Corporate Tax 2020

Last Updated January 15, 2020

Colombia

Law and Practice

Authors



Osman & Rodríguez Abogados is a tax and international trade boutique, located in Bogotá, that advises national and foreign clients in domestic and cross-border transactions. For tax purposes, the key lines of service are the following: national, sub-national and international taxation; tax planning; estate planning; mergers and acquisitions; corporate restructuring; tax due diligence; and transfer pricing.

Businesses in Colombia generally adopt a corporate form. There are several corporate forms in Colombia, including corporations and limited liability companies. The main difference between them consists of the requirements for their incorporation. However, they are subject, in general terms, to a uniform tax treatment. From an Income Tax standpoint, Colombian entities are subject to taxation on their worldwide income.

Foreign entities may be deemed Colombian entities for tax purposes if their place of effective management is in Colombia.

Foreign companies may conduct business in Colombia throughout branches, which are subject to Income Tax on their Colombian-source income.

Colombian entities are taxed as separate legal entities.

Shareholders are subject to taxation on dividends, as follows:

  • resident individuals – the law provides a threshold to trigger taxation; up to 10% Income Tax for dividends originated in profits taxed at a corporate level, and the Corporate Income Tax rate for dividends originated in profits that were not taxed at a corporate level;
  • non-resident individuals – no threshold to trigger taxation; 10% Income Tax for dividends originated in profits taxed at a corporate level, and the Corporate Income Tax rate for dividends originated in profits that were not taxed at a corporate level;
  • resident entities – 7.5% Income Tax withholding, creditable by the resident individual or non-resident investor as ultimate beneficial owner; and
  • non-resident entities – 10% Income Tax for dividends originated in profits taxed at a corporate level and the Corporate Income Tax rate for dividends originated in profits that were not taxed at a corporate level.

Private equity funds, hedge funds and foreign capital investment funds are transparent entities for Colombian tax purposes.

An entity is deemed to be Colombian for tax purposes if (i) it is incorporated in Colombia, (ii) it is domiciled in Colombia, or (iii) its place of effective management is in Colombia.

Double taxation treaties to which Colombia is bound have typically adopted OECD residence rules.

The general Corporate Income Tax rate is 33% for FY 2019, 32% for FY 2020, 31% for FY 2021 and 30% for FY 2022 onwards. A 20% Income Tax rate applies in free-trade zones.

Colombian resident individuals are subject to Income Tax at rates of up to 39% on their net taxable income.

Foreign non-resident individuals are subject to Income Tax at a rate of 7% (certain professors only), 20%, or 35%, depending on the kind of income.

Income Tax rules refer, in general terms, to IFRS, albeit with certain adjustments. Thus, taxable profits are based on accounting profits, with adjustments referred to specific exemptions and deductions, and special limitations (namely, among others, transfer pricing rules, thin capitalisation rules and deduction caps).

Income is taxed on an accrual basis.

Technology investments qualify for special, non-simultaneous, tax deductions or tax credits, provided they comply with certain requirements.

R&D expenses are deductible for Income Tax purposes, with an annual cap.

The law provides Income Tax exemptions and benefits for the following industries and businesses, with certain statutory requirements: orange economy, agricultural and livestock projects, alternative power generation, forestry and priority housing construction.

Hotel services rendered in new hotels and refurbished hotels in small municipalities are subject to a special 9% Income Tax for a 10-year or a 20-year period, depending on the project.

Industrial users located in free-trade zones are subject to customs benefits, and a special 20% Income Tax rate, provided they comply with certain statutory requirements.

Taxpayers are entitled to loss carry-forwards with a 12-year limitation for losses assessed as from FY 2017. This limitation does not apply to losses accrued before FY 2017.

Colombian law does not provide loss carry-back rules.

Taxpayers may not offset income losses against capital gains.

Under Colombian thin capitalisation rules, taxpayers are entitled to deduct interest originated in loans with a total average during the fiscal year that does not exceed two times the net worth of said taxpayer as of December 31st of the preceding year.

Tax consolidation does not apply in Colombia. Thus, each entity must comply with separate tax obligations.

Separate company losses may be utilised through mergers, spin-offs and acquisitions, although the effect of these kinds of transactions may imply a limited utilisation of losses.

Capital gains are subject to Capital Gains Tax at a rate of 10%.

Certain costs may be deducted for Capital Gains Tax purposes.

The sale of shares that are deemed a fixed asset for their holder is subject to Capital Gains Tax if the investment is held for more than a two-year period. Otherwise, it is subject to ordinary Income Tax.

The sale of shares listed on the Colombian Stock Exchange is tax exempt if they do not exceed 10% of the outstanding shares of the company in which they are held.

Value Added Tax (VAT) is levied, at a general rate of 19%, on the sale and import of tangible assets and of intangibles related to intellectual property, and on the provision of services. Certain services provided from abroad may be subject to VAT. Special VAT rates apply to certain goods and services.

