The Conceptual Boundary of Wealth in the Colombian Tax Regime: Presumptive Income versus Wealth Tax

Introduction: Wealth as the Axis of Taxation in Colombia

The Colombian tax system has historically structured various methodologies to tax wealth and ensure a minimum collection from taxpayers. Within this regulatory framework, two figures have generated constant doctrinal and jurisprudential debates: presumptive income and the wealth tax. Although both figures take the taxpayer's accumulated wealth as a starting point, their legal natures, tax bases, rates, and purposes are profoundly divergent in character. Confusing these mechanisms not only constitutes a serious conceptual error but can also lead to costly tax contingencies or the loss of legitimate opportunities to adjust the taxable base.

This analysis addresses the conceptual boundary between these two figures in a rigorous manner, taking as its central axis the jurisprudence of the Council of State, specifically the ruling on file 16310 (www.consejodeestado.gov.co/documentos/boletines/PDF/25000-23-27-000-2004-00664-01(16310).pdf). Through this ruling, the highest administrative court has specified the rules for determining and adjusting presumptive income, particularly the exclusion of assets linked to companies in unproductive periods. Furthermore, this historical framework and its active litigation are contrasted with the current outlook of the Wealth Tax under Law 2277 of 2022.

The Legal Nature of Presumptive Income

To understand the scope of the Council of State's decisions, it is imperative to define precisely what presumptive income is. According to the analyzed jurisprudence, presumptive income is defined as a special net income in which it is presumed that the wealth produced a minimum return. This figure does not constitute an autonomous tax on wealth, but rather an alternative and mandatory system for determining income tax.

As the Council of State points out in its official pronouncement:

La renta presuntiva se define como el monto mínimo estimado de rentabilidad de un contribuyente, sobre la cual la ley espera cuantificar y recaudar el impuesto sobre la renta. No es una renta generada por la actividad del contribuyente sino que opera por mandato de la ley, bajo los parámetros establecidos en la misma.

Under this design, the legislator assumes that the possession of net or gross wealth must generate a minimum economic return. Therefore, if a taxpayer reports an ordinary net taxable income lower than this presumed threshold, the law obliges them to pay tax on the presumptive base. In the words of the court: "Según la presunción establecida en la ley, todo patrimonio genera una renta mínima, por lo que si el contribuyente no obtiene una renta ordinaria igual o superior a [la renta presuntiva]", the taxpayer must liquidate their income tax using this special system.

The Historical Framework of Presumptive Income Rates and Bases

Article 188 of the Colombian Tax Statute has historically regulated the percentages applicable to this calculation. According to the text analyzed by the Council of State for the periods under litigation:

Conforme al artículo 188 del Estatuto Tributario vigente para el año gravable en discusión, para efectos del impuesto sobre la renta se presume que la renta líquida del contribuyente no es inferior a la cifra que resulte mayor entre el cinco por ciento (5%) de su patrimonio líquido o el uno y medio por ciento (1.5%) de su patrimonio bruto, en el último día del ejercicio gravable inmediatamente anterior.

These percentages (5% of net wealth or 1.5% of gross wealth) represented a minimum return standard that taxpayers had to challenge or, failing that, assume as their taxable base. Over the course of subsequent tax reforms, these percentages underwent substantial modifications. Law 1943 of 2018 and subsequently Law 2010 of 2019 initiated a gradual phase-out of presumptive income, reducing the general rate to 1.5% for the tax years 2019 and 2020, and finally to 0% starting in the tax year 2021.

However, although the presumptive income rate is currently 0%, the jurisprudence of the Council of State remains fully relevant. This is because the tax administration (DIAN) and taxpayers continue to resolve disputes corresponding to tax years prior to 2021, where the rates of 5% or 1.5% were fully applicable and where the correct adjustment of the base is decisive in defining credit balances or million-dollar tax liabilities.

Adjusting the Taxable Base: The Case of Assets in Unproductive Periods

One of the most complex and debated aspects in the determination of presumptive income is the adjustment of the taxable base. Article 189 of the Tax Statute exhaustively establishes the concepts that can be subtracted from the net wealth of the previous year for the purposes of calculating the presumption of profitability. Among these concepts, the exclusion of assets linked to companies in unproductive periods stands out in a special way.

