Undervalue transactions in real estate business in Colombia
Many potential real estate buyers in Colombia are confronted with demands from the sellers to state a fictitious price in the notarized purchase contract that is significantly lower than the price agreed by the parties (under-value transactions). By doing so, the seller intends to conceal his capital gain to pay less income tax on it. Often, the seller claims that this practice is "completely normal in Colombia," has "always been done this way" in Colombia, or is "also in the interest of the buyer." Sometimes the demand for undervalue sale appears just before the conclusion of the notarized purchase contract, after down payments have already been made, putting the buyer in an awkward position.
As a buyer, you should not get involved in undervalue transactions for the following reasons:
- As of January 1, 2019, undervalue transactions are officially prohibited in Colombia as part of the Ley 1943 de 2018 (Ley de Financiamiento) tax reform. Among other things, the reform amended Article 90 of the Colombian Tax Statute (Estatuto Tributario, E.T.), which clearly prohibits undervalue sales.
- According to Art. 90 E.T., the parties (seller and buyer) must certify under oath (bajo la gravedad de juramento) in the notarized purchase agreement (escritura de compraventa) that the price they state in the notarized contract is the real price. If the parties knowingly state a false price, this can have criminal law related consequences.
- For the buyer, there is usually no reason to agree to an undervalue transaction anyway, as an undervalue sale is usually in the exclusive interest of the seller. The tax on the capital gain "saved" by the seller during the undervalue sale becomes a boomerang for the buyer in the event of a future resale to a third party. This is because the basis for calculating the income tax on resale is the official acquisition price at the time of purchase according to the notary contract. The lower the official purchase price, the greater the capital gain on resale in the future - at least on paper. The larger the profit, the higher the tax on it.
- Sometimes sellers (or brokers) claim that undervalue sales are also in the buyer's interest because stating the real price would lead to an increase in property tax (impuesto predial). The property tax is levied by the municipalities or cities in which the property in question is located and is recalculated every year. The property tax is calculated based on official tables and estimates (avalúo catastral). The purchase price, which the parties indicate in the notary contract, plays no role at all in this context.
- For foreign buyers, undervalue sales are particularly problematic, because there is a risk of discrepancies between the amount of money officially imported into Colombia and the amount stated in the notary contract. This means that problems with banks and possibly later with the export of money during resale are pre-programmed, in addition to complex tax problems caused by such discrepancies. In the worst case, one can be accused of money laundering or aiding and abetting tax evasion in such a constellation.
- Finally, especially foreigners who wish to obtain an investor visa through the purchase of real estate should categorically reject undervalue transactions. This is because what is relevant for the Colombian authorities is always the price stipulated in the notary contract. Whether the real price is stated in preliminary contracts (especially promesa de compraventa) is irrelevant.
Conclusion: Stay away from undervalue sales. As a buyer, it is best to proactively raise the issue with the seller at an early stage of negotiations. Otherwise, it sometimes happens that the seller raises the demand for an undervalue transaction for the first time shortly before the purchase price is paid and, if rejected, tries to renegotiate the price or refuses to sell at the agreed price.