Corporate Tax 2021

Last Updated March 29, 2021

Colombia

Law and Practice

Authors



Salazar & Asociados Abogados is a boutique firm that was created in order to render highly qualified services in specific areas of law. The firm’s mission is to deliver solutions that create value for clients, thus allowing them to achieve their business interests, while complying with the tax and legal framework. The firm's professionals are committed to serving the clients through a complete and detailed understanding of all their business interests as well as the legal topics involved and by always seeking to be value generators. The firm has significant experience in assisting international companies in planning and implanting their business presence in Colombia and in advising local and international companies in corporate tax, indirect tax and local tax matters. The practice includes the representation of clients before the national and local tax authorities and courts in tax discussion and litigation matters.

Businesses in Colombia normally adopt a corporate form, fundamentally to limit the liabilities of partners or shareholders. There are several corporate alternatives, ranging from a general partnership to a stock corporation, but more than 95% of the corporate entities created in Colombia have recently taken the form of a simplified stock company (Sociedad por Acciones Simplificada, or SAS). This corporate format is used for big and small businesses.

The fundamental reason why an SAS is so frequently selected is that it has the benefit of complete limitation of liability of shareholders, along with very flexible, simple rules for its operation, with significant cost savings, when compared with partnerships, limited liability companies and corporations.

Foreign investors normally use the form of an SAS to organise their businesses in Colombia, except for in cases where the law or regulation demands a specific type of company (ie, to list in the stock market, it has to be a stock corporation) or when it wants to achieve certain tax planning objectives at the parent company level, demanding a certain corporate form, such as the limited liability company.

Foreign investors may also organise a branch office in Colombia to undertake their business. It is not as usual as the SAS in general terms, but it is the standard form in certain business sectors such as oil and gas, and oil services, due to the exceptional exchange control regime applicable to those sectors.

Transparent entities are very exceptional in Colombia. As a rule, all entities are individual taxpayers. It is only as a matter of anti-deferral rules applicable to passive income from foreign entities that those entities are regarded as transparent in order to tax foreign-sourced passive income without delay.

There are exceptional transparent forms of investment organisations. Private capital funds and collective investment funds are not regarded as taxpayers for income tax purposes and participants in those funds can get additional deferral benefits if certain requirements are met.

With respect to the test to determine the residence of incorporated businesses, without prejudice of particular rules included in double taxation treaties in force, incorporated businesses are considered tax residents in Colombia if:

  • they are incorporated in Colombia;
  • they have their principal domicile in Colombia; and
  • they have their effective seat of management within Colombian territory.

Corporate Rates

The current corporate tax rates in Colombia are:

  • for 2021 – 31%; and
  • for 2022 onwards – 30%.

Financial institutions such as banks are subject to a 3% surcharge for 2021 and 2022.

There are certain exemptions and preferential treatments, among others:

  • for small creative and technological enterprises, which can get a complete exemption for seven years;
  • hotels and theme parks are taxed at a rate of 9%; and
  • industrial users of free trade zones are taxed at a 20% tariff.

Personal Tax Rates

Personal (individuals) tax rates are fixed in a scale ranging from 0% to 39% depending on their annual income:

  • up to the equivalent of approximately USD11,000, the rate is 0%;
  • 19% up to approximately USD17,000 annual income;
  • 28% up to approximately USD42,000 annual income;
  • 33% up to approximately USD89,000 annual income;
  • 35% up to approximately USD195,000 annual income;
  • 37% up to approximately USD320,000 annual income; and
  • 39% for annual income exceeding USD320,000.

Simplified Regime

There is a special simplified regime applicable to small taxpayers aimed at simplifying their tax compliance. Small businesses (incorporated or not) with gross annual income of less than approximately USD800,000, meeting certain other requirements, can access the simplified tax regime where income tax along with local industry and commerce tax is paid over gross income. Tariffs are fixed on scales for different economic sectors, ranging from 1.8% to 11.6% over the gross income. The simplicity and the fact that the payments include income tax and industry and commerce tax make this regime very attractive for small businesses with good profit margins.

Income tax is applied to tax profits calculated on an accrual basis. For the most part, taxable income is calculated on the basis of accounting profits, but several adjustments have to be made, according to the income tax rules. Not all accounting income is taxable income and not all accounting cost and expense may be deducted from the tax base.

