In 2012 the Colombian government took a decision to reform the country’s tax legislation to adjust certain inconsistencies in the system. In particular, the tax reform proposed by the government aimed to accomplish the following five goals: Equality: As in any tax reform, the main goal of the 2012 changes was to obtain equality for all taxpayers, which translates into higher taxes for some people given their ability and resources to pay more, and conversely, to avoid taxing people that have less income. Efficiency & simplicity: The Colombian Tax Code is composed of several rules and articles that have been incorporated into the legal system through the passing of time, but not always in a coherent manner. This prompted the government to try to reduce the number of rules and articles throughout the Tax Code in order to simplify the understanding and applicability of the tax legislation for taxpayers as well as for law-enforcement tax authorities. Benefits: To guarantee the success of the tax reform, the government had in mind several benefits for taxpayers, such as lower penalties, creation of new jobs and fewer administrative costs associated with tax compliance, among others. Adoption of international standards: In light of increasing foreign investment made in Colombia in recent years, the tax reform aimed to increase the appeal for investors by reducing the statutory corporate tax rate, incorporating anti-avoidance and tax haven rules and by regulating international tax practices not defined by the Colombian tax legislation, such as the notion of permanent establishment. Tax collection: Just like previous tax reforms, the government wanted increase the collection of taxes in the country, which would automatically follow if the above goals were accomplished.
These were the goals and ideals set forth by the government in the last quarter of 2012. As it was drafted, the 2012 tax reform seemed a little ambitious to some people, considering the short amount of time available for the government to create a reform that would amend the essence of the tax system or, at least, was intended to transform the structure of tax legislation.
It was not an easy task, since the Colombian tax system has been constantly changing and the previous attempts to reform it have not always been spot on. Only time will tell if the most recent efforts made by the government will be successful and will accomplish all the objectives it intended to.
Detailed Tax Review
Companies doing business in Colombia are subject to a number of taxes, including corporate income tax, an income tax for equality (CREE), value-added tax (VAT), financial transactions tax, registration tax, real estate tax, municipal industry and trade tax, and consumption tax. The regulations applying to each of these are detailed below.
Corporate Income Tax
Companies incorporated in Colombia and foreign entities that make their profit through branches or permanent establishments are subject to income tax at a rate of 25% in respect to their global income (both national as well as foreign source income). Foreign firms (those whose income is not attributable to branches or permanent establishments in Colombia) are subject to income tax at a rate of 33% of their national source income. Taxable income in Colombia is defined as gross income less returns, rebates, discounts, all ordinary costs incurred in obtaining the net income and all allowed deductions.
As per Law 1607 of 2012, profits distributed by a branch are now categorised as dividends. Therefore, the distribution of profits abroad from a branch to its home office would be subject to 33% income tax withholding in the event that the profits distributed were not taxed at the branch level.
Income Tax For Equality
Law 1607 of 2012 also created the CREE, an income tax by which companies and similar payers of income tax contribute for the benefit of workers, employment generation and social investment. The CREE is levied on all the taxable income received by a taxpayer during the fiscal year. The CREE’s tax basis corresponds to the annual gross revenue, minus the ordinary and necessary expenses, interest and depreciation. For the years 2013, 2014 and 2015 the CREE will have a rate of 9%; as of 2016 the rate will be reduced to 8%.
Although the CREE has a similar tax basis as that established for corporate income tax purposes, there are several differences in the way each tax is calculated. Not all items that are deductible in the income tax basis are deductible for CREE purposes (e.g., donations may not be deducted from the CREE tax basis). And, although the corporate income tax allows offsetting the ordinary losses from previous periods, this is not possible for CREE purposes, as it is strictly prohibited to do so.
Several decrees have been issued by the government regulating the CREE, by virtue of which the following matters were legislated: i) withholding tax on the account of CREE; ii) the tax base of the CREE, as well as the process of refund and compensation of CREE balance in favour; iii) clarification regarding deductions established by articles 107 and 108 of the Tax Code. In this sense, when calculating the tax base of the CREE, the ordinary costs and deductions that meet with the requirements set by the aforementioned articles of the Tax Code may be deducted.
As a general rule, legal entities that have their effective administrative headquarters in Colombia are deemed to be resident for tax purposes. It is understood that the effective administrative headquarters of a legal entity is the place at which the commercial, management and all the other necessary decisions are taken to carry out the activities of the company. Companies with their main domicile in Colombia, or that were constituted in Colombia in accordance with the in-force dispositions, are also considered to have their fiscal residence in the country.
Taxation Of Individuals
Taxation of individuals in Colombia depends on the source of their income, their nationality and on whether or not they are Colombian residents. According to Law 1607 of 2012, residence is defined as physical presence in the country continuously or discontinuously for more than 183 days over a period of 365 consecutive days.
Colombian citizens are subject to income tax on their income from both national and foreign sources. Nonresident foreigners are subject to income tax in respect to their Colombian source income, and on their foreign source income as of the first day of their first year of continuous or discontinuous residency in Colombia.
