On 15 January 2020, Colombian tax authority (DIAN) has published Executive Order No. 4 of 7 January 2020 in the official gazette where DIAN clarifies the application of General Anti-Avoidance Rule (GAAR). The GAAR provisions are contained in article 869 of the Tax Code which was amended as from 1 January 2017 through Law 1819 of 2016.

Article 869 of the Tax Code, modified by article 300 of Law 1819 of 2016, establishes that: DIAN may re-characterize or reconfigure any operation or series of operations that constitute abuse in tax matters and, consequently, ignore its effects. In this sense, DIAN can issue the acts corresponding administrative in which propose and settle taxes, interest, and respective penalties. An operation or series of operations will constitute abuse in tax matters where a transaction involves the use or implementation of one or more artificial steps, with no apparent commercial or economic purpose, with the aim of obtaining a tax advantage. It will be understood that a legal act or business is artificial and therefore lacks economic and/or commercial purpose, when it is evidenced, among other circumstances, that:

• The legal act or business is executed in a way that, in economic terms and/or commercial, it is not reasonable.
• The legal act or business gives rise to a high tax benefit that is not reflected in economic or business risks assumed by the taxpayer.
• The conclusion of a structurally correct legal act or business is apparent since its content hides the true will of the parties.

The Order clarifies the definition of tax evasion and tax avoidance. Tax evasion is the action or omission by a taxpayer that results in a failure to comply with a tax obligation and hence hides a tax liability. Tax evasion is not in the scope of GAAR but subjects to the penalties provided by the Tax Code. Tax avoidance is an act through which a taxpayer avoids the occurrence of an event that is necessary for tax liability to arise. Tax avoidance takes place when a transaction involves one or more artificial steps, with no apparent economic and/or commercial reason or purpose, with the purpose of obtaining a tax benefit, regardless of any intention additional subjective. Tax avoidance is subject to the scope of GAAR.

The burden of proof is on the DIAN to demonstrate that a transaction is artificial, with no apparent commercial or economic purpose, and is aimed at obtaining a tax advantage. The Order also clarifies about tax advantage.

Transactions subject to the application of a Double Taxation Agreement (DTA) or international treaty signed and ratified by Colombia, which is recategorized or reconfigured in the terms of articles 869 and following of the Tax Code, they must take into account the nature of the recapitulated operation, under internal law, for the application of the respective DTA or treaty.