Debit tax is levied at a rate of 0.4% on the performance of financial transactions that imply (i) the disposition of funds that are deposited in bank, savings or deposit accounts (including those with the Colombian Central Bank), and (ii) debits on accounting records to make payments or transfer funds to third parties.

Industry and Commerce Tax (which is a sub-national tax) is levied, at rates of up to 1%, on the gross income obtained because of the performance of industrial, commercial and service activities within a municipal jurisdiction.

Certain notarial and registration duties apply to transactions related to real estate.

There is no applicable information in this jurisdiction.

Closely held businesses usually operate in corporate form.

Corporate Income Tax rates are usually higher than individual rates and they are equal in some cases.

There are no specific rules to prevent individual professionals from earning income at corporate rates.

There are no specific rules to prevent closely held corporations from accumulating earnings for investment purposes.

Dividends are subject to taxation, as a rule. Special rules may apply to dividends paid to foreign shareholders who are deemed residents in jurisdictions with which Colombia is a party to double taxation treaties.

The sale of shares that are deemed a fixed asset for their holder is subject to Capital Gains Tax if the investment is held for more than a two-year period. Otherwise, it is subject to ordinary Income Tax.

Dividends paid by publicly traded corporations are subject to the same tax treatment as those dividends paid by closely held corporations.

The sale of shares listed on the Colombian Stock Exchange is tax exempt if they do not exceed 10% of the outstanding shares of the company in which they are held.

Interest is subject to a 15% Income Tax withholding.

For dividends, (i) those originated in profits that were taxed at a corporate level are subject to Income Tax at a rate of 7.5% and (b) those originated in profits that were not taxed at a corporate level are subject to Income Tax at a rate of 33%.

Royalties are subject to a 20% Income Tax withholding, as a rule.

Colombia has double taxation treaties in force with the Andean Community (Ecuador, Peru and Bolivia), Canada, Chile, Czech Republic, India, Mexico, Portugal, South Korea, Spain, Switzerland and the United Kingdom. Treaties with France, Japan and Italy have already been negotiated and are currently subject to internal approval.

There are no judicial precedents related to the challenge by the tax authorities of the use of treaty country entities by non-treaty country entities.

Transfer pricing rules were enacted in Colombia in 2002 and, in general terms, follow OECD standards.

Colombia has recently adopted BEPS Actions 10 and 13, related to transfer pricing.

One of the biggest transfer pricing issues presented for an inbound investor operating through a local corporation concerns intra-group services.

The use of related-party limited risk distribution arrangements for the sale of goods or provision of services in transactions with foreign related parties, or with individuals or entities domiciled, located, or operating in tax havens is subject to transfer pricing rules and thus may be challenged by the tax authorities via the transfer pricing regime.

In general terms, Colombian transfer pricing rules follow OECD standards, due to the recent entry of Colombia to the OECD in 2018.

Prior to the enactment of transfer pricing rules, the Colombian Tax Code already included rules related to minimum acceptable prices for tax purposes in the transfer of assets, based on the market value of the given asset, even if it differs from the actual price of the transaction. These rules are applicable to transactions performed either by related or by non-related parties.

As a result of the enactment of transfer pricing rules, official transfer pricing adjustments, as well as compensating adjustments, apply to transactions performed by Colombian taxpayers with foreign related parties.

Local branches of non-local corporations are subject to Income Tax only on their Colombian-source income (as opposed to local subsidiaries of non-local corporations) but are subject to the same Income Tax rate applicable to local subsidiaries of non-local corporations.

The sale of shares that are deemed a fixed asset for their holder is subject to Capital Gains Tax if the investment is held for more than a two-year period. Otherwise, it is subject to ordinary Income Tax.

The sale of shares listed on the Colombian Stock Exchange is tax exempt if they do not exceed 10% of the outstanding shares of the company in which they are held.

Double taxation treaties provide rules regarding the taxation applicable to the sale of shares in local corporations by non-residents.

There are no change of control provisions in Colombia.

No specific formulas are used to determine the income of foreign-owned local affiliates selling goods or providing services. However, if the goods or services are sold by local affiliates to foreign related entities, the relevant transactions shall be subject to transfer pricing rules.

Overhead expenses, different from royalties or payments for the purchase or exploitation of intangibles, are deductible provided that (i) the local affiliate performs a 20% Income Tax withholding on the given payment and (ii) the transaction complies with transfer pricing rules.

Related-party borrowing by foreign-owned local affiliates paid to non-local affiliates is subject to transfer pricing rules.

Under Colombian thin capitalisation rules, taxpayers are entitled to deduct interest originated in loans with a total average during the fiscal year that does not exceed three times the net worth of said taxpayer as of December 31st of the preceding year.

Local corporations are subject to Income Tax on their worldwide income. Certain exceptions may apply under double taxation treaties.

Foreign tax credit rules are available in the absence of double taxation treaties.

Should foreign income be exempt, the related expenses would not be deductible for Income Tax purposes.

Dividends from foreign subsidiaries of local corporations are deemed ordinary income and are subject to Income Tax based on ordinary rules. Nevertheless, double taxation rules and foreign tax credit rules may apply.

