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2.2. Tax Consequence of Contributions

Contributions to Companies

(a) Capital contribution levies

The registration of the incorporation document of a company or the capital increase of an existing company is subject to a registration tax. The taxable base is the subscribed capital of the company being incorporated or the subscribed capital that is being increased. The rate varies from 0.3% to 1% (depending on the State where the company was incorporated and the type of contribution).

Note that:

  • When incorporating a company, Chambers of Commerce charge registration fees that depend on the assets of the new company being incorporated (for year 2016, approximately from US $11 to US $600).
  • If the incorporation of the company or the capital contribution needs to be made through a public deed, there will be notary fees.

(b) Capital gains at level of contributor or the company that receives the contribution

i. Contributions made to companies that are Colombian tax residents

Pursuant to Colombian law, in-kind or cash contributions –including real estate- will not generate capital gains at the level of the contributor or taxable income for the company receiving the contribution, as long as new shares or quotas are issued by such company as a consequence of the contribution. In sum, partners and companies have the right to have a tax rollover and defer taxable income until they sell their shares or until the company sells the contributed assets. Therefore:

  • The cost basis for the company in the contributed asset will be the same the contributor had on such assets and there will not be an extension or reduction of the depreciation or amortization or the depreciable life of such assets. The contributed assets will keep the nature (fixed, movable, etc.) that they had originally for the contributor.
  • The cost basis for tax purposes of the newly issued shares or quotas will be the same cost basis the contributor had on the contributed assets.

In order to be eligible for these rules, the contributor and the company that receives the contribution will need to expressly declare in the document that contains the contribution that the latter will fall into the regime provided by article 319 of the Colombian Tax Code. Conversely, if this requirement is not fulfilled, then there will be taxable income for the company and the contributor pursuant to the general rules of the disposal of assets.

Furthermore, if within 2 years following the contribution the company sells the contributed assets or the contributor sells his shares, they will not be able to compensate accumulated tax losses or excess of presumptive income with income generated in the sale of such assets.

ii. Contributions made to companies that are non-Colombian tax residents

In-kind contributions made by Colombians to foreign entities are considered as a real disposition for tax purposes. This means that such contribution could generate capital gains for the contributor pursuant to income tax general rules.

Contributions Made to Hybrid Entities

(a) Consortia, Temporary Unions, Participation account agreements and non-regulated joint ventures

In principle, there are no tax consequences for contributions made within the scope of these agreements as long as the contributed assets remain in the net worth of the partner in the agreement.

(b) Trusts

Contributions will not generate income tax for the contributors pursuant to article 102 of the Tax Code which determines that a tax rollover is available to investors until they sell their participations in the trust or such trust obtains taxable income.

Note that if the contribution consists of real estate property, the formal transfer of the real estate property would generate a registry tax, registration rights and notary fees that amount approximately to 1,33% (the exact rate varies depending on the place where the property is located).

Contributions in cash or in kind, but of assets that do not require registration as a condition for the transfer of property, do not generate registration tax.

(c) Investment Funds

There will not be income tax at the level of the fund upon contribution since investment funds are not taxable persons for income tax purposes.

On the other hand, if contributions are made at cost basis of the contributed assets, there will be no capital gain recognition at the level of the contributor. Nevertheless, it is important to remark that there is no legal certainty regarding the taxes that could be generated for the contributor, taking into account that there is no  legal rule that expressly regulates contributions made to funds (as there is for trusts and corporations). Furthermore, there is not yet a regulatory decree or an Official Doctrine that establishes if contributions can be made at book value or at a higher value than the cost basis of the corresponding asset without generating income tax.

Note that if the contribution consists of real estate property, the formal transfer of the real estate property would generate a registry tax, registration rights and notary fees that amount approximately to 1,33% (the exact rate varies depending on the place where the property is located).

Contribution of cash or of assets that do not require registration as a condition for the transfer of property will not generate registration tax.