This country-specific Q&A provides an overview to tax laws and regulations that may occur in Colombia.
This Q&A is part of the global guide to Employee Incentives. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/employee-incentives/
What kinds of incentive plan are most commonly offered and to whom?
Incentive plans are commonly granted to different types of employees in Colombia. The above, considering Colombian Labour Law has authorized employers to grant to its employees such incentive plans or non-mandatory benefits. Granting non mandatory benefits imply the possibility for employers to increase the employee´s income but with a smaller impact on the employer´s costs, since most of those non mandatory benefits may be excluded from the base to calculate other labor related obligations such as social security contributions, payroll taxes, fringe benefits, severances, among others.
Companies usually establish different benefit plans according to the different levels of employees within a company. Management or directive employees are usually granted benefits such as signing bonuses, performance bonuses, stock options, company car, country club membership, vacation periods that exceed those granted legally by local labor law, among others.
Non-management employees are usually granted benefits such as food and transportation allowances, annual bonuses, and additional health insurance.
What kinds of share option plan can be offered?
Share option plans are not very common among Colombian employers, however some companies do offer such plans to their employees. Some employers give shares to their employees as gifts, and they do not necessarily have to purchase them or perform any additional payment to become shareholders. In other cases, employers grant stock options in which employees can decide whether or not to acquire them in a specific period of time.
What kinds of share acquisition/share purchase plan can be offered?
Employers are entitled to create any type of share acquisition/purchase plan they want to establish with their employees.
What other forms of long-term incentives (including cash plans) can be offered?
As previously mentioned, stock option plans are not common among Colombian employers, thus, other long term incentives are frequently used by employers as incentives. Annual bonuses are the most common cash plans. Companies offer as well, contributions to a saving fund, whereby, if the employee saves part of its salary in such fund, the employer will perform an additional contribution.
Monthly payments destined for food, transportation or cell phone plans are normally included in an incentive plan.
In some cases, employers perform indirect payments to third parties as a benefit to their employees. Such is the case of school allowance paid directly to education institutions for the employee´s children, gym memberships, country club memberships, and car leasing or renting.
Are there any limits on who can participate in an incentive plan and the extent to which they can participate?
As long as benefits are provided under a non-discriminatory basis, employers are free to establish the type of benefits that they will grant and who will be entitled to such benefits. Employers can establish limitations as per who participates on an incentive plan. For example, a company may establish that an specific benefit will only be granted to people who have rendered services to the company for a specific period of time.
Can awards be made subject to performance criteria, vesting schedules and forfeiture?
Yes. Awards may be subject to performance criteria, and to the fulfilment of specific goals. It is important to bear in mind that all incentives granted due to performance are considered as salary payments, and must be included in the base to calculate other labour related obligations. The parties of an employment contract may agree forfeiture or situations in which the incentive plans will not be paid if certain requirements are not accomplished.
What are the tax and social security consequences for participants in an incentive plan including: (i) on grant; (ii) on vesting; (iii) on exercise; (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.
According to the tax code, by general rule it is considered as Colombian-source income the personal services rendered by any individual within Colombia, which include among others the employment income.
In general terms, employment income includes salaries, wages, bonuses, benefits in kind and any other amount, received in cash or in kind, under an employment relationship. Therefore, the stock option, the awards or any other incentive plan made by a company to its employee in Colombia, may be deemed to be taxable as employment income under provisions in the tax code.
The tax liability for any incentive plan depend on the kind of plan; nonetheless, the Colombian tax law is clear in establishing that the income tax arises for employees only when the income is realized, as it is described below :
(i) Cash awards/ bonus: The income would be taxable when the employee's compliance with certain covenants and it is payed to the employee. (Taxable on granted).
(ii) Stock option: The income would not be taxable until the rights to ownership of the equity awards on the employee's compliance with certain covenants and the option is exercised. Thus, no income tax liability arises at grant, but it would be spread at exercise.
