COLOMBIA: An Introduction to Tax

Colombia’s Evolving Tax Landscape 

The tax landscape in Colombia for 2024 is set to be a dynamic terrain. Recent changes, including the 2022 Tax Reform, have significantly influenced the trajectory of taxation in Colombia, affecting tax rates, regulations, and constitutional debates. However, it is worth highlighting that the impact of the 2022 Tax Reform extends beyond its enactment.

In the last months of 2023, the Constitutional Court is reviewing numerous lawsuits regarding the constitutionality of several changes introduced by the 2022 Tax Reform. Indeed, the Court is assessing whether the approved regulations adhere to constitutional principles such as equity, legality, non-retroactivity, and progressivity. Furthermore, during 2023, the executive branch issued different regulations to implement the 2022 Tax Reform, potentially generating further discussions about the extent of the approved changes.

Looking forward to 2024, ongoing discussions concerning the Colombian fiscal landscape will likely develop new regulations. Matters such as a potential reform to the local tax regime and internal arbitration for resolving tax disputes could be at the centre of the debate.

Insights of the 2022 Tax Reform 

Colombia’s 2022 Tax Reform brought about notable modifications in tax rates and regulations. While the general corporate income tax rate remained steady at 35%, the capital gains tax rate suffered an increase from 10% to 15%. Additionally, a minimum effective tax rate of 15% was introduced. Specific sectors of the economy, such as financial institutions, insurance companies, and non-renewable extractive industries, are now subject to a corporate income tax surcharge of up to 15%.

Furthermore, the Reform introduced the concept of Significant Economic Presence (SEP) for foreign companies with a digital presence in Colombia. Also, foreign companies’ definition of Place of Effective Management (PoEM) was adjusted to cover the day-to-day management and not only the place where senior management decisions take place.

As for individuals, dividends distributed to residents are now subject to a dividends tax at a rate of up to 20%, depending on their total annual income. A permanent wealth tax, with annual rates up to 1.5% from 2023 to 2026 and 1% from 2027, was also introduced for individuals and foreign companies with assets in Colombia different to certain types of investments.

These modifications have profound implications for corporations, foreign entities with a digital presence, and individual taxpayers in Colombia.

Recent developments 

During 2023, more than 60 lawsuits have been filed before the Constitutional Court to challenge the constitutionality of different provisions of the 2022 Tax Reform. The Court’s primary focus is to assess whether the challenged provisions align with constitutional principles, including equity, legality, non-retroactivity, and progressivity. If the challenged regulations threaten these principles, the Court can expel them from the tax system.

Recently, the Constitutional Court issued an important decision regarding the permanent wealth tax where some justices expressed reservations about the constitutionality of this tax considering that it might not fully uphold the principles of equity and uniformity due to its status as a permanent tax that raises concerns about potential confiscatory impacts. While a final decision is pending due to formal aspects of the lawsuit, it is possible that, in the coming months, the Constitutional Court will re-examine the constitutionality of this tax.

In addition, the Constitutional Court is currently examining the applicability of other provisions within the Tax Reform, including the surcharges imposed on specific entities, notably those in the extractive sector. The non-deductibility of royalties paid by companies to the state for resource exploitation is also under constitutional scrutiny. The role of the Constitutional Court in 2024 will undoubtedly be pivotal in determining whether the regulations approved in the latest Tax Reform align with the Constitution.

On another front, the executive branch is in the process of enacting regulations to implement the changes brought about by the recent Reform. In particular, the tax authority reformed the specialised committee dedicated to the inspection of companies with PoEM in Colombia. This aims to enhance revenue collection by closely monitoring companies effectively managed within the country.

Furthermore, the executive branch is actively working on regulating specific aspects of the SEP, including the criteria for its applicability and which transactions will be subject to taxation, among other considerations. It is anticipated that oversight of these transactions will gradually intensify in the coming years. Depending on advancements made by the OECD in this area of taxation, internal regulations may undergo further modifications.

Lastly, new taxes introduced in the Tax Reform, such as the tax on single-use plastics, beverages with high levels of sugar, and highly processed foods, are now in effect.

Challenges and opportunities 

Some discussions related to tax law will likely take place in 2024, which could change formal and substantive aspects for taxpayers.

One notable area of discussion involves the consideration of a reform to the local tax regime. Although an official tax bill on this matter has not yet been issued, the potential regulatory changes are expected to centre around the consolidation of regulation regarding local taxes in Colombia, such as the Industry and Commerce Tax, Registration Tax, and Property Tax. The overarching goal is to promote uniformity in order to stimulate tax compliance and alleviate tax evasion.

Furthermore, there is a rising political interest in discussing the introduction of domestic arbitration for tax matters. This mechanism would be intended to expedite the resolution of tax disputes. Nonetheless, it is important to acknowledge that there may be legal and constitutional obstacles to overcome in making this measure a reality.

Final comments 

The 2022 Tax Reform has conducted significant changes to Colombia’s tax landscape, affecting both corporations and individual taxpayers. The adjustments of tax rates, the introduction of the SEP concept, and the ongoing debates over the wealth tax’s constitutionality have created new challenges for taxpayers. The role played by the Colombian Constitutional Court in 2024 will be crucial in determining the fate of the 2022 Tax Reform, underscoring the importance of aligning these changes with constitutional principles.

Looking ahead to 2024, the tax landscape presents both challenges and opportunities. Discussions around a potential local tax reform seek to streamline local tax regulations and enhance tax compliance while addressing issues like tax evasion. Simultaneously, the consideration of domestic arbitration for resolving tax disputes highlights the commitment to improving the efficiency of tax dispute resolution.