On 17 November 2022, the Colombian Congress approved the tax reform bill submitted by the Colombian Government. The bill is expected to be signed by the Colombian President and then published in the Official Gazette to enter into force.
The approved tax reform bill was subject to multiple changes throughout the legislative process (See EY Global Tax Alerts, New Colombian Government submits tax reform bill to the Congress, dated 17 August 2022 and Colombia’s modified tax reform bill approved in first debate, dated 19 October 2022).
This Alert summarizes the most relevant changes and key provisions of the tax reform approved by the Congress.
Corporate income tax (CIT) rates
The general 35% CIT rate will remain the same. However, there are certain exceptions, listed below:
- Financial institutions, insurance and reinsurance companies, stockbrokers, among others, will be subject to a 5% CIT surtax (total CIT rate of 40%) until 2027, to the extent their taxable income exceeds 120,000 tax units (approx. US$1 million).
- Taxpayers whose main economic activity is power generation from hydric resources and that receive taxable income higher than 30,000 tax units (approx. US$255,000), including the taxable income from related parties, will be subject to a 3% CIT surtax (total CIT rate of 38%) until 2026. This surtax will not apply to power stations with an installed capacity lower than 1,000 Kw.
- A 15% CIT rate will apply to income of certain hotels and theme parks developed in some municipalities, for 10 years. Application of this benefit would need to be approved by the Ministry of Commerce, Industry and Tourism. The construction, refurbishment or expansion of hotels should be developed within five years following the entry into force of the bill. In the case of refurbishment or expansion projects, the value of the same cannot be lower than 50% of the acquisition value of the property to be refurnished or expanded. Likewise, the 9% CIT rate for hotel and ecotourism services was repealed.
- The bill eliminates reduced CIT rates applicable to some late maturity crops (e.g., cocoa, rubber, oil palm, citrus, and fruit trees); some publishing companies; care, food, accommodation, nursery, physical therapy, recovery and assistance services provided to elderly tourists; income derived from the equalization reserve created by pension and severance funds and international shipping services performed by vessels registered in Colombia. In those cases, the general CIT rate will apply (except for publishing companies under certain requirements which may apply a 15% CIT).
Free Trade Zones
As of 2024, industrial users of the free trade zones (FTZs) will continue to benefit from the 20% tax rate applied to income derived from the exportation of goods or services; the 35% CIT rate will apply to income derived from other types of activities. The taxable income subject to either the 20% or the 35% rate shall be determined based on the ratio between the income received for each type of activity (i.e., exportation of goods and other type of activities) and the total taxable income (excluding capital gains).
To apply the 20% rate, industrial users of FTZs must sign an internationalization plan with the Ministry of Commerce, Industry and Tourism. Otherwise, the 35% rate will apply over the overall income received by the industrial user.
For purposes of the application of the 20% rate, income derived from the provision of health services provided to nonresidents as well as airport infrastructure projects will be deemed as income derived from the exportation of goods and services.
For industrial users who, for fiscal year (FY) 2022, obtained a 60% increase in their gross income, compared with FY 2019’s gross income, the 20% rate should apply to their overall income until FY 2025.
The 20% CIT rate will still apply for offshore FTZs, industrial users of special FTZs for the provision of port services, industrial users of port services of FTZs, industrial users of FTZs engaged on oil fuels or industrial biofuels refining, industrial services users of FTZs engaged in the provision of logistic, transportation, handling, distribution, packaging, re-packaging, labeling or sorting services and FTZs’ operators.
15% minimum tax rate (adjusted tax rate)
The tax reform bill establishes a 15% minimum tax rate (referred to as adjusted tax rate - ATR). The ATR would be determined based on the ratio between the adjusted income tax (AIT) over the adjusted income (AI). The bill establishes the factors to be considered for calculating the AIT and AI. If the ATR is lower than 15%, it should be adjusted to achieve the 15% rate. The calculation is not necessarily aligned with the Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two model rules.
This rule will not apply, among others, to nonresidents, companies incorporated under the special economic and social development zones regime (Zese) over the period in which such companies are subject to a 0% rate, companies whose main domicile and whole activity is carried out in zones affected by armed conflict (ZOMAC), companies engaged exclusively in publishing activities, hotel services subject to a 15% tax rate and concession agreements.
Measures for extractive industries
Permanent CIT Surtax
Companies receiving income derived from the development of certain extraction activities of non-renewable resources, and whose taxable income is higher than 50,000 tax units (approx. US$424,000), including the taxable income of related parties, should be subject to a permanent CIT surtax which will vary between 0% to 15% for oil companies (total CIT rate between 35% to 50%) and between 0% to 10% for coal mining companies (total CIT rate between 35% to 45%). The applicable surtax rate would be determined based on a calculation that considers the average mining/oil prices within the 10 years prior to the year in which the surtax is determined and the average price of the product in the year in which the calculation is made.