Among others, the following differences between accounting and income tax rules imply that adjustments have to be made to reach taxable income:

  • in transactions where implicit interest has to be calculated according to accounting rules, such implicit interest shall not be accrued for income tax purposes;
  • where income has to be calculated according to the equity participation method, it shall not be accrued for income tax purposes;
  • income derived for fair-value calculation of assets shall not be accrued for income tax purposes and such difference will only be taxed when the asset is sold or its property transferred;
  • accounting provisions and their reversal associated with liabilities shall not be accrued as taxable income;
  • account receivable deterioration provisions rules for tax purposes are determined in the Tax Statute and normally differ from accounting rules; the same applies with respect to receivables write-off, where the possibility of taking a tax deduction is subject to much more stringent rules than accounting rules;
  • depreciation rules for income tax purposes in certain aspects differ from depreciation rules for accounting purposes, which lead to an adjustment to the accounting records to reach the income tax figures; and
  • the cost of certain fixed assets, such as real estate and shares, for income tax purposes and the calculation of capital gains have rules different from accounting rules, which imply an adjustment.

In summary, the accounting tax reconciliation that has to be worked out yearly is an extensive exercise.

There are very significant tax incentives for investments in investigations, technological development and innovations (ITDI) that are fulfilled following the conditions and criteria determined by the National Council of Tax Benefits for Science, Technology and Innovation (CNBT), including:

  • investments made in ITDI in projects endorsed by the CNBT and according to its conditions can be deducted in the same tax year in which they were made;
  • taxpayers that make an investment in ITDI projects endorsed by the CNBT and according to its conditions will have a tax credit equivalent to 25% of the investment made in the tax year in which the investment was made, and if the investment is made by a micro, small or medium-sized enterprise, the tax credit will be equivalent to 50% of the investment made, but in this case there will be no right to take the deduction described in the prior point; and
  • there are special tax incentives for investment in, and the development of, non-conventional energies, and companies making investments in those activities are entitled to a special deduction of 50% of the investment made, in addition to a special depreciation system and certain VAT exemptions.

There are very generous tax incentives for certain industries, mainly the so-called orange economy industry, hotels and theme parks.

Orange Economy

This sector is comprised of new small companies (with gross annual income of less than the equivalent of approximately USD800,000) that develop creative and technological value-added activities, which include a wide diversity of businesses, among others:

  • jewellery;
  • editorial and music editions;
  • TV and movie production;
  • IT consulting and installations;
  • architecture;
  • engineering;
  • photography;
  • plastic arts;
  • visual arts; and
  • theatre.

Meeting small investment and employment requirements, these new companies are entitled to be income tax exempt for seven years.

Hotels and Theme Parks

New hotels and theme parks are subject to a preferential income tax rate of 9% for a term of ten years. If the municipality in which it is located has less than 200,000 inhabitants, the preferential rate will be for 20 years.

Mega Investments

Investments amounting to not less than approximately USD300 million and generating 400 employments can access a 27% income tax tariff for a term of 20 years, by meeting several requirements.

Industrial Users Free Trade Zones

These users (that do not include simple commercial activity users) of free trade zones have a preferential income tax rate of 20%. Noticeably, in Colombia, this preferential rate is not tied to exports.

Acquisition of Productive Fixed Tangible Assets

In addition to these incentives, there is a general one for all industries for the acquisition of fixed productive tangible assets that directly participate in the income-generating economic activity of the taxpayer. The VAT paid in the acquisition of those assets (general rate of 19%) can be credited to the income tax payable in the year of acquisition or the coming years. Normally, such VAT should have been made part of the cost of the asset for future depreciation throughout the useful life of the asset.

With respect to the tax treatment of losses, companies can offset tax losses with ordinary taxable income obtained during the 12 years following the tax year in which the loss occurred. Tax losses may not be offset against capital gains.

In the case of mergers of companies with tax losses, the absorbing company may only use the losses of a merged (absorbed) company up to the proportion of its patrimony in the merged patrimony and subject to the tax years already passed and the limits existing in those years (up to 2011, tax losses had to be used within the following eight years).

In the case of spin-offs, the beneficiary company may only use the tax losses of the spun-off company up to the proportion that the patrimony transferred to the beneficiary company represented in the patrimony of the spun-off company. The spun-off company may use its accumulated losses up to the proportion of the patrimony after the spin-off in the patrimony before it. Both cases are subject to the tax years already passed and the limits existing in those years.

In all cases, the economic activity of the companies involved in the mergers of spin-off transactions has to be the same.

As a rule, interests paid are deductible, provided the applicable income tax withholding is paid. The deductibility of interest has certain limitations.

Thin Cap Limitations

The deductibility of interest paid to local or foreign affiliates is limited, in general terms, to a debt-to-equity ratio of 2. This rule is not applicable to financial entities (banking entities) under the surveillance of the Financial Superintendency, to companies dedicated to receivables discount transactions, to financings of infrastructure projects and to companies in an unproductive stage.

