A Brief Approach to the Legal Regulation of Offshore Companies in Colombia

Offshore companies are legal entities characterized by being incorporated in a certain State, but their activities are carried out in other jurisdictions. The International Monetary Fund has made an approximation to the term when it classifies corporate types in the financial sector as offshore when they are “licensed in offshore financial centers and are not authorized to have residents of the jurisdiction as clients”[1]. From the above, three characteristics emerge: first, they are in force, that is, they legally exist in a jurisdiction; second, that jurisdiction is characterized by being an offshore financial center or “tax haven”; and third, their activities are normally not carried out in the state where they exist or with its residents.

It should be clarified from the outset that these entities are legitimate and their creation, per se, does not constitute a crime or disciplinary actions against them, but due to their legal position in the State that allows them, called tax havens, they have facilitated the commission of criminal conduct such as tax evasion, commercial triangulation for the alleged reduction of profits, or money laundering of proceeds from illicit activities. In addition, they enjoy very particular legal benefits compared to other jurisdictions, coupled with absolute anonymity - financial, banking, and corporate.

It should be noted that the aforementioned “tax havens” are States that have historically been characterized by maintaining anonymity, low taxation of foreign companies, banking secrecy, extremely flexible incorporation of companies, and in general have legal figures that prevent a real knowledge of the transactional movements, partners, and assets that a company may have, noting that, due to their acquiescence, tax evasion with respect to other countries is economically indeterminate.

The international community has sought that States with lax fiscal policies enter into international cooperation treaties in tax matters, in order to increase information channels, with a view to maximizing control over assets belonging to companies legally incorporated in other jurisdictions. This goal has been partially achieved through financial information exchange agreements, such as the one entered into by the Santos government in the first quarter of this year with Panama[4].

Regulatory response in Colombia.

The Colombian State, being aware of the problem, and due to the non-effective collection of corresponding taxes, which results in less money for state maintenance and investment, has issued regulations in order to suppress such activities that cause it, or at least reduce the effects produced by these entities and the places that support them.

Thus, the Tax Statute – Decree 624 of 1989, art. 260-7 – has set the guidelines for the National Government to determine which States can be classified as tax havens, namely the following:

When there is:

1. Lack or limitation of an effective exchange of information between states.
2. Lack of transparency in the administrative or regulatory functioning of the State to be classified as a “tax haven”.
3. Permission regarding the lack of local presence of the company and a true development of real activity (that declared by the company) in the State to be classified.
4. Low nominal rates, or absence of tax rates on income, compared to those applicable in Colombia.
5. Internationally accepted criteria for its determination.

According to the above, our regulations grant a differentiated treatment to companies incorporated in States classified as “tax havens”, which will be explained below.

Obligations of companies linked to offshore companies or tax havens:

1. The State imposes on taxpayers who carry out operations with “persons, companies, entities or enterprises located, resident or domiciled in tax havens”, the obligation to file an informative return and supporting documents for each operation carried out, an obligation imposed even if they do not meet the thresholds set forth in the general rules for such filings[5]. The foregoing, under penalty of incurring the sanctions established in article 260-11[6]. Likewise, it is required to demonstrate “the detail of the functions performed, assets used, risks assumed and all costs and expenses incurred by the person or company located, resident or domiciled in the tax haven for carrying out the activities that generated the aforementioned payments…” and if not demonstrated, “such payments” will be treated as non-deductible from income tax and complementary taxes.[7] Establishing for those who make monetary transactions with third parties in these places information and tax burdens significantly greater than those who in the same condition did so with another State. Likewise, such operations must be subject to the Transfer Pricing Regime - Chapter XI of Title I of Book I - contained in the Tax Statute.

1. On the other hand, mention should be made of the provision of Article 10 of the Tax Statute which states that “for tax purposes, natural persons who meet any of the following conditions:…” “3. Be nationals and during the respective year or taxable period:” “f) have tax residence in a jurisdiction classified by the National Government as a tax haven” implies a special condition for those who have decided to establish their taxation in a tax haven, and that is that this ensures oversight as well as taxation to the national treasury when Colombian nationals have decided, for whatever reason, to move to a country with marked tax advantages such as these places.

1. For foreign capital investors domiciled in a State classified as a Tax Haven, they must pay withholding tax of thirty-three percent (33%) of their income, whereas, on the contrary, an investor domiciled in any other State must pay a lower amount, only fourteen percent (14%) of their income. [8]

1. The same occurs with respect to procedural treatments[9], since if acts of abuse in tax matters are carried out involving the use of States classified as Tax Havens, a sanctioning process will be initiated before the committee mentioned in article 869 of the aforementioned Tax Statute.

It should be concluded that, even with the “advantages” historically announced for offshore companies and tax havens, it is evident that today the Colombian State has foreseen and regulated the matter in such a way that their use may result in greater obligations, taxes, and sanctions in tax matters, so the use of this figure must be carried out with great foresight and, advisably, with a legitimate, verifiable, and demonstrable interest.

By:

Nestor Delgado