The Council of State, in the ruling on file 16310, ratified this prerogative, noting:

BASE PARA LA RENTA PRESUNTIVA: Cuando lo sea el patrimonio líquido se puede restar el valor de los bienes vinculados a empresas en períodos improductivos

The economic and legal justification for this exclusion is clear: if an asset is in a stage of development, prospecting, or assembly, it lacks the material capacity to generate immediate income or returns. Requiring the taxpayer to presume a 5% return on an asset that by its very nature is unproductive would violate the principles of tax equity and contributive capacity. However, for this exclusion to be applicable, the taxpayer must comply with a series of formal and substantial requirements, demonstrating unequivocally the direct link of the asset to the unproductive project and the duration of said period in accordance with current accounting and tax rules.

The causal chain for the application of this benefit is structured as follows:

• Application of Article 188 of the Tax Statute to establish the presumption of profitability on the net wealth of the previous year.
• Identification of assets linked to companies in unproductive periods according to Article 189, literal c.
• Calculation of the net patrimonial value of said unproductive assets for their exclusion.
• Subtraction of these values from the net wealth base of the previous year.
• Legitimate reduction of the final presumptive income on which the income tax will be liquidated if it exceeds ordinary income.

Structural Differences: Presumptive Income versus Wealth Tax

It is a common mistake among advisors and taxpayers to confuse the taxable base and exclusions of presumptive income with those of the Wealth Tax. The Wealth Tax is a direct, autonomous, and independent tax, re-established on a permanent basis by Law 2277 of 2022. Its primary taxpayers are individuals and liquidating estates with high net wealth (exceeding 72,000 UVT), as well as foreign companies or entities that do not file income tax returns and hold assets located in the country (other than shares, accounts receivable, and/or portfolio investments). In contrast, presumptive income is a component of the income tax.

The fundamental differences between both instruments are detailed below:

As shown in the table above, the adjustment rules of presumptive income (such as the exclusion of unproductive assets) are not automatically or analogously applicable to the current Wealth Tax. The Wealth Tax has its own regime of exclusions, which is highly restrictive and does not contemplate the deduction of unproductive assets in a generalized manner.

Practical Implications for Tax Defense and Tax Planning

Understanding the Council of State's jurisprudence on presumptive income is of vital importance for three fundamental reasons:

1. Resolution of Ongoing Disputes: The relevance of this discussion remains primarily for official assessment processes that are already in administrative or judicial stages, or for tax returns with extended statute of limitations (for example, due to the liquidation or offset of tax losses under Article 714 of the Tax Statute), considering that the general three-year statute of limitations has already expired for most tax returns of the 2018, 2019, and 2020 tax years. In these specific cases, the correct application of the exclusion of assets in unproductive periods can represent the difference between an official review assessment with inaccuracy penalties and the finality of the private tax return.

1. Proof of the Unproductive Period: Jurisprudence requires that the unproductive period be fully proven through statutory auditor certifications, technical studies, or construction schedules. Taxpayers cannot simply claim the unproductivity of an asset without suitable evidentiary support demonstrating the physical or legal impossibility of generating income.

1. Legal Certainty: The clear delimitation of concepts prevents the DIAN from attempting to apply restrictive interpretations that exceed the literal text of Articles 188 and 189 of the Tax Statute.

On the other hand, regarding the current Wealth Tax, taxpayers must structure their wealth considering that the progressive rates of 0.5% to 1.5% (the latter being temporary until tax year 2026, as the maximum rate will decrease to 1.0% starting in 2027) apply directly to the net wealth held as of January 1 of each year. Planning for this tax does not directly involve the unproductivity of assets, but rather their correct valuation (shares, real estate, foreign assets) in accordance with the special valuation rules set forth in Law 2277 of 2022. However, it is worth noting that the unproductivity of a company's underlying assets can indirectly affect the valuation of shares not listed on the stock exchange by reducing their intrinsic value. It is essential to specify that the exclusion from presumptive income under Article 189, literal c of the Tax Statute strictly requires that the assets be linked to companies or business units that are globally in an unproductive period (pre-operative stage), and not simply that an individual asset is not generating income in isolation.

Conclusion

The historical coexistence and evolution of presumptive income and the wealth tax in Colombia demonstrate the complexity of taxing wealth. While presumptive income has been neutralized with a 0% rate starting in 2021, its jurisprudential legacy remains an indispensable defense tool for disputes of prior periods. Parallelly, the Wealth Tax consolidates itself as the direct tax par excellence for high-income individuals, requiring a separate and rigorous analysis of its bases and rates. Clarity in distinguishing these figures is, without a doubt, the best guarantee of legal certainty for taxpayers in the country.