On 8 August 2022, the new Colombian Government submitted to the Colombian Congress a tax reform bill that is expected to bring in COP25 trillion in revenue for 2023 (approx. US$6.2 billion) (1.72% of the GDP), and COP50 trillion (approx. US$12.4 billion) in revenue by 2026, by reducing tax evasion.
Corporate income tax (CIT) rates
The general 35% CIT rate would remain the same. The bill, however, would eliminate the reduced CIT rates (generally 9%, or in some cases 2%) applicable to the income of certain hotels, theme parks, ecotourism services, some late maturity crops (e.g., cocoa, rubber, oil palm, citrus, and fruit trees), some publishing companies, and international shipping services performed by vessels registered in Colombia, among other things. In those cases, the general CIT rate would apply.
The bill would make the 3% surtax applicable to financial institutions (currently in force until 2025) permanent (for a total CIT rate of 38%).
Industrial and service users of free trade zones (FTZs) would have to comply with some exportation thresholds set by the Colombian Government to keep benefiting from the reduced CIT rate, which is generally 20%. The special FTZ would be subject to the 35% CIT.
Dividends paid to nonresidents out of profits subject to taxation at the corporate level would be subject to a 20% withholding tax rate (currently dividend tax is levied at a 10% rate).
The bill would increase the capital gains tax rate from 10% to 30% for the capital gains of nonresident companies and individuals, and Colombian resident companies.
Tax deductions, benefits and incentives
The bill would eliminate the ability to treat 50% of the industry and commerce tax effectively paid as a tax credit. Therefore, that tax would be treated 100% as a tax deduction.
The bill would not allow taxpayers to deduct certain expenses, such as the payment of club memberships, or certain payments to employees to help in the acquisition of housing, among other things. It would also limit certain non-taxable income, special deductions, exempt income, and tax credits to 3% of net taxable income, calculated without applying the special deductions subject to the limitation.
The bill would eliminate the following special tax treatments:
- The characterization of some gains from the transfer of shares listed on the Colombian stock exchange, as well as income derived from certain stock dividends, as non-taxable income
- The concept of deemed costs and expenses applicable to coffee crops
- Several income tax exemptions (e.g., those applicable to some entrepreneurial activities related to technological and creative industries, activities related to the development of the agricultural sector, as well as forestry plantations, fluvial transportation and construction of low-income housing)
- The mega-investment regime
- The special economic and social development zones regime (Zese)
- Certain benefits related to the film and publishing industries
As a transitory measure, taxpayers meeting the requirements of those treatments could still benefit from them for the period that it was originally contemplated in the law.
Changes to the concept of "effective place of management"
The bill would change the criteria for determining whether a foreign company has its effective place of management in Colombia (making it a Colombian tax resident). The proposed test would focus on the place where day-to-day activities are carried out, rather than where strategic and executive decisions are made.
Taxation of nonresident entities with significant economic presence in Colombia
The bill would establish the concept of "significant economic presence," under which foreign entities would be taxed as if they have a permanent establishment in Colombia. The income related to a "significant economic presence" would be considered as Colombian-source income.
According to the bill, a nonresident entity would trigger a “significant economic presence" in Colombia when:
- Its gross income from transactions with customers in Colombia is higher than 31,300 tax units (approx. US$297,000) during the relevant tax year; or
- It uses a website with a Colombian domain or
- It interacts with more than 300,000 users in Colombia during the relevant tax year
If the activities in Colombia are developed by different related parties, the criteria mentioned previously would take into account the transactions of all related entities.
Payments to nonresidents with a significant economic presence in Colombia would generally be subject to a 20% withholding tax. The collection mechanism would be subject to regulations for payments made by individuals who use Colombian methods of payment (e.g., credit cards issued by banks in Colombia), which are expected to be issued after the bill’s enactment.
The bill would allow a tax treaty to prevail over Colombian domestic law when foreign entities reside in a tax treaty jurisdiction.
The bill would subject dividends and capital gains obtained by Colombian resident individuals to ordinary progressive rates ranging from 0% to 39% (currently, these items are generally subject to a 10% withholding tax rate).
The bill also would reduce the annual cap for claiming 25% of labor income as tax exempt from 2,880 tax units (approx. US$27,400) to 790 tax units (approx. US$7,500).
The 40% limit for tax-exempt income and deductions related to income in the general basket would be reduced from 5,040 tax units (approx. US$48,000) to 1,210 tax units (approx. USD$11,500).
The annual tax-exempt income limit for pensioners would be reduced from 12,000 tax units (approx. US$114,000) to 1,790 tax units (approx. US$17,000).
The bill would establish a new permanent equity tax on Colombian resident individuals’ 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 would 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 COP3 billion (approximately US$750,000) as of January 1 of each year. The equity tax rates would range from 0.5% to 1%.
Additional tax measures
The bill would make changes applicable to certain sectors or activities, as follows:
- Tax on single-use plastics. The tax would apply to single-use plastics used for packaging, wrapping or packing goods. The rate would 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 could not be deducted for income tax purposes. The bill would exclude single-use plastics used to wrap, pack or package medicines and hazardous waste material, as defined by current regulations, from this tax. In addition, the bill would not levy the tax on single-use plastics when the taxpayer obtains the Circular Economy Certification -CEC, which will be regulated by the Ministry of Environment.
- New national consumption taxes. These new taxes would apply to sugary beverages (some dairy products would be excluded) and ultra-processed foods. For sugary beverages, the tax rate would vary from COP $0, $18 or $35 per 100 ml, depending on the level of sugar. For ultra-processed foods, the tax rate would be 10%. Producers or the importers and their related parties (if any) would be subject to the consumption taxes.
- Carbon tax applicable to coal. The sale, importation or self-consumption of coal would be subject to the existing carbon tax. The purchaser or the producer would be subject to the tax when it uses the carbon for its own benefit. Coking coal would not be subject to carbon tax. The applicable rate would be COP20,500 (approx. US$5) per ton.
Finally, the bill would include some additional measures for the oil and gas and mining sectors:
- Exports of certain customs subheadings of oil, coal and gold would be subject to a 10% windfall tax on the exportation value in excess of some reference values.
- Royalties paid to the Government for the exploitation of non-renewable natural resources could not be deducted for income tax purposes.
- The accelerated amortization over five years for investments in exploratory activities from 2017 to 2027 would be repealed.
- The certificate of tax credit (CERT) for new investments in oil and gas and mining would be repealed.
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
Enrique Perez Grovas
Ernst & Young Abogados, Latin America Business Center, Madrid
Ernst & Young LLP (United Kingdom), Latin America Business Center, London
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.