For residents, income tax rates are progressive. The maximum tax rate is 33% and is applicable to taxable income in excess of 4100 UVT (UVT is a tax value unit equivalent to around $13.74). Net income up to 1090 UVT would be subject to an effective rate of 19%.
Law 1607 of 2012 introduces two new concepts applicable to resident employees: the National Alternative Minimum Tax (IMAN) and the Simple Alternative Minimum Tax (IMAS). The IMAN is a mandatory and presumptive determination of the tax basis and tax rate of the income tax; the IMAS is a simplified system for determining the tax due, and shall apply only to individuals who are resident in the country, classified as an employee and whose alternative taxable income during the tax year is less than 4700 UVT.
A foreign company is deemed to have a permanent establishment in Colombia when it possesses a fixed place of business through which it performs all or a part of its activity. Furthermore, according to the new regulation, when a person other than the independent agent is acting on behalf of a foreign company regularly on Colombian territory, and has authority to conclude acts or contracts on behalf of the foreign company, that company shall be deemed to have a permanent establishment in Colombia in respect of any activities that the person undertakes for the foreign company, unless the activities of such person are preparatory or auxiliary activities.
If the activities that are carried out in Colombia are of an ancillary or preparatory nature, it will not be understood that the foreign company has a permanent establishment in the country.
Recently, the government regulated certain matters surrounding permanent establishments. The new regulation established: i) what should be understood as a foreign company; ii) a fixed place of business; and iii) ancillary or preparatory activities for permanent establishment purposes, among others.
Decree 2193 of 2013 established a list of 44 countries that are considered tax havens, in addition to a list of seven countries that on a temporary basis (for at least a year) are not deemed as tax havens.
The dispositions related to tax havens are in force as of November 1, 2013. Under the decree, payments made to a tax haven jurisdiction are, as a general rule, subject to income tax withholding of 33%. The operations are subject to the transfer-pricing regime, and the deductibility of the costs and expenses made in a tax haven must comply with certain requirements established by the current dispositions.
Among those requirements, there has to be a transfer-pricing study that shows the detail of the activities performed, the assets that were used, the risks assumed, and the total costs and expenses which the provider of the goods or services had to incur. Individuals domiciled in a tax haven jurisdiction are considered Colombian residents for tax purposes.
Law 1607 of 2012 introduced the thin capitalisation rule within the Colombian tax system. Taxpayers can deduct from the corporate income tax only the interest arising from debts whose total amount during the corresponding taxable period does not exceed the result of multiplying by three the taxpayer’s net equity determined on December 31 of the immediately preceding fiscal year. Interest exceeding this amount is non-deductible. The rules apply to domestic and foreign loans, regardless of whether the loan is from a related or unrelated party.
Corporate reorganisations shall not be taxed, under the in-force dispositions, should they comply with all the requirements set by law. If the participants of an operation consisting of a merger or a spin-off are unrelated parties, shareholders owning at least 75% of the shares (or a minimum of 85% should they be related parties) must receive, as a result of this operation, a number of shares proportional to what they held in the participant prior to the merger or spin-off.
At least 90% of the value of this procedure must be released in shares (99% if participants are related). If these shares are sold within two years from the merger or the spin-off, shareholders will lose the benefit of no taxation, and shall have to pay the corresponding taxes that arise on this operation.
Colombia has adopted International Financial Reporting Standards (IFRS) for accounting purposes. From a tax perspective, the reference to accounting dispositions will still be ruled by Colombian generally accepted accounting principles for the four years following the introduction of the IFRS (i.e. 2018). During this period, the tax effects and impacts will be measured by the government in order to enable it to plan for the adoption of the corresponding legal dispositions that may be needed to avoid any adverse tax effects the implementation of the IFRS may imply for the National Treasury.
Capital Gains Tax
Capital gains are taxed at a rate of 10% (reduced from 33% as of January 1, 2013). Gains derived from the sale of assets held for at least two years as well as gains on the liquidation of a company that has been in existence for at least two years are considered capital gains.
The incomes produced from lotteries, raffles, betting and similar are subject to a 20% rate.
The amortisation of goodwill is allowed on the purchase of shares, as long as the shares are subject to a demerit (loss of value). The demerit has to be proved through technical studies and the amortisation of goodwill must comply with the necessity, proportionality and causality relationship.
The equity contributions made to a national legal entity, should they be in money or in kind, will not be considered taxable income as long as the following requirements are met. The receiving entity (Colombian company) must not register the equity contribution as an income nor a loss, but should issue new shares as a result; the tax cost of the goods contributed to the national legal entity must be the same as the tax cost of the shares issued; the goods contributed must retain, for tax purposes, the same nature of fixed assets or moveable goods that they had in the contributor of capital.
If a beneficiary disposes of assets within two years of the time when the contribution was made, any gain will not be eligible to be offset against available tax loss, having to be subject to the payment of the income tax.
