The tax regime of the so-called Colombian Holding Companies (CHC) was introduced with the issuance of Law 1943/20181 (a rule declared unenforceable by the Constitutional Court) with the purpose of "generating jobs and growth in foreign direct investment (...)"2: The regulations in terms of CHC were resumed in the same terms of the foregoing by Law 2010/20193, which provides in that regard:
Definition: The term "CHC" is understood as those "domestic companies that have as one of their main activities the holding of securities, the investment or holding of shares or interests in Colombian and/or foreign companies or entities, and/or the administration of such investments”4.
Requirements: The company must: (i) have an interest (direct or indirect) in at least ten percent (10%) of the capital of two (2) or more domestic or foreign companies, for a minimum period of twelve (12) months; and (ii) have human and material resources that allow it to carry out its corporate purpose.5 To do so, it must prove that it has at least three (3) employees, that it has its own management in Colombia and that the strategic decisions on its investments and assets are made in the country.
Tax benefits: The tax benefits are focused on deducting income from profits of foreign companies and the profits from the transfer of the shareholding owned therein; in this way it provides: (i) exemption of income tax with respect to dividends or interests distributed by non-resident entities in Colombia to a CHC; (ii) the distribution of dividends or interests by the CHC to a non-resident for tax purposes in Colombia, will be understood as foreign source income; as a consequence it will not be taxed in the name of the shareholder who receives it; (iii) the distribution of share placement premium will be exempt when the beneficiary is a CHC and will be foreign source income when the CHC distributes it to a Colombian non-resident for tax purposes; (iv) exemption of income or windfall profit tax of those incomes derived from the sale or transfer of the interest of a CHC in non-resident entities in Colombia "except for the value corresponding to the profits obtained from activities carried out in Colombia"6 and unless the recipient of the income is a resident of a non-cooperating jurisdiction or of low or null taxation.
DIAN processes: In order to invoke the CHC regime, companies must inform it to the DIAN through the timely filing of the forms established in the regulations. The entity reserves the right to verify the requirements. The processing will be applicable in the taxable year in which the application is filed with the DIAN.
The National Government, by means of Decree 598 dated April 26, 2020, regulated the requirements of Articles 894 to 898 of the Tax Code, establishing in general terms:
1. The procedure to be taken into account to determine the percentage of indirect interest of the CHC in other companies, which makes it necessary to multiply the direct ownership interest of the CHC in the first level entity in which it has direct interest, by the ownership interest of the latter in the second level entity in which it has indirect interest. If there are more intermediate levels or vehicles, the previous result should be multiplied by the interest in the next level entity or vehicle and so on.
2. The documents that must accompany the application that the CHCs must send to the International Surveillance Management Sub-directorate of the National Taxes and Customs Directorate -DIAN-, in order to be able to benefit from the CHC Regime.
3. The documents -transaction support- that may be requested by the tax authority to prove the origin of the exempted windfall profits referred to in article 896 of the Tax Code, derived from the sale or transfer of interests of a CHC in entities not resident in Colombia and/or from the sale or transfer of the interest held in a CHC.
Finally, it is worth mentioning that according to the provisions of Law 2010/2019 and Decree 598/2020, companies with effective management headquarters in Colombia may request the application of the CHC regime.