Interest Paid to Parent and Foreign Affiliates

Interest paid to a parent company and foreign affiliates is deductible if the local company is subject to transfer pricing rules, which will normally be the case. If not subject to transfer pricing rules, it is not deductible, except for:

  • interest paid by financial entities under the surveillance of the Financial Superintendency;
  • interest paid on short-term supplies of raw materials and inventories; and
  • interest attributable to a Colombian permanent establishment of a foreign company, provided that tax withholding is made.

Interest on Overdue Tax Payments

Late-payment interest of tax liabilities may not be deducted.

Company grouping for tax purposes is not allowed. The use of intercompany transactions as a means to localise losses within a corporate group is limited by an arm's-length principle and transfer pricing rules.

Among local companies, accumulated tax losses can be transferred from one company to another vía merger and spin-off transactions. However, the use of the losses is limited to the proportion that the patrimony of the “loss” company represents in the merged patrimony and provided that the economic activity of the merged companies is the same.

In Colombia, capital gains are a part of occasional profits, which, in turn, are complementary and a part of income tax. Occasional profits have to be treated and reported separately from ordinary taxable income. The rate for occasional profits is 10%, which is significantly lower than the ordinary corporate tax rate.

Sales of shares in other companies, real estate or other fixed assets held for two years or more will exclude that income from ordinary taxable income to be treated as an occasional profit (capital gains). If the shares, real estate or other fixed assets were not the property of the company for more than two years, the profit will be treated as part of ordinary taxable income.

Corporations are taxed on capital gains whenever they receive an income derived from the sale of fixed assets or the sale of shares in other companies.

The cost of real estate can be adjusted annually according to certain indexes aligned with inflation or to the property tax base for municipal property taxes. The cost of shares can also be adjusted annually according to the mentioned indexes (Articles 70–72, Tax Statute).

Values or assets received as a result of the liquidation of a company in existence for more than two years in which a participation in capital was held will be treated as capital gains. The amounts corresponding to retained profits distributable as dividends will not be treated as capital gains. The capital gain is calculated on the difference between the cost of the asset, shares or participations in the liquidated company and the amount received.

For corporations that qualify as Colombian holding companies, the sale of stock in non-local companies is tax exempt. The sale of stock in Colombian holding companies is also exempt, except for accumulated profits.

Capital gains derived from the sale of stock of corporations listed on the stock exchange in which the seller is a beneficiary of less than 10% of the listed entity are tax exempt.

In addition to income tax, there are other taxes payable by incorporated businesses and taxes for certain determined industries, the most relevant of which are:

  • the tax on financial transactions – this applies on debits of any type of financial accounts, such as bank accounts, at a fixed tariff of 0.4% over the gross amount of the debit; only 50% of this tax is deductible for income tax purposes; and
  • local industry and commerce tax – this is a local tax charged by the municipalities over industrial, commercial and services activities carried out within the municipality; generally, tariffs range from 0.2% to 1% over gross income.

There are a variety of indirect taxes that apply to businesses, the most important of which is VAT. However, the design of VAT normally shifts the burden to final consumers and in the case of productive fixed assets, it can be credited against income tax.

There are local property taxes on real estate and vehicles, and contributions on payments to public utilities that apply to all businesses.

Most closely held businesses operate in a corporate form. Usually the corporate form is an SAS.

Corporate rates are normally lower than individual rates at relatively low levels of annual income. At a level of annual taxable income of the equivalent of approximately USD42,000, individual rates become higher than corporate rates. If, in addition, it is considered that individual income gives rise to social security contributions, in general terms, individual income has a heavier tax and social security burden than a corporate tax burden.

It is legal for professionals such as architects, engineers or accountants to create a corporate entity to be the service provider of their clients. The corporate tax rate will apply to the taxable income of the company. But when the professional is paid or receives dividends, individual taxes and social security contributions will have to be paid.

Companies can lend money to partners or shareholders, but in that case, the company will have to accrue a presumptive interest as taxable income at an annual rate fixed annually, which currently is 4.54%.

There are no rules in Colombia preventing earnings accumulation in closely held corporations.

Individuals are taxed on dividends distributed by companies:

  • resident individuals – 0% up to approximately the equivalent of USD3,000 and 10% above that amount; and
  • non-resident individuals – 10%, without prejudice of the special provisions included in double taxation treaties.

The sale of shares in closely held corporations is taxed in the same way as all corporations. If shares qualify as fixed assets held for not less than two years, the sale is taxed as a capital gain over the tax profit at a rate of 10%. If the shares do not qualify as such, the sale will be taxed as ordinary taxable income at the rates applicable to individuals, as stated above.

There is an exemption for the sale of shares in Colombian holding companies.