Income derived from the sale of natural gas will be not subject to the CIT surtax.
Royalties paid for the exploitation of non-renewable resources will be not deductible for income tax purposes (regardless of how they are recorded from an accounting perspective, the denomination or payment conditions of such royalties). In the case of oil and gas, for taxpayers who pay in-kind royalties, the non-deductible value would be equivalent to the production costs of the volumes paid as royalties.
The tax reform repeals the five years accelerated amortization for investments in exploratory activities carried out between 2017 and 2027 as well as the incentive credit (CERT) for oil, gas and mining investments.
Taxation of nonresident entities with a significant economic presence in Colombia
Nonresidents with a “significant economic presence” (SEP) in Colombia will be subject to 10% income tax withholding (unless another withholding tax rate applies). Nevertheless, the nonresident entity may opt to assess its income tax liability at a 3% rate over the gross income. For such purposes, the nonresident entity should file an income tax return.
The tax reform allows a Double Tax Treaty to prevail over Colombian domestic law. Moreover, in the case that Colombia signs an international agreement which forbids this form of taxation, the rules mentioned above would be inapplicable as from the taxable year following the one when the international agreement enters into force (we understand that this rule is related with Pillar One of the BEPS 2.0 project of the Organisation for Economic Co-operation and Development).
A significant economic presence would be triggered if the following criteria are met:
- The nonresident entity has a deliberate and systematic interaction with the Colombian market. This type of interaction would be presumed to exist when the nonresident has interaction or marketing activities with more than 300,000 users in Colombia during the prior year, or within the relevant tax year, or displays the price of goods in Colombian Pesos or allows the payments in Colombian Pesos.
- Its gross income from transactions with customers in Colombia is higher than 31,300 tax units (approx. US$265,000) during the prior year or the current taxable year.
If the activities in Colombia are developed by different related parties, the above criteria will consider the transactions of all related entities.
This rule will enter into force as of 2024.
Tax deductions, benefits and incentives
Certain non-taxable income, special deductions, exempt income, and tax credits will be limited to 3% of net taxable income, calculated without applying the special deductions subject to the limitation. The limitation will apply only to the tax benefits expressly provided by the rule.
Furthermore, the following special treatments were repealed: non-taxable income derived from certain capitalizations, tax exemptions applicable to certain innovative and technological activities (so called orange economy), sale of real property for urban renovation projects, river transportation services, forest plantations. The mega-investments regime is also repealed. However, it is generally provided that acquired rights should be respected until the term, originally provided by the repealed law, has lapsed.
Other CIT measures
- Profits on the sale of listed shares on the Colombian Exchange Market will be considered non-taxable income when shares are held by the same final beneficiary, and do not represent more than 3% of the outstanding shares (currently the shares should not represent more than 10% of the outstanding shares).
- The possibility that nonresident entities have an effective place of management in Colombia (becoming Colombian tax residents) has been broadened, as now an effective place of management may exist based on the day-to-day activities (not only on strategic activities).
- The tax reform will include additional restrictions for concurrent tax benefits. Currently, an income taxpayer cannot claim a special income tax deduction (non-related with the income producing activity) and a tax credit based on the same economic situation/fact. According to the tax reform bill, the restriction will also apply for non-taxable income, exempted income or a reduced income tax rate. For such purposes, non-taxable income which does not increase the equity of the taxpayer would not be considered for purposes of the limitation.
- The tax reform repeals the special deduction for investments in research, technological development and innovation. However, taxpayers may be able to claim as a tax credit 30% (currently 25%) of the value invested in these types of projects in the taxable year in which the investment is made.
Dividends and capital gains
Dividends paid to nonresident entities out of profits subject to taxation at the corporate level will be subject to a 20% withholding tax rate (currently 10%).
Dividend distributions between Colombian entities would be subject to dividend withholding tax at a rate of 10% (currently a 7.5% applies). Such withholding tax may be claimed against the dividend tax levied on the shareholder in the case of individual tax residents in Colombia and foreign investors. The exceptions for the application of the dividend withholding tax will still apply.
The tax reform increased the capital gains tax rate from 10% to 15% for the capital gains of nonresident companies and individuals, as well as Colombian residents.
Labor, capital, non-labor income, pensions and dividends would be combined and subject to the ordinary income progressive rates ranging from 0% to 39%. However, a 19% tax credit on the value of the dividends would be granted (thus the dividends themselves would be subject to a tax rate of up to 20%).
The tax reform reduces the annual cap for claiming 25% of labor income as tax exempt from 2,880 tax units (approx. US$24,500) to 790 tax units (approx. US$6,700).
The 40% limit for tax-exempt income and deductions related to income in the general basket will be reduced from 5,040 tax units (approx. US$43,000) to 1,340 tax units (approx. US$11,400).
It included the possibility of claiming a deduction for up to four dependents, (72 tax units – approx. US$610 - for each).