The use by non-local subsidiaries of intangibles developed by local corporations may be subject to taxation in Colombia and is subject to Colombian transfer pricing rules.

Colombia recently enacted controlled foreign corporation (CFC) rules following BEPS Action 3.

The mere substance of non-local affiliates is not regulated. However, foreign entities that have their effective place of business in Colombia are deemed Colombian entities for tax purposes.

Local corporations are subject to Colombian Income or Capital Gains Tax (depending on the time during which the shares were held) on the capital gains obtained on the sale of shares in non-local affiliates, as they are subject to taxation on worldwide income.

Under certain double taxation treaties, said gain may be subject to taxation, with limitations, in the jurisdiction of the non-local affiliate.

In the absence of a double taxation treaty, said capital gains may be subject to taxation both in Colombia and in the jurisdiction where the non-local affiliate is domiciled, but Colombian foreign tax credit rules may apply in certain cases.

Colombia has enacted anti-avoidance rules, which have been recently modified, in a way that gives the tax authorities a wide discretionary ability to challenge those transactions that may potentially imply the obtainment of illegitimate tax advantages.

The ordinary statute of limitations for Income Tax returns is three years, counted as from the due filing date, or the untimely filing date.

The statute of limitations for Income Tax returns in which the taxpayer has assessed or offset tax losses is six years, counted as from the due filing date, or the untimely filing date.

The statute of limitations for Income Tax returns filed by taxpayers who are subject to transfer pricing rules is six years, counted as from the due filing date, or the untimely filing date.

The tax authorities may conduct audits during said periods, and challenge tax returns.

The following BEPS actions have been implemented in Colombia: digital economy (Colombia has enacted certain VAT rules), CFC rules, interest deductions (by way of thin capitalisation rules), permanent establishment rules and transfer pricing (including transfer pricing documentation). Colombia is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.

Colombia has been gradually adopting OECD standards for tax purposes, and its membership in the OECD implies a stronger convergence to its model.

The Colombian tax treaty network has increased in recent years.

Colombia has been gradually adopting OECD standards, including BEPS recommendations.

Colombia is a signatory of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, the Convention on Mutual Administrative Assistance in Tax Matters and the CRS Multilateral Competent Authority Agreement.

Colombia's competitive tax policy objectives are as follows:

  • encouraging tax compliance;
  • discouraging and penalising tax evasion;
  • providing more efficiency to the Tax Administration;
  • facilitating tax compliance;
  • adopting electronic invoicing; and
  • enhancing the cross-checking of mandatory tax information.

Reducing tax evasion and encouraging tax compliance are permanent challenges that must be addressed by competitive tax systems.

Although Colombia has not adopted BEPS Action 2, the Colombian Tax Code contains rules that intend to prevent base erosions and the reduction of the tax impact in the sale of shares. Additionally, several tax treaties of which Colombia is a signatory address rules to prevent mismatches originated in the tax treatment of dividends (preventing their characterisation as interest).

Colombian Income Tax is based on source-jurisdiction rules. However, the latest double taxation treaties of which Colombia is a signatory privilege residence rules (based on OECD standards).

Interest paid on foreign indebtedness is subject to Income Tax (at a 15% rate, as opposed to the ordinary 20% rate applicable to other payments made abroad).

Interest deductibility is subject to thin capitalisation rules in the case of indebtedness with local or foreign related parties.

There is no applicable information in this jurisdiction.

It does not seem that double taxation convention (DTC) limitation of benefit or anti-avoidance rules have a definitive impact on inbound and outbound investors in Colombia.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

Colombia has not adopted special Income Tax rules aimed at taxing digital economy businesses operating largely from outside the country. Discussions in that sense are not on the way, either. Under current tax rules, foreign non-domiciled entities are subject to Income Tax on their Colombian-source income, deriving from the transfer of assets located in Colombia at the time of their transfer, the exploitation of assets in Colombia and the provision of services within Colombian territory (with certain exceptions). In the case of transactions performed with residents in jurisdictions with which Colombia has double taxation treaties in force, the tax treaties prevail.

VAT is levied on the provision of digital services, including streaming services, services provided through digital platforms, online publicity and online training. The service providers must be registered with the Tax Administration and may choose to collect and report the VAT accrued in the transactions performed with Colombian customers, or designate a third party (namely, financial entities) to withhold the applicable tax.

There is no applicable information in this jurisdiction.

There are no other general comments in this jurisdiction.

Osman & Rodríguez Abogados

Avenida Carrera 9 # 115-06
Office 801
Bogotá DC
Colombia

+57 (1) 552 2323

+57 (1) 552 2323

info@orlegal.co www.orlegal.co
Author Business Card

Law and Practice

Authors



Osman & Rodríguez Abogados is a tax and international trade boutique, located in Bogotá, that advises national and foreign clients in domestic and cross-border transactions. For tax purposes, the key lines of service are the following: national, sub-national and international taxation; tax planning; estate planning; mergers and acquisitions; corporate restructuring; tax due diligence; and transfer pricing.

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