Dividends received by individuals from publicly traded companies are taxed in the same way as those received from privately held companies. The sale of shares in publicly traded companies is taxed in the same way as for all companies, but if the seller is a beneficiary of less than 10% of the listed corporation, the sale will not attract taxation.

The following income tax withholdings apply to payments to non-residents, without prejudice of special differential tariffs in certain double taxation treaties:

  • interest – interest on financial transactions of more than one year are subject to a 15% withholding on the gross payment; if the financing is for an infrastructure project, the tariff is 5% and for interest on other transactions, the tariff is 20%;
  • dividends – 10%, provided that the dividends come from profits subject to corporate tax at the distributing company; if not, the full corporate rate will apply; and
  • royalties – 20% over the gross payment.

Colombia has double taxation treaties in force with several countries, including Switzerland, Peru, Ecuador, Canada, Chile, South Korea, Spain, India, Mexico, Portugal, Czech Republic and the United Kingdom. Other negotiated treaties are in the process of approval and entry into force with France, the UAE, Japan and Italy.

The treaties used depend fundamentally on the place of business of the investor and origin of the investment. Treaty shopping is not frequently observed in practice.

Any claim of a tax treaty benefit must be based on the evidence of residence. If residence is not properly proven according to the standards of the particular treaty, the tax authority has the power and the duty to reject the benefit and collect the appropriate tax.

Besides the anti-abuse rules contained in the Colombian Tax Statute, recent treaties contain provisions regarding the principal purpose test following the OECD's recommendation.

In addition, Colombia is a signatory to the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, but the Convention has not yet been approved by Congress.

Normally, the biggest transfer pricing issues for inbound investors are services and royalties on intellectual property, including technology transfer, paid to parent companies and foreign affiliates.

As a matter of general policy, tax authorities do not challenge related-party limited risk distribution agreements for the sale of goods or provision of services. In fact, many subsidiaries in Colombia of foreign corporate groups use limited-risk models, without expecting challenges by tax authorities.

Colombia is an active OECD member. In general terms, Colombian transfer pricing rules follow OECD standards and recommendations.

It is not often that transfer pricing disputes are resolved through double taxation treaties and mutual agreement procedures (MAPs).

The Colombian Tax Authority does not have a negative view of MAPs. It is a procedure provided by rules of law and tax treaties that has to be applied.

In line with BEPS Action 14, a new article in the Tax Statute has recently been enacted in order to facilitate MAPs and give better access to them for taxpayers. The mandatory assistance that the Tax Authority must give to taxpayers in this respect has been established, and the agreements reached as a result of MAPs shall have the force of a final judicial sentence.

In the same line of BEPS Action 14, the MAP was further developed by a recent regulation issued by the Tax Authority that established a detailed local procedure to be followed for the assistance to taxpayers in MAPs.

As a rule, adjustments have to be made whenever a difference with comparables has to be corrected. Moreover, if a claim is settled and if it is as a result of a MAP, it will be regarded as a final judicial sentence that will have to be implemented mandatorily.

Taxation rules for subsidiaries and branches of foreign corporations have a significant difference. While subsidiaries of foreign corporations are taxed on Colombian and non-Colombian-sourced income, branches are only taxed on Colombian-sourced income.

The capital gains of non-residents on the sale of stock in local corporations are taxed in Colombia. If the stock has been held for less than two years, the profit on the sale is treated as ordinary taxable income subject to the general corporate rate (currently 31%). If held for more than two years, the profit is treated as capital gains, taxed with a tariff of 10%.

There is an exemption for stock in Colombian holding companies. In addition, if the sold shares are of a corporation listed on the stock exchange and the seller is a beneficiary of less than 10% of such corporation, the sale will be exempt.

Normally, sales of stock of a foreign corporation by another foreign corporation will not be taxed in Colombia, but if the former holds shares, rights or assets in Colombian territory amounting to an indirect sale, the transaction will be taxed. The transaction will be treated as if the underlying assets were sold directly and taxed accordingly.

Certain double taxation treaties to which Colombia is a party contain provisions limiting and reducing applicable capital gains tax under general rules.

There are no change of control provisions for tax purposes.

There are no fixed formulas to determine the taxable income of foreign-owned local affiliates.

Management and administrative expenses paid to foreign parent companies or affiliates by Colombian companies are deductible for income tax purposes, with the condition that a tax withholding is made with a tariff of 20% over the gross payment. For these payments, transfer pricing rules are applicable. If the payment is made to a company in a tax haven, more stringent transfer pricing rules are applied.

Related-party borrowing is subject to thin cap rules, as discussed in 2.5 Imposed Limits on Deduction of Interest. The general limitation on deductibility of interest paid to related parties is based on a debt-to-equity proportion of 2, considering only debt that generates interest. The limitation extends to cases where foreign related parties participate in back-to-back loans where the lender of record is not a related company but the debt is substantially owned by the foreign affiliates.