Under several conditions, up to 1% of all kinds of payments made by individuals for the acquisition of goods or services may be taken as a deduction in the general basket (capped to 240 tax units – approx. US$2,000) to the extent they are supported in electronic invoices.
The annual tax-exempt income limit for pensioners will be kept in 12,000 tax units (approx. US$102,000). The same benefits would apply for foreign pensions received by Colombian tax residents.
The bill establishes a permanent equity tax which will be levied on 1 January of each year.
Colombian resident individuals will be subject to equity tax over their worldwide net worth (nonresident individuals would be taxed only on their Colombian assets). Nonresident entities would have to pay this tax on their assets in Colombia, such as real estate, yachts, artwork, boats, planes, and rights over mines or oil wells. In calculating this tax, nonresident entities shall not consider shares in Colombian companies, accounts receivable from Colombian debtors, certain portfolio investments and financial lease agreements.
For this tax to apply, the net equity of the taxpayer must be at least of 72,000 tax units (approximately US$611,000) as of 1 January of each year. The equity tax rates would range from 0.5% to 1.5%. The 1.5% will apply until 2026. As from 2027, the highest tax rate will be 1%.
Additional tax measures
The bill also makes changes applicable to specific sectors or activities as summarized below.
Tax on single-use plastics
The tax will be levied on the sale, self-consumption and importation of single-use plastics used for packaging, wrapping or packing goods. The rate will be 0.00005 tax units (approx. COP2) for each gram of the container, packaging or packing. Producers and importers of single-use plastics would be subject to this tax. This tax will not be deductible for income tax purposes. The bill excludes certain single-use plastics such as the ones used to wrap, pack or package medicines or hazardous waste material, from this tax. In addition, the tax reform does not levy the tax on single-use plastics when the taxpayer obtains the Circular Economy Certification – CEC. This certification should be regulated by the Ministry of Environment within the next six months from the date the tax reform comes into effect.
Tax on sugary beverages
The tax will apply over ultra-processed sugary beverages, as well as concentrates, syrups, and powders which, after being mixed or dissolved, create sugary beverages. This tax comes into effect as of 1 November 2023, and its tax rate, which is a fixed value, depending on the sugar content by each 100 ml, will be progressively increased until 2025.
Tax on ultra-processed foods
As of 1 November 2023, some ultra-processed foods will be subject to tax when they have added sugar, salt, sodium and/or fats. The tax rate is set to be increased progressively from 10% (FY 2023), to 15% (FY2024) and to 20% (from FY2025 onwards).
Carbon tax applicable to coal
As of 2025, the sale, importation or self-consumption of coal for combustion purposes will be subject to the existing carbon tax. The purchaser or the producer will be subject to the carbon tax when it uses the carbon for its own benefit. Coking coal will not be subject to carbon tax. The applicable rate will be COP20,500 (approx. US$4) per ton.
On the other hand, the carbon tax rates introduced by the tax reform and applicable to gas fuels, diesel, and gasoline will be updated as from FY 2024. Taxpayers who are certified as carbon neutral (subject to regulations) could reduce up to 50% of the carbon tax levied. A 0% carbon tax will apply on gasoline, diesel and jet fuels in certain regions of Colombia. Exportations of fuels will not trigger the carbon tax.
Value Added Tax (VAT) exemption for courier and urgent shipments
The tax reform keeps the VAT exemption for courier and urgent shipments whose value does not exceed US$200 and come from countries that have signed a Free Trade Agreement (FTA) with Colombia which expressly provides that benefit. However, to apply the benefit, it is provided that the requirements of the relevant FTA should be observed and not the mere fact that the goods are coming from a given country.
A 1.5% stamp tax is introduced on public deeds to document the transfer of immovable property with a value in excess of 20,000 tax units (US$170,000 approx.), For a value in excess of 50,000 tax units (US$425,000 approx.), a 3% tax rate will apply. The stamp tax will also apply on public deeds that document the transfer of ships, or mortgages on such immovable property or ships.
Some measures to avoid the duplication of debit tax when payment processors are involved have been included.
For additional information with respect to this Alert, please contact the following:
Ernst & Young S.A.S. Bogota
- Luis Orlando Sánchez
- Juan Torres Richoux
- Andrés Millán Pineda
- Amalia Borja Gonzalez
- Isabel Rodriguez Daniels
- Zulay Andrea Arevalo
Ernst & Young LLP (United States), Latin American Business Center, New York
- Ana Mingramm
- Lucas Moreno
- Enrique Perez Grovas
- Pablo Wejcman
- Pablo Angel
Ernst & Young LLP (United Kingdom), Latin America Business Center, London
- Lourdes Libreros
- Claudia V León Campos
Ernst & Young Tax Co., Latin America Business Center, Japan & Asia Pacific
- Raul Moreno, Tokyo
- Luis Coronado, Singapore
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.