It should be mentioned that contributions made by resident entities to foreign entities located abroad will be considered as taxable event, as per regulations.
Double Taxation Treaties
In recent years, Colombia has made a great effort to sign double taxation treaties to keep up with worldwide trends. Currently, Colombia has such treaties in force with five countries: Spain, Switzerland, Mexico, Chile and Canada.
Furthermore, during the course of 2013, the Colombian Congress approved double taxation treaties with South Korea, India, Portugal and the Czech Republic, though these are not currently in force.
As of 2013, the export of services is free of VAT without the requirement of having a contract registered with the tax authorities, as long as the services are rendered in Colombia, the provision of services does not imply the mobilisation of the supplier of the services to a location abroad and the services are used exclusively abroad (i.e. the beneficiary of the services is located exclusively abroad).
Furthermore, for a company to be able to prove the export of services, it must be registered as a service exporter in the unique tax record (RUT) and will have to retain certain documents should the National Tax Authority ever demand them from the company.
The national consumption tax came into effect in 2013 and applies to the provision of services, retail sales and imports by the final consumer of certain goods and services such as mobile phone services; the sale or import by the final consumer of a number of utility vehicles; and the sale of food and beverages by restaurants, cafes and supermarkets for consumption on site, to be taken away, or to be delivered to a residence, including the sale of both food and alcoholic beverages for consumption in bars, taverns and nightclubs.
The consumption tax is generated by the nationalisation of the imported good by the final consumer, by the delivery of the good or service, or by shipment of the account, issuance of ticket, bill, invoice or equivalent document by the responsible party to the final consumer, and in the case of mobile phone services, at the time of the payment by the user.
The consumption tax is a deductible expense for income tax returns, as it is considered an increase in the value of the good or service purchased. It is not deductible for VAT returns, nor does it imply any right to deductible taxes for the taxpayer.
Industry & Commerce Tax
This is a municipal and district tax applicable to any operating and non-operating income of individuals or entities performing industrial or commercial activities, or rendering services in any Colombian municipality or special district.
Certain exceptions are applicable to the sale of fixed assets and exports. The individual or legal entity that receives operating, and non-operating, income for performing industrial or commercial activities, or rendering services within a Colombian municipality or special district, will be subject to the payment of this tax.
The tax on industry and commerce paid throughout the fiscal year is fully (100%) deductible for the purposes of income tax.
There is not a single or unified rate of taxation for industry and commerce purposes. In this respect, each municipality in the country has the authority to designate the rate it considers relevant for industries operating in its jurisdiction provided that the said rate does not exceed the maximum authorised by the legislation that created this tax in Colombia (Law 14 of 1983).
Colombia’s transfer-pricing rules use the arm’s length principle and apply to transactions between Colombian taxpayers and foreign related parties. Such transactions must be determined according to the prices and profit margins that would have been used in comparable transactions between independent parties. Transfer-pricing rules are also used to determine assets and liabilities between related parties.
Parties are deemed to be related if there is any subordination or control or the parties are members of an entrepreneurial group within the meaning set out by the Tax Code and Commercial Code. Control, as it is defined, can be individual or joint, without participation in the stock of the subordinated company or by a principal head office established abroad.
Taxpayers are required to maintain records of all transactions involving non-resident related parties for five years and must report to the tax authorities annually all transactions with such parties that meet certain thresholds defined by the authorities.
General Anti-Avoidance Rule
A general anti-avoidance rule applies as of January 1, 2013, which introduces the substance-over-form principle. The regulation allows the Colombian tax authorities to disregard (or to re-characterise) a transaction in cases where abuse is found to be present.
Tax On Financial Transactions
The levy on financial transactions is assessed at the time of disposal of funds that are the subject of the transaction. Only those financial transactions involving the disposal of funds deposited in accounts opened with bank institutions that are located on Colombian territory will be taxed. The payers of the tax on financial transactions will be the users and customers of those institutions supervised by the Financial Superintendence.
The taxable events of the tax on financial transactions are the performance of financial transactions where the funds deposited in the financial sector are disposed of: current or savings accounts, deposit accounts of central bank, and drawing of cashier’s cheques; the disposal of funds through collection contracts or agreements or similar; the payments made by credit institutions through the credit in current, savings or deposits accounts, when this payment is not related to a movement of another current, savings or deposit account; the transfer or assignment of funds or rights on collective portfolios between different coowners of said portfolios, as well as the withdrawal of these same rights by the beneficiary trustor.
Half of the amount of the tax on financial transactions effectively paid by the taxpayer during the tax year can be deducted from corporate income tax, as long as it is duly certified by the withholding agent ( financial institution).
Additionally, Law 1694 of 2013 reduces the rate of the tax gradually starting in 2015. As such, for 2014 the rate will still be 4 x 1000, while for the year 2015 the rate will be 2 x 1000 and, finally, in the years 2016 and 2017 the rate will be decrease again to 1 x 1000.