These thin cap rules are not applicable to debt incurred by local financial entities (banking entities) under the surveillance of the Financial Superintedency or to companies dedicated to receivables discount transactions.

Local corporations are taxed on Colombian-sourced and foreign-sourced income. The foreign-sourced income is taxed as part of the taxable income of the corporation.

Local corporations are allowed to use income tax paid for the foreign-sourced income in the jurisdiction of its source as a tax credit. The tax credit is limited to the tax applied in Colombia to such foreign-sourced income. Additional tax credit rules are available under double taxation treaties.

Under supranational Decision 578 of the Cartagena Agreement, income sourced in Ecuador and Peru of Colombian corporations may only be taxed in those jurisdictions and will be treated in Colombia as exempt income.

As a rule, expenses attributable to exempt income are not deductible for income tax purposes.

Normally, dividends received by local corporations from foreign affiliates are taxed as ordinary taxable income. Under double taxation treaties, tax benefits may be available (ie, the treaty with Spain).

If the local corporation is a Colombian holding company, such dividend will be exempt. To be regarded as a Colombian holding company, the corporation has to meet very simple requirements in terms of holdings in other companies and employees.

The use of intangible assets by non-local subsidiaries must be done on an arm's-length basis. Therefore, such use must normally produce an income for the local corporation subject to the transfer pricing rules examination.

In addition, under controlled foreign corporation (CFC) rules, the income of the non-local company derived from the exploitation of intangibles is regarded as passive income that must be included directly as current taxable income of the local corporation.

The contribution of an intangible to a non-local subsidiary is subject to income tax determination as well, on an arm's-length basis.

Local corporations are taxed on the passive income of CFCs. The passive income of the non-local subsidiary is regarded as having been directly obtained by the local corporation.

The income of branch offices of local corporations is taxed in Colombia.

Non-local affiliates of local companies are regarded as tax residents if it is determined that the effective seat of management is Colombia.

In addition, all payments to tax-haven companies are subject to income tax withholding and to stringent transfer pricing rules.

Local corporations are taxed on the gain on sale of shares in non-local affiliates. The gain on the sale of shares of non-local affiliates is taxed as ordinary taxable income at the general corporate tax rate if held for less than two years. If held for more time, it will be taxed at the capital gains rate of 10%. Provisions in certain double taxation treaties include beneficial treatments.

If the local corporation qualifies as a Colombian holding company, there will be an exemption.

In line with the BEPS recommendations, the Colombian Tax Statute has a general anti-avoidance provision, granting far-reaching powers to the Tax Authority in order to recharacterise transactions that imply an abuse of tax rules. An abuse of tax rules exists whenever a tax benefit is obtained by means of one or several artificial transactions without reasonable financial or economic purpose.

There is no established routine audit cycle by tax authorities. Audits are based on certain triggering events (such as a request for reimbursement of balance in favour), information received (such as information from Common Reporting Standard (CRS) countries), risk profiles developed by tax authorities and programmes developed from time to time by tax authorities to tackle points where they anticipate repetitive tax evasion schemes may exist.

Colombia is a member of the OECD and an active participant in tax matters. It has implemented several BEPS recommendations, including:

  • BEPS Action 3 – CFC rules and declaration of assets held abroad;
  • BEPS Action 4 – thin cap rules;
  • BEPS Action 6 – anti-avoidance rules;
  • BEPS Action 7 – permanent establishment regulation;
  • BEPS Actions 8–11 – transfer pricing rules, corporate restructuring rules and taxation of certain contributions;
  • BEPS Action 13 – country-by-country reports; and
  • BEPS Action 14 – MAPs.

The general attitude of the Colombian government towards BEPS is to move in the direction of implementing the recommendations. The main objective is to set the local standards at the level of international best practices in taxation as recommended by the OECD, with the expectation of reaching a much more efficient and modern tax system.

It is expected that these implementations will increase the competitive position of Colombia internationally, with a more efficient tax system that will allow lower corporate rates.

International tax is constantly increasing its public profile in Colombia.

In the first place, less than 20 years ago, double taxation treaties were very exceptional. Since then, Colombia has negotiated a network of double taxation treaties that have become increasingly important, along with free trade agreements with its most important commercial and investment partners.

Recently, the government decided to become a member of the OECD with active participation in tax matters and, as a consequence of that policy, the CRS was fully implemented and the BEPS recommendations are always a part of the tax policy agenda of the government.

It is to be expected that the BEPS recommendations will continue to be implemented and developed.