The sale of the acquired shares made by the employee may be deemed to be taxable upon the difference between its acquisition value (fiscal cost) and its sale price. If the shares qualify as a fixed asset for the employee, it could varied the tax treatment: (i) if the shares have been held for over 2 years and qualify as fixed assets, the profit would be deemed as a capital gain (10% tax rate); or (ii) if the shares do not comply with the 2 characteristics mentioned above, it would be taxable as ordinary income with progressive rates, up to 39%.
(iii) Awards -shares: The employee should be subject to income tax once the shares are delivered and applies the same rule mentioned above for the disposal of the shares, according to the section 108-4 of the tax code.
As summary, the employee would not be subject to tax the income until such is realized, in other words, the incentive would be taxable at the time of their perception when it is likely to produce a net increase for the employee.
(i) on grant: It would not have tax effects for the participant of the incentive plan; hence, not subject to be taxable.
(ii) on vesting: It would be deemed to be taxable on spread at exercise for those stock options’ plans where the rights to ownership of the equity awards on the employee's compliance with certain covenants and the option is exercised.
(iii) on exercise: For most of the incentive plans, it is on exercise of the right and the acquisition where the income is taxable.
(iv) on the acquisition, holding and/or disposal of any underlying shares of securities: (See the comments for stock option)
As per social security, all plans when granted shall always be agreed between the parties as non-salary payments in order for them to be excluded of the base to perform social security contributions. If such agreement is executed, incentives will not be taken in to account for social security payment purposes on the moment of vesting, exercising or acquiring.
What are the tax and social security consequences for companies operating an incentive plan?
By general rule, the employer giving rewards or any incentive plan to its employees have also certain tax limits over how much and when, said rewards can be written off against the income tax.
The tax treatment may varied depending on the incentive plan, as would be explain above:
(i) Cash award: Section 107-1 of the tax code allows a maximum of 1% of taxpayer´s net income to be deducted when the expense refers to “attention to employees” such as gifts, courtesies, parties, meetings and celebrations. It is important to mention that this limitation also applies for attention to customers and suppliers and may be deducted only in the year the award is payed.
(ii) Stock option: No liability or expense will be recognised for this concept until the moment the employee compliance with the covenants and exercises the purchase option. Section 108-4 of the Colombian Tax Code allows employers to deduct the value of the shares determinate according to the provision of the section 90 of the tax code, once the options are exercised. Hence, the value of the shares could be: (i) if the shares are listed in the stock market, the value would be the one certificated during the day the option is exercised; or (ii) if the shares are not listed, the value must be at least the intrinsic value added an extra 30%. (130% the intrinsic value).
When the company qualify as Colombian entity, it is required to report and withhold in respect to the participants, since the incentive plans qualified as employee income and it may be deemed to be taxable.
Regarding social security payments, no consequences should exist from creating incentive plans if employers and employees enter in to an agreement establishing the incentive plan must be excluded from the employee´s salary base. If there is no agreement between the parties, local social security authorities could request contributions to the social security system using the amount paid as benefit as part of the base to calculate such contributions.
What are the reporting/notification/filing requirements applicable to an incentive plan?
Incentive plans are usually granted to employees by writing since, as previously mentioned, the exclusion of the benefits from the salary base must be agreed by both parties.
Although it is advisable to always establish benefits and incentives by writing in a company’s policy, there are no specific rules or requirements regarding reporting, notification or filing of an incentive plan.
Do participants in incentive plans have a right to compensation for loss of their awards when their employment terminates? Does the reason for the termination matter?
Parties within an employment contract may agree on the terms and conditions in which incentive plans will be granted, hens, they may agree benefits will not be paid if the employment contract is terminated with cause, or if the employee does not fulfil an specific requirement such as being engaged to the company for a specific period of time.
As per awards, usually the stock option agreement establishes conditions regarding termination of the employment contract, and possible compensation.
Do any data protection requirements apply to the operation of an incentive plan?
There is no specific or special data protection requirement applicable to incentive plans.
Are there any corporate governance guidelines that apply to the operation of incentive plans?
There are no specific corporate governance guidelines that apply to the operation of incentive plans. They vary from one company to another depending on each company´s policies.
Are there any prospectus or securities law requirements that apply to the operation of incentive plans?
No, there is no securities regulations in Colombia applicable to incentive plans granted to employees.
