Colombia's tax legislation and recent changes

Colombia is one of the Latin American countries that offer the most opportunities for economic development and investment. In fact, the IMF classifies the country as the fourth-most-important economy in Latin America, and in 2015 Fortune magazine listed it as one of seven new destinations for investment, along with India, Indonesia, Malaysia, Mexico, Poland and Kenya. According to The Economist magazine, the economies of the so-called CIVETS group (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) are expected to see a GDP increase of 4.5% in the next 20 years. In a further sign of its investor readiness, the World Bank’s “Doing Business” report for 2016 ranks Colombia’s regulatory environment 54th from 189 economies.

Considering that the decision to invest in a country must be principally founded on potential economic prospects, the tax system is a secondary aspect, although no less important, when making such a decision. Colombia has been adapting its tax system with the best tools provided by international tax law in order to compete in the global arena. At the same time, the government is focusing on internal tax collection and is searching for a better distribution of the tax burden among the various actors who contribute to producing the country’s riches.

This article focuses on the most relevant fiscal provision to be taken into account once the decision to invest in Colombia has been made. It does not aim to cover all the taxes, duties or contributions which might be encountered at a national, departmental or municipal level when an investment is made; nor should it be considered exhaustive advice.

National Regulations

In accordance with the Colombian constitution, in times of peace, only Congress, departmental assemblies and district and municipal councils may impose fiscal or para-fiscal contributions. The constitution also states that the departmental assemblies), or agreements (issued by municipalities), which regulate contributions may only be applied starting from the period which commences after the law, ordinance or agreement in question comes into effect.

System Formality

Colombia’s legal system is governed by Roman-Germanic law. Therefore, formality in judicial and administrative spheres continues to be of great importance. Fiscal measures which are introduced, and must eventually be debated by the Colombian fiscal authorities or before the courts, should therefore be clear and firmly founded on existing regulations.

For this reason, since the formalities prescribed by existing regulations are respected by the population, it was difficult for the Treasury to dispute them as their measures would not have any business purpose. However, even if formality has taken precedence over substance, Colombia continues to make great strides to give it the importance it ought to have in legal debates, especially with relation to tax.

Prevention Of Fraud

Law 1607 of 2012 introduced two regulations which are symptomatic of this new focus and which combat the use or implementation, through an operation or series of operations, of any type of entity, judicial act or procedure which aims to alter or modify the tax status generated by one or more contributors or taxpayers or their colleagues, collaborators or associates or other beneficiaries. In the event of such an abuse being uncovered, the tax office has the authority to ignore the effects of the conduct which constitutes abuse and to re-characterise or reconfigure them as if the abuse had never occurred.

This law additionally states that when a company of any kind is used with the purpose of defrauding the tax office or in an abusive manner as a means of tax evasion, the person or persons who carried out, participated in or facilitated the acts of fraud or abuse of the company’s legal entity, will be liable to the tax authorities for the damages caused.

International Regulations

Colombia has been adapting its internal fiscal regulations with international scope to comply with the practices commonly accepted by the Organisation for Economic Cooperation and Development (OECD) member countries. For these practices to have legal force in Colombia, they must be incorporated into a law of the republic, as could be the case for the actions proposed by the OECD within the base erosion and profit shifting (BEPS) initiative, especially since Colombia is not yet a member of the OECD.

However, Colombia has also been developing the other indispensable instrument to facilitate commerce between countries – treaties for the avoidance of double taxation. These treaties must also have legal force in order to be effective in Colombia and must therefore be incorporated into a domestic law approved by the Constitutional Court and promulgated via a governmental decree once the exchange of diplomatic notes between the countries involved has been completed.

Finally, another source which can regulate international taxation matters, which foreign investors should bear in mind depending on the provenance and destination of the investment, is the decisions of the Andean Community, which do not need to be incorporated into Colombian law.

Taxes Applicable To Legal Entities

We proceed to the subject of the taxes that, at the time of writing, apply to legal entities in Colombia, along with other relevant aspects which should be noted to determine potential tax charges.

We will limit ourselves to national and municipal taxes, leaving departmental taxes aside (because of their exceptional nature and specificity), and to aspects which could have been modified in the past few years, especially since the last two major tax reforms (Law 1607 of 2012 and Law 1739 of 2014).

