COLOMBIA: An Introduction to Tax

During 2023, the Colombian tax landscape will see the impact of the 2022 tax reform that introduced significant changes to the taxation of businesses and individuals in order to increase government revenue.

Among the most significant changes introduced by the 2022 tax reform, we highlight (i) the increase in tax rates, (ii) the limitation of tax benefits, (iii) the introduction of tax provisions that affect international businesses, and (iv) other provisions that increase the cost of transfer of immovable property and affect individuals.

Increase in Tax Rates 

Although the 35% corporate income tax rate of was not modified, capital gains tax increased from 10% to 15%. In addition, a 15% minimum effective tax rate was introduced.

The tax reform also established a corporate income tax surcharge for certain sectors of the economy (ie, financial entities, insurance companies, stockbrokers, non-renewable extractive industries and hydroelectric power generators).

The dividend withholding applicable to distributions among national companies was raised from 7.5% to 10% and the withholding tax rate on outbound dividends increased from 10% to 20%. In any case, the withholding applicable to dividends paid to foreign shareholders can be limited if the effective beneficiary is located in a jurisdiction covered by the Colombian tax treaty network. The current treaty network includes most countries of occidental Europe with the notable exception of Germany (Czech Republic, France, Italy, Portugal, Spain, Switzerland and the UK), some Latin American countries (Bolivia, Chile, Ecuador, Bolivia, Mexico and Peru), and other countries around the globe (Canada, India, Japan and South Korea). Tax treaties negotiated with other countries that are currently under a domestic approval process include those with Brazil, Luxembourg, the Netherlands, the United Arab Emirates and Uruguay.

Limitation of Tax Benefits 

In line with the recommendations of the 2021 Tax Expenditures Report, the 2022 tax reform removed several tax benefits including income tax exemptions on investments that increase productivity in the agricultural sector, the income tax credit on 50% of the municipal turnover tax (industry and commerce tax, or ICA) paid and the deduction for donations and investments in R&D projects.

Measures that particularly affect the oil, gas and mining sectors were implemented. For example, the prohibition on deducting royalties paid for the exploitation of non-renewable resources, and the abolition of the five-year amortisation of investments in the exploration, development, and construction of mining and oil and gas deposits.

Other specific tax incentives were limited to 3% of the taxpayer’s annual net income to prevent the erosion of the tax base. Among the limited benefits, we highlight (i) the discount for investments in environmental projects; (ii) the exemption on profits distributed to workers through shares; (iii) the deductions provided for employee education; (iv) the deduction for investments in infrastructure for public performances; and (v) the discount for donations to non-profit entities.

From 2024, industrial users of Free Trade Zones who wish to maintain the 20% Free Trade Zone preferential corporate income tax rate will need to obtain approval for a “Plan for Internationalisation and Annual Sales.” All income other than that sourced from the export of goods and services will be taxed at the general rate of 35%.

Tax Provisions that Affect International Businesses

Introduction of the significant economic presence (SEP) concept

In order to be able to tax the profits of foreign companies that, despite not having a physical presence in the country, do have a connection to the country through their digital presence or by taking advantage of the Colombian market, the 2022 reform introduced the concept of SEP.

From 2024, foreign companies that maintain a deliberate and systematic interaction with users or customers in Colombia will be taxed on the income received from the sale of goods or the provision of services to customers or users located in national territory if certain thresholds are met.

The provision of digital services including mobile apps, e-books and digital subscriptions to audio-visual media will also trigger the existence of an SEP in Colombia

Foreign companies with an SEP in Colombia may opt in to filing and paying income tax at a rate of 3% on their total gross income. Otherwise, a withholding tax of 10% will be applied. The interaction between the SEP rules and double tax treaties is an interesting matter to evaluate.

Reform to the place of effective management (POEM) definition

Foreign companies effectively managed in Colombia are considered Colombian companies for income tax purposes.

The reform modified the definition of POEM to refer to the place where the entity’s daily activities are carried out instead of being limited to the place where the senior management activities take place. The interaction between domestic POEM provisions and double tax treaties is also an interesting matter to evaluate.

Other Provisions that Affect Individuals 

Dividends distributed to residents, which used to be taxed at a 10% rate, are now taxed at an effective rate of up to 20%, depending on the total annual income of the individual.

A permanent wealth tax levied on individuals as well as certain foreign companies that have assets in Colombia, other than certain types of investments, was also established. It taxes net assets above around COP3 billion (USD650,000) and the applicable marginal rate is up to 1%. During 2023 to 2026, an additional marginal rate of 1.5% will be applicable to those assets exceeding approximately COP10 billion (USD2.15 million),

Wider Trends in the Colombian Tax Framework 

Besides the effects of the 2022 tax reform, 2023 will be a year in which the government is likely to submit a bill to reform the municipal tax regime.

In the medium term, it is foreseeable that the Colombian tradition of following the OECD’s tax recommendations will continue. Indeed, Colombia has played an active role in the implementation of BEPS and it is likely that at some point, it will implement the provisions derived from Pillar 1 and Pillar 2. In fact, the 2022 tax reform implemented provisions that somewhat reflect the current global discussions related to the two pillars: (a) the 15% minimum corporate income tax rate established for local companies and (b) the concept of SEP that seeks to tax foreign taxpayers with a deliberate and systematic presence in the country or rendering digital services to the Colombian market.