Individual income tax, tax residency and net worth tax

It all starts with tax residency

Before discussing income baskets and deductions, one has to answer whether the person is a tax resident in Colombia, because that answer determines which income and which assets are taxed here. It is the question with the greatest effect and also the one most often settled by ear, with rules picked up in a conversation and applied to a case that was not the same.

• Residency analysis based on days of presence and on the family and economic ties set out in the law.
• Effect of leaving or returning to the country, and of the years in which the status changes.
• Application of double taxation treaties where two countries claim the same income.
• Treatment of foreign source income and of tax paid abroad.
• Reporting obligations attached to assets held outside Colombia.

Classifying and computing the income

The schedular system requires each item of income to sit where it belongs, and that placement determines which costs and deductions may be subtracted. Income placed in the wrong basket does not just change the rate: it drags along deductions that no longer apply and produces a return that is hard to sustain later.

• Classification of each item: employment income, capital income, non-labour income, pensions and dividends.
• Computation of each basket and review of the support behind costs, deductions and exempt income.
• Professional fees and services, and the effect of engaging staff for the activity or not.
• Rental income, financial yields and investments inside and outside the country.
• Dividends and profit distributions from the person's own companies, and how they interact with tax already paid by the company.
• Sale of real estate, shares and partnership interests, with the tax basis and the applicable treatment determined.

Net worth

We review the taxpayer's asset position to establish whether the net worth tax is triggered and with what filing consequences, and to check that what is reported matches what is actually held.

• Analysis of whether the tax is triggered on the specific situation.
• Review of the taxable base and of the tax value of the assets, including real estate, shareholdings and assets abroad.
• Consistency between reported net worth and the year's movements, which is what usually prompts questions from the authority.

When the conversation stops being about one tax year and becomes one about how assets are held and transferred, the work continues in our wealth structuring practice.

How we work

1. Interview and scoping. We establish what is being asked, for which year, and what documents exist.
2. Review. Income certificates, available third-party reporting, statements, deeds, contracts and earlier returns.
3. Analysis. Residency, classification of income, support for the computation and net worth position, with the possible readings and their risk.
4. Written opinion. With the answer, its basis and the caveats, in language a client can follow without being a lawyer.
5. Follow-through. If the authority asks later, the response starts from an analysis that is already done and documented.

What the client receives

• A written opinion on tax residency, on the classification of the income and on the treatment of the assets.
• A list of the support to keep and for how long, with the missing items clearly marked.
• Warnings about positions that are reasonable but arguable, given before filing rather than afterwards.
• Scope and fees agreed in writing, and confidential handling of the information provided.

Who this is for

• People with income from several sources: salary, professional fees, rent, dividends and investments.
• Colombians who left the country or came back and are unsure where they must file.
• Foreign nationals spending extended periods in Colombia or holding local investments.
• Shareholders receiving dividends or drawing profits from their own companies.
• People who sold real estate or a shareholding during the year.
• Taxpayers who received a communication from the authority about an earlier return.