Income Tax & Related Taxes

The Colombian tax system currently has two methods of determining the tax base for income tax; the system for ordinary net income and the system for presumptive income (minimum tax base). The system for presumptive income states that the base for calculating income tax should not be less than 3% of the liquid assets on December 31 of the year immediately preceding the tax year. Certain types of assets have been excluded from the base for the calculation of this tax as per the regulations. If the presumptive income is greater than the ordinary net income, the difference can be compensated within the next five fiscal years, through the readjustment of the liquid income determined by the contributor.

Taxation Of National Companies & Permanent Establishments Or Subsidiaries Of Foreign Companies

For tax purposes, those companies which have their main administrative site on Colombian territory during the year or tax period in question are considered national. Companies which were founded in Colombia or conduct most of their business on Colombian territory are also considered national, in accordance with the laws of the country. The income tax applies to profits obtained by taxpayers arising from their ordinary operations. The income tax period is annual and coincides with the calendar year. The income tax rate is 25%, and applies to income from global sources in the case of national companies and to income from Colombian sources in the case of permanent establishments or subsidiaries of foreign companies.

The supplementary tax on occasional income applies to certain activities of the taxpayer which do not fall within the bounds of their ordinary operations. The most common example of this relates to the profits arising from the disposal of the taxpayer’s assets which had been owned for two or more years. The tax rate for occasional income is 10%, and applies to the global occasional profits of national companies and the profits from Colombian sources in the case of permanent establishments or subsidiaries of foreign companies.

A new income tax, called the income tax for equality (CREE) and intended to finance social investment programmes, was introduced on February 1, 2013. This new tax is applied on practically the same base as the income tax, and the rate of the tax is 9%. A minimum tax base, as described with relation to the income tax, also applies to this tax.

Investors should bear in mind that from 2015 and until 2018 a surcharge will be applied to this tax when its base is equal to or more than COP800m ($294,000). The rates of this surcharge will be as follows: 5% in 2015, 6% in 2016, 8% in 2017 and 9% in 2018. Companies established in free zones continue to have the special income tax rate of 15% and, in general, are not obliged to pay the CREE.

Taxation Of Foreign Companies

In accordance with Colombian law, companies and other entities which are not national are considered to be foreign. These businesses are only taxed on their income from Colombian sources. For the income which the foreign company declares in Colombia, the applicable rates are: 39% in 2015; 40% in 2016; 42% in 2017 and 43% in 2018. In 2019 and thereafter, the rate will be 33%. These companies may be taxed on their net profits after costs and expenses and the use of any other existing tax benefits.

If a foreign firm is not obliged to declare its income in Colombia, it will be taxed according to the amount of taxable income generated in Colombia, under the mechanism of withholding tax. The applicable rates depend on the type of income, as follows:

• Technical services, technical assistance or consultancy given in Colombia or from abroad: 10%;
• Royalties on intangible assets: 33%;
• Software licences: 26.4%; and
• Dividends for which tax has not been paid by the Colombian company distributing them: 33%.

The rates listed above may vary in cases where Colombia has signed a treaty to avoid double taxation with the country in question.

Value-Added Tax

In Colombia value-added tax (VAT) is another national tax, which principally applies to the sale of physical goods which are not fixed assets and which have not been expressly excluded; the provision of services within the national territory; and the importation of physical goods which have not been expressly excluded.

VAT is structured as a tax on added value, so to determine the tax to be paid it is permitted to deduct the VAT generated and the VAT paid for goods and services which generate income for the operations being taxed.

In sales and service provision, the tax base is generally defined by the total value of the operation. There is a standard rate for VAT, which applies to the majority of operations and is currently set at 10%, and various other rates from 0% to 5%, which apply to certain goods and services. The periods for the presentation of VAT declarations are bi-monthly, every four months and annually.

Consumption Tax

This national tax was created on January 1, 2013 and applies to the provision of services or sale of goods to the consumer or consumer importation. The rates are 4%, 8% and 16%. When the goods or services are subject to a consumer tax, they are not subject to VAT. The tax period for the declaration and payment of the consumption tax is bi-monthly or annual.

Wealth Tax

For the fiscal years 2015, 2016 and 2017, tax-paying companies in Colombia which possess liquid assets of COP1bn ($368,000) on January 1, 2015 will be subject to wealth tax.

The tax base for the following years (from 2016 onwards) will vary very little from the initial base (year 2015), even if the liquid assets increase or decrease considerably during these years. The rates for the wealth tax will vary for each year.

Levy On Financial Movements 

The levy on financial movements was created for financial transactions through which the party in question liberates resources deposited in current or savings accounts, cashier’s cheques and credit expenditures through payments to current or savings accounts. It is possible to deduct from the taxpayer’s income tax base 50% of the value cancelled, whether or not there is any link with the income producing activity of the taxpayer.