A competitive tax policy must be based on reasonably low rates of taxation and well-defined and very limited tax benefits. A competitive tax policy may not be based on loose controls and lack of transparency in tax administration. Most likely, implementation of BEPS and international tax transparency of information will allow the reduction of tax burdens that are often increased as a consequence of tax evasion.

Abundant tax beneficial treatments and complexity of certain rules creating obstacles to control make the Colombian tax system vulnerable to manipulation with permanent aggressive tax strategies and straightforward evasion.

BEPS Action 2 has not been implemented in Colombia.

Most likely, the recommendations for local legislation will be implemented in Colombia, particularly with information disclosure requirements of facts that can evidence a hybrid instrument strategy, non-deductibility rules, tax withholdings and limitation on tax credits.

The Colombian income tax regime is, for the most part, territorial.

As a rule, interests are deductible, provided that tax withholding is made within the thin cap rules. These withholdings and thin cap rules certainly affect certain investment and financing structures based on debt, but tax credits at parent company level may grant relief enough to offset the negative impact.

In general terms, CFC rules are necessary and desirable with respect to passive income in an anti-deferral policy. It is not advisable to extend those rules beyond passive income.

Should there be substance in a particular jurisdiction, regardless of the tax rate level, that should not be the basis for applying CFC rules. That would be equivalent to having inefficiency as the standard.

It is not anticipated that the limitation of benefit in double taxation treaties and anti-avoidance rules will significantly impact serious inbound and outbound investors.

There are no current proposals that can result in a radical change in the transfer pricing rules in Colombia.

The taxation of intellectual property has always been, and most likely will continue to be, a source of controversy. Changes may create temporary discomfort but not material insurmountable difficulties in practice.

In Colombia, county-by-country reports have been mandatory since 2016.

Colombia has not implemented a comprehensive regulation on income tax for the digital economy. However, the issue is part of an extensive public discussion in order to create tax rules for the digital economy. It is expected that in 2021, new legal rules will be enacted to capture the income of the digital economy by the Colombian tax system.

The first steps were taken in terms of the VAT applicable to digital services from abroad, which was widely unpaid in the past. A system was put in place to get the digital service providers to register before the Tax Authority. In addition, credit or debit card operators or payment platforms are bound to withhold the applicable VAT when payments are made to the platforms.

There is not yet a clear government position included in a bill presented to Congress with respect to the BEPS proposal for digital taxation. The general opinion is that the issue has to be included in the discussion agenda for a tax reform to create a comprehensive regulation of income tax applicable to the digital economy.

Most likely, that discussion will take place shortly in Congress at the initiative of the government and rules can be expected within 2021.

Intellectual property deployed in Colombia and compensated by means of royalties is taxed through income tax withholding at a general rate of 20%. Certain treaty countries have lower withholding rates. If the payment is made to a tax haven, for it to be deductible, a transfer pricing rule demanding extensive supportive documentation has to be met, along with the income tax withholding.

If the intellectual property acquired by the local company (not by way of licensing but by way of ownership transfer over the rights) is to be amortised, it has to come from an independent third party.

Salazar & Asociados Abogados S.A.S.

Carrera 12 No. 84-12 Of. 502.
Bogotá
Colombia

+57 1 30 990 00

jcsalazar@salazarabogados.com Salazarabogados.co
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Trends and Developments


Authors



Salazar & Asociados Abogados is a boutique firm that was created in order to render highly qualified services in specific areas of law. The firm’s mission is to deliver solutions that create value for clients, thus allowing them to achieve their business interests, while complying with the tax and legal framework. The firm's professionals are committed to serving the clients through a complete and detailed understanding of all their business interests as well as the legal topics involved and by always seeking to be value generators. The firm has significant experience in assisting international companies in planning and implanting their business presence in Colombia and in advising local and international companies in corporate tax, indirect tax and local tax matters. The practice includes the representation of clients before the national and local tax authorities and courts in tax discussion and litigation matters.

2021 will certainly bring a broad and intensive discussion on the tax system, within which, corporate tax will be a major issue. There is a consensus that a tax reform is needed this year, fundamentally to correct the deficit created by the economic impact of the COVID-19 pandemic and to correct certain structural deficiencies in the tax system. The government is aware of the compelling need to enhance tax revenue sources in order to be able to meet the fiscal rule to preserve its creditworthiness.

International Experts Commission Recommendations for Tax Reform

A commission of international experts has been convoked to report on recommendations for the forthcoming tax bill to be presented to Congress. Its report was presented in March 2021, with much emphasis on the inefficiency created by the abundance of tax benefits in Colombia. The commission's report includes many recommendations directed to the elimination of many of those benefits, expanding the tax base and achieving efficiency and a better progressive performance of the system.

The commission's most important recommendations to the Colombian government can be summarised as follows.

