COLOMBIA: An Introduction to Tax

Colombia’s Evolving Tax Landscape

During 2025, Colombia's tax framework will continue to evolve in response to fiscal and economic challenges. Although the 2024 Tax Reform Bill was not approved by Congress, it included significant concepts that signal the government's fiscal policy direction. These included a gradual reduction of the corporate income tax rate, an increase in the corporate income tax surcharge applicable to the oil and gas industry and adjustments to increase individuals’ taxation, such as raising the capital gains tax rate and expanding the wealth tax base. This tax bill also aimed to raise revenue for financing the government budget.

Simultaneously, key rulings by the Constitutional Court in 2024 declared the unconstitutionality of the tax measures introduced by the 2022 Tax Reform Bill, which, among other goals, were intended to generate state revenue.

As a result of the collapse of the 2024 Tax Reform Bill and the Constitutional Court’s rulings on provisions from the 2022 Tax Reform Bill, more aggressive tax audits by the tax authority are anticipated as they seek to collect revenue from taxes due and penalties.

Proposed changes in the 2024 Tax Reform Bill

Although ultimately shelved, the 2024 Tax Reform Bill proposed several key measures aligned with the government’s priority to raise revenue to finance a constantly expansive budget, while also relieving the general income tax rate.

• Increase in the individuals’ tax burden: The bill sought to (i) increase the capital gains tax rate, raising it from 15% to 20%; (ii) expand the wealth tax to include non-productive real assets owned by corporations and permanent establishments, with progressive rates potentially reaching 2%; (iii) abolish, by 2026, the SIMPLE tax regime that is often used by individuals and small businesses to control their tax burden; and (iv) impose a deemed dividend equivalent to 30% of the profits of companies and increase the dividends tax from a maximum rate of 20% to a maximum rate of 39%.
• Changes to corporate income tax: The reform proposed gradually decreasing the general corporate income tax rate from 35% to 30% while increasing the corporate income tax surcharge on the mining sector from 15% to 20%.
• Green energy: The bill proposed increasing taxes on hybrid and plug-in hybrid vehicles to the standard 19% from the current 5%, while maintaining the preferential 5% rate for electric vehicles. It also contemplated modifications to the carbon tax by aligning tax on coal with that applicable for gas and petroleum products, and proposed new incentives for renewable energy projects.
• More instruments for tax audits: The reform contemplated compensation for whistle-blowers, streamlined procedures for addressing tax abuse and conducting audits and introduced penalties for non-compliant invoicing, while also expanding the definition of “fictitious suppliers” to include company shareholders.

Constitutional Court rulings on the 2022 Tax Reform Bill

In 2024, the Constitutional Court played a crucial role in reviewing the constitutionality of several provisions of the 2022 Tax Reform Bill. These rulings have significantly shaped Colombia's tax landscape and deserve particular attention.

• Corporate income tax surcharge on oil companies: The Court upheld the constitutionality of the corporate income tax surcharge imposed on companies involved in crude oil extraction, linked to fluctuations in international prices. It clarified that this surcharge does not contravene the principle of tax non-retroactivity, as it applies exclusively to fiscal periods following the enactment of Law 2277.
• Tax on single-use plastics: While upholding the overall constitutionality of the tax, the Court struck down a specific provision to better align the taxable event with the responsible taxpayer.
• Wealth tax: Although the wealth tax, made permanent under Law 2277, remains contentious, the Court refrained from ruling on its constitutionality. Critics argue that the tax may have confiscatory effects and question the inclusion of real estate within its taxable base, citing potential conflicts with municipalities' fiscal autonomy. The changes made by the 2022 Tax Reform Bill to the wealth tax included targeting non-productive assets owned by companies. This approach sought to curb tax avoidance through asset transfers to legal entities. However, the definition of “non-productive assets” remains contentious, as it is seen as overly restrictive and inconsistent with previous judicial interpretations.

These rulings highlight the Constitutional Court’s critical role in shaping Colombia's tax system, ensuring that fiscal policies adhere to constitutional principles and balance economic and legal considerations. Unlike the rulings issued in 2023, the rulings detailed herein did not significantly impact the state’s ability to collect taxes to finance the government’s budget.

Final comments

Colombia's tax system is poised for further transformation, driven by the country’s fiscal priorities as outlined in the general national budget. With ambitious revenue targets in place, continued tax reform with the main goal of increasing revenue is expected to shape the national landscape in the coming years.

In recent years, the government has also focused on improving tax dispute resolution mechanisms, particularly through the potential introduction of tax arbitration. This tool aims to expedite dispute resolution and unlock significant revenue currently tied up in lengthy litigation. Although the Tax Arbitration Bill was introduced in 2024, it did not advance. Nevertheless, its reintroduction in 2025 cannot be discounted. If adopted, tax arbitration could become a critical mechanism for enhancing tax system efficiency, fostering compliance and reducing legal costs.

As Colombia refines its fiscal policies, its commitment to broadening the tax base and tightening compliance measures to fund the government’s budget will be pivotal in shaping the future of its tax regime.