The current rate is four per 1000 but it will be reduced as follows: three per 1000 in 2019, two per 1000 in 2020, one per 1000 in 2021 and zero per 1000 in 2022 and thereafter.

Supplementary Tax For Tax Standardisation

For the tax years 2015, 2016 and 2017, parties subject to the wealth tax and those who voluntarily declare that they have assets and/or non-existent liabilities on January 1, 2015, 2016 and 2017 which had not been reported in previous years may declare them in their declaration for the wealth tax.

The basis for determining this tax is the value of the non-declared assets and/or non-existent liabilities. The rates for this tax will be 10% in 2015, 11.5% in 2016 and 13% in 2017.

Tax Residency

The concept of residency is of equal importance when determining the tax base of citizens, since those who are resident in Colombia are taxed on their global income and assets, while those who are not resident are taxed on their income and assets in Colombia.

Furthermore, residents pay income tax on a sliding scale, while non-residents pay a fixed rate of 33%. For tax purposes, residents in Colombia are defined as foreigners or Colombians who comply with any of the following conditions:

• Having lived continually or non-continually in the country for more than 183 calendar days, including the days on which they entered and left the country, during a 365-day period; when the continual or non-continual stay in the country exceeds more than one year or tax period, a person is considered to be a resident from the second year or tax period. Colombian citizens are also considered to be residents if, during the tax period or year in question:
• Their spouse or dependent under-age children are residents in the country;
• 50% or more of their income is from a national source;
• 50% or more of their goods are managed in the country;
• 50% or more of their assets are in the country;
• Having been requested by the tax office to do so, they have not provided evidence of their tax residency abroad; or
• They have tax residency in a jurisdiction which the national government classes as a tax haven. This excludes Colombians who meet either of the following conditions:
• 50% or more of their annual income comes from the jurisdiction in which they are domiciled; or
• 50% or more of their assets are located in the jurisdiction in which they are domiciled.

Colombian citizens who, in accordance with the provisions of this article wish to provide evidence of their residency abroad for tax purposes, should do so at the National Tax and Customs Office by producing a certificate of tax residency or equivalent document issued by the country or jurisdiction in which they are now a resident.

Categories Of Citizens Resident In The Country & Applicable Income Tax

In accordance with the latest fiscal reforms, citizens are classified in three categories for the purposes of taxation. These categories are as follows:

• Employees, including those who work in liberal professions or technical services which do not use machines or equipment;
• Self-employed; and
• Those not covered by either of the above.

Employees are defined as citizens resident in the country who obtain 80% or more of their income from the provision of services or from carrying out an economic activity for an employer or contractor, through a labour or legal and regulatory link.

The tax is determined in accordance with the ordinary mechanism for calculating liquid income and the progressive table of taxes, but may not be less than the minimum national alternative tax (IMAN), which is an obligatory minimum for determining the tax base and rate.

The IMAN tax is applied to the total gross income from all sources, with certain specific authorised concepts. Occasional profits do not form part of the IMAN base. The IMAN base is subject to a different progressive table than the ordinary liquid income tax, for which the rates are lower.

Employees who earn less than 2800 tax value units (COP79.18m, $29,100) may have their tax determined using the system of simple alternative minimum tax (IMAS), which is a simplified form of determining tax. This system is voluntary and its base is determined in a manner similar to that used for IMAN. This declaration is valid from six months after its presentation.

Payments to employees are, in general, subject to tax. The amount should be calculated in the ordinary way and is also subject to a minimum withholding mechanism.

This minimum withholding results from the application of a special progressive table for payments to the employee, after subtracting, among other things, the social security contribution. (This does not apply to non-declarers).

Citizens resident in the country who obtain 80% or more of their income from one of the economic activities defined in article 329 of the Tax Statute are considered to be self-employed.

In the case of self-employed citizens, the ordinary system (tax on a sliding scale) applies to determine the person’s taxable income.

Furthermore, they may opt to apply the IMAS when their income is less than 27,000 tax value units (COP763.53m, $281,000).

Those who do not belong to either of the above categories are taxed according to the sliding scale of income tax and the minimum tax base is equivalent to 3% of their liquid assets from the year before.

Other Relevant Aspects To The Fiscal System

Citizens are equally subject to both the wealth tax and the supplementary tax for standardisation purposes. However, with regards to the wealth tax specifically, the principal differences between citizens and legal entities are the tariffs and periods.