General recommendation

  • Expand the tax base significantly, increase effective progressiveness, and reduce complexity and statutory rates in the medium term.

Personal taxation recommendations

  • Drastically reduce exempt income in personal taxation. Treat all payments of employers as personal taxable income, including voluntary contributions to pensions and payments for the education of employees' children.
  • Eliminate deductions for personal income and, for deductions that are maintained, set a cap (which has been announced to be 35% of gross income). Eliminate the tax deductions that increase with income (based on a percentage of gross income, which is essentially regressive) and convert tax deductions into a tax discount.
  • Reform the rate scheme, reducing deductions and rate ranges. Enhance the tax base to allow a reduction in marginal income tax rates.
  • Strengthen compliance with the tax obligations to ensure that the payment of contributions to the health and pension systems is made on all personal income of all types of workers and self-employed persons, and prevent independent workers from deducting their private consumption as a business deduction.
  • Transfer the tax burden on capital income from the corporate level to the shareholder level.
  • Continue with the automatic exchange of tax information to guarantee a fair taxation of capital income.
  • Tax pensions at a fair effective rate. The government has announced the taxation of pensions above COP7 million pesos.

VAT recommendations

Colombia receives only 39% of the potential VAT. The recommendations have the objective of increasing that revenue to 46% of the potential VAT.

  • Progressive reduction of excluded and exempt goods and services, according to international practices, and tax as many as possible at the standard VAT rate of 19%.
  • Tax all goods and services at the general VAT rate and make direct cash transfers to poor families to reimburse VAT paid. If not practicable, tax the basic family basket at a 0% rate.
  • Increase the current reduced rate of 5% to a range between 10% and 12% to minimise the number of companies with a right to refund, thus reducing the opportunities for fraud.
  • Allow companies to credit against VAT generated in their sales the VAT paid in the purchase of productive fixed assets and eliminate the credit against income tax.
  • Increase taxes on goods and services that harm the health of individuals and the environment.
  • Eliminate consumption tax and impose VAT instead.
  • Bring the free zones (FZs) to the ordinary VAT regime, particularly the single business FZs (special permanent FZ). If this is not possible, eliminate the latter. Introduce a system that allows the businesses in the FZs to defer the payment of VAT on imports from abroad, and a provision for the refund of imports whereby these are reimbursed after the exportation of qualified items.

Corporate tax recommendations

  • Eliminate the industry and commerce tax (ICA), which is a local tax based on gross income. Currently, 50% of it is creditable against income tax. It is expected that the government will not follow this recommendation and keep the credit as it works currently.
  • Eliminate the treatment of VAT paid on the purchase of fixed assets as part of their cost, so that the cost of the investment does not continue to increase. VAT paid would be creditable against VAT generated in current operations.
  • Eliminate the tax on financial movements (GMF) or convert it into a tax on cash withdrawals only. This is a heavily criticised tax on all debits on bank and financial accounts.
  • Eliminate differences in the tax treatments of economic activities, to make uniform the taxation of businesses in all sectors and avoid the use of tax benefits and special tax rules focused on specific sectors.
  • Significantly broaden the tax base and eventually eliminate the income tax recovery (withholding of dividends) of the corporate tax.
  • Reduce the general corporate tax rate to a level that is competitive internationally. The government is considering corporate tax rate reductions with marginal tariffs starting at 24% up to 31%, based on the elimination of tax benefits.
  • Maintain the FZ regime but with movements towards the merger of this regime with the ordinary corporate tax regime.
  • Allow simpler and easier access of small businesses to the Simple Tax Regime (the regimen applicable to small businesses that simplifies taxation with a fixed rate on gross income), and promote this system to particular sectors, such as the agricultural sector. Strengthen the formalisation strategy of the agricultural sector and reduce associated costs.

Other Tax Issues under Discussion

Besides the issues covered by the experts commission report, there are other current issues subject to public discussion.

Taxation on patrimony

The government is considering, and it is likely to introduce, a permanent tax on personal patrimonies above COP5 billion in the tax bill. It is likely that it will be proposed at a rate of 3% and that it will be deductible for income tax purposes.

Taxation on unhealthy food

A consumption tax on sweetened beverages is being considered. Public awareness of unhealthy food is increasing and, with it, an opinion movement to tax heavily beverages sweetened with sugar. In past years, this initiative has been blocked in Congress but for sure it will be part of the discussion again and it is likely that the tax will be created.

Taxation and the environment

A carbon tax has already been created in Colombia, but the general expectation is for it to be reformed to achieve higher impact. The current legislation on carbon tax does not tax coal, which, in general terms, is not regarded as reasonable. The carbon tax intended to disincentive contaminating fuels with this twist becomes an incentive to use the most contaminating fuel, which is coal. However, this tax has had a relatively immaterial impact in terms of environmental progress, which is a point that will be revisited, particularly bearing in mind the international commitments Colombia has made on damaging emissions reduction.