Do any specialist regulatory regimes apply to incentive plans?
Are there any exchange control restrictions that affect the operation of incentive plans?
Exchange control restrictions will only be applicable to incentive plans, if the same include foreign companies’ shares or stocks, or payments that will be done abroad.
What is the formal process for granting awards under an incentive plan?
There is no legal or formal process under Colombian law in order to grant awards under an incentive plan.
Can an overseas corporation operate an incentive plan?
Although incentive plans may include stock options or shares from a foreign company, the plan itself must always be granted by the employer. The operation, and even the location of the benefits included in an incentive plan may be operated abroad by an overseas corporation, but the employer is responsible for such plan, its terms and conditions, and any future litigation or claim as a consequence of the plan.
Can an overseas employee participate in an incentive plan?
An overseas employee may participate in an incentive plan, but if considered an employee of a Colombian company, all agreements as per such plan must be executed with his local employer.
How are share options or awards held by an internationally mobile employee taxed?
Under Colombian law, the concepts of source and residence govern the liability to Colombian tax, affecting specially the internationally mobile employee (hereinafter “IME”):
According to the tax law, it is considered as Colombian-source income the services rendered by any individual within Colombia, which include among others the employment income, as mentioned above.
In order to be consider as resident for tax purposes in Colombia, an individual must stay within the country for more than 183 continuous or discontinuous days during a consecutive 365-day period.
While Colombian tax residents are liable to Colombian tax on their global revenue, the non-Colombian residents are only liable to taxes in Colombia in respect of Colombian-source income.
2.1. IME non-resident: The share options or awards received by the IME from a Colombian company are deemed to withholding tax at a tax rate of 20%. This IME is not required to file any tax revenue as long as the company withheld the full amount; otherwise, the non-resident would require to file an individual income tax revenue, at a flat tax rate of 35% on gross Colombian income.
Net income is calculated by subtracting allowable deductions from total assessable income.
2.2. IME-resident: Employment income is taxed at progressive income tax rates up to 39%. An IME-resident might not file an income tax return if their only income consists of employment income from which tax has been withheld at source and their gross income is lower than COP $47,978,000 for 2019 (USD $1.5993 at a Fx. of $3.000). In any other case, the resident IME must file a tax return.
Double tax treaties (DTT)
Colombia has double tax treaties with 10 countries in force, 3 already approved and is negotiating 7 more DTTs, which are based on the OECD model; thus, most of them provide that IME´s income would be taxed only in their home country as long as they stay in Colombia less than 183 days in any period of 12 months.
(i) Stock Option: as it was mentioned before, the income would not be taxable until the rights to ownership of the equity awards on the employee's compliance with certain covenants and the option is exercised.
(ii) Awards: the income would be taxable at the time it is deliver/pay to the employee.
How are cash-based incentives held by an internationally mobile employee taxed?
It is applicable the same rules mentioned above, since the consideration vary depending on the classification of residence in Colombia as resident or non-resident.
What trends in incentive plan design have you observed over the last 12 months?
The strongest trend regarding incentive plans in Colombia is related with what is currently called emotional salary. All efforts towards creating a healthy, equilibrated work environment are highly appreciated. As examples of this emotional salary we can see all benefits related to making parenthood easier (such as providing day care or kindergarten services or paying for them), the possibility of working remotely, healthcare benefits, education incentives such as courses or financial aid for undergraduate or graduate studies.
Monetary incentives will always be attractive to employees, however, the emotional salary trend has shown through the past years, employees are highly interested in benefits that improve their life quality such as (additional to the previous examples) longer vacation periods, home office and flex time, monthly exercise or spa sessions provided by the employer, pet day-cares or the option of taking pets to work.
What are the current developments and proposals for reform that will affect the operation of incentive plans over the next 12 months?
Due to legislative timeframes in Colombia, current proposals of reform will not make any significant changes within the following 12 months, yet, the following are topics that are being discusses and could affect the operation of incentive plans in the future:
a) Specifications regarding the mandatory family day (two times per year).
b) Promotion of entrepreneurships and start-ups.
c) Creation by employers of mandatory lactation rooms for their employees.