities if they represent less than 20% of the total gross income of the individual.
The rates for this tax are defined in Article 908 of the ET