In addition, there are other initiatives being discussed, such as the creation of a local tax on vehicles, and the creation of a tax on single-use plastics and on the use of pesticides.

Taxation of the digital economy

The experts commission report does not make a precise and specific recommendation on digital economy taxation. However, some general comments are included in the report, stating that Colombia should align its VAT system with international developments to expand the base to digital trans-border sales.

It is generally accepted that the Colombian tax system is missing a comprehensive treatment of digital economy activities. The need to capture part of the income generated by digital economy transactions that extract resources from the local economy is generally regarded as an urgent measure to be adopted.

In this context, the report of the commission will raise important elements for discussion. The position that will be taken on Pillar One and Pillar Two matters in the context of BEPS Action 1 analysis remains uncertain.

Considering past experience, the initial steps in the approach to income taxation of digital economy transactions will probably be based on a redefinition of territoriality or an elimination of the territoriality principle for digital economy businesses and transactions, along with widespread income tax withholding requirements and reports (including specific transfer pricing documentation). Under current territoriality principles of income tax rules, developed before the digital economy existed, the taxation of digital economy businesses and transactions is difficult.

An invitation to create a local legal presence derived from the fact that it will be, tax-wise, cheaper will be underlying those rules.

Part of the burden for the collection of the income tax withholding will be placed on the credit card operators and payment platforms in the same way as it was with respect to VAT. For VAT purposes, certain rules were recently enacted whereby payment platforms and credit card operators were designated as withholding agents on the VAT over those transactions.

In the area of the digital economy, it is expected that a chapter on virtual currencies or crypto-assets that are being constantly created and traded will appear. In Colombia, there is a lack of a legal and tax framework for crypto-assets. There is a general concern that the lack of that framework creates an opportunity for tax evasion and money laundering. There are many questions unanswered in this area that will be answered shortly when the discussion of the forthcoming tax reform starts in Congress.

  • What is the characterisation of crypto-assets and virtual currencies?
  • Shall crypto-assets and virtual currencies be subject to VAT?
  • Where are crypto-assets and virtual currencies located in the context of territoriality rules?
  • Where do transactions over crypto-assets in general or virtual currencies happen?
  • For local tax purposes, where do virtual currencies and crypto-assets fit?
  • What are the necessary disclosure requirements with respect to crypto-asset transactions?

Tax treaty with the USA

Apart from all the issues that will be discussed and decided in the context of a tax reform, another big issue in the corporate tax agenda in Colombia is a double taxation treaty with the United States. This treaty is certainly missing in the double taxation treaty network Colombia has, considering that the USA is the most important source of private investment into Colombia. Hopefully, the negotiation will be finalised in 2021.

Besides the clear benefits of a tax treaty with the USA, the issue of tax information exchange with the United States is very important. Colombia is an active participant in the Common Reporting Standard, the benefits of which are undoubtable. But the exchange of information with the USA based on the Foreign Account Tax Compliance Act is not as effective. In this context, the provisions on tax information exchange in this treaty are widely expected from all sides of the discussion.

Salazar & Asociados Abogados S.A.S.

Carrera 12 No. 84-12 Of. 502.
Bogotá
Colombia

+57 1 30 99 000

jcsalazar@salazarabogados.com Salazarabogados.co
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Law and Practice

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Salazar & Asociados Abogados is a boutique firm that was created in order to render highly qualified services in specific areas of law. The firm’s mission is to deliver solutions that create value for clients, thus allowing them to achieve their business interests, while complying with the tax and legal framework. The firm's professionals are committed to serving the clients through a complete and detailed understanding of all their business interests as well as the legal topics involved and by always seeking to be value generators. The firm has significant experience in assisting international companies in planning and implanting their business presence in Colombia and in advising local and international companies in corporate tax, indirect tax and local tax matters. The practice includes the representation of clients before the national and local tax authorities and courts in tax discussion and litigation matters.

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Authors



Salazar & Asociados Abogados is a boutique firm that was created in order to render highly qualified services in specific areas of law. The firm’s mission is to deliver solutions that create value for clients, thus allowing them to achieve their business interests, while complying with the tax and legal framework. The firm's professionals are committed to serving the clients through a complete and detailed understanding of all their business interests as well as the legal topics involved and by always seeking to be value generators. The firm has significant experience in assisting international companies in planning and implanting their business presence in Colombia and in advising local and international companies in corporate tax, indirect tax and local tax matters. The practice includes the representation of clients before the national and local tax authorities and courts in tax discussion and litigation matters.

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