The frequent changes in Colombian tax regulation demand constant revision of tax-planning strategies of companies undertaking business in Colombia. Below, we will refer to key factors to bear in mind, such as income tax assessment depending on the entity type, group structures, transactions with third parties and indirect taxes.i Entity selection and business operationsEntity forms
Colombian companies and permanent establishments are taxpayers subject to income tax on their worldwide income. On the contrary, foreign companies without a permanent establishment in Colombia are only subject to income tax in Colombia on their Colombian-source income. Before the 2018 tax reform, permanent establishments were only subject to their attributable Colombian-source income. However, the most recent tax reform changed this rule, narrowing tax-planning strategies for multinational businesses that used permanent establishments or branches to limit their attributable income to only their Colombian-source income.
An entity is Colombian for tax purposes if any of the following criteria is met:
- it has been incorporated in Colombia;
- its domicile is in Colombia; or
- its key managing decisions are made in Colombia.
Partnerships and consortiums, among others, are joint venture agreements that are not deemed to be taxpayers. Consequently, the parties to these types of agreements must assess their income tax liability according to their participation. Additionally, the parties are obliged to comply with formal duties, such as keeping record of the activities developed by virtue of the agreement, to support the income, costs and expenses incurred.
Fiduciary business vehicles, similar to trusts, are vehicles commonly used in Colombia for different purposes, mainly in the construction sector. These vehicles are fiscally transparent, and therefore they are not taxpayers. In accordance with the transparency rules, the settlors and beneficiaries must report income, costs and expenses as if they received them directly. If the settlor or beneficiary is an individual, the income will be taxable at the moment of its distribution instead of being taxable at the moment of its perception by the fiduciary.
Private equity funds and collective investment funds are not taxpayers either. If certain requirements are met, participants in these funds will also defer income taxation until the funds are distributed. The 2018 Tax Reform established requirements to achieve deferral, to avoid funds being used for the sole purpose of deferring taxation.Domestic income tax
Colombian taxpayers are subject to income tax on their net taxable income, which results from the sum of all revenues realised by the taxpayer, minus the sum of all specifically excluded items of income, minus the sum of all costs and expenses allowed as deductions. The Colombian regime also establishes an alternate minimum taxable income, equivalent to 1.5 per cent of the taxpayer's net worth. This used to be 3.5 per cent of the taxpayer's net worth, however, to reduce the effective tax rate, the 2018 tax reform reduced it to 1.5 per cent for 2019 and 2020, and established its definitive repeal as of 2021.
The current general income tax rate is 33 per cent, while capital gains are taxed at a 10 per cent rate. Only financial entities are subject to an additional income tax surcharge of 4 per cent for 2019, 3 per cent for 2020 and 2 per cent for 2021. On the contrary, certain activities and special regimes benefit from preferential income tax rates. Hotels, book publishers and theme parks are subject to a 9 per cent income tax rate if certain requirements are met. Free trade zones are subject to a 20 per cent income tax rate, and mega-investments generating 250 jobs and investing at least US$300 million are subject to a 27 per cent income tax plus an exclusion of dividend tax for their shareholders. The mega-investments regime also implies the execution of tax stability agreements between the state and the investor, guaranteeing the stability of this preferential treatment.
The 2018 tax reform established a 10-year income tax exemption for investments in agriculture, and a seven-year income tax exception for the 'orange industry', which is related to creative activities and added value technologies activities strictly defined by the legislation. In both cases, it is necessary to fulfil requirements related a minimum investment and job creation.
Besides the regular deductibility requirements, costs and expenses incurred abroad by Colombian taxpayers are subject to a limitation of 15 per cent of the taxpayer's net taxable income assessed without taking into account these deductible items. This limitation is not applicable where the payment has been subject to withholding tax and corresponds to certain interest payments (deemed from a foreign source or made in connection with the import of movable tangible property). Additionally, payments to a foreign home office are only deductible in Colombia if they were subject to withholding tax and the transfer pricing regime.
Besides the double taxation relief that will be explained below, the Colombian tax regime provides a foreign tax credit applicable to Colombian taxpayers obliged to pay income tax abroad with regard to their foreign-source income. The tax paid abroad can be credited towards the Colombian income tax liability, provided that the amount does not exceed it.Dividends and other repatriation mechanisms
In addition to income tax, the distribution of dividends is subject to dividends tax at different rates depending on the characteristics of the beneficiary. Dividends paid to foreign companies or individuals are subject to a 7.5 per cent withholding tax. Dividends paid to Colombian tax residents are subject to a 15 per cent withholding tax applicable to the amount exceeding approximately US$3,000. Dividends distributed to Colombian companies are subject to a 7.5 per cent withholding tax creditable towards further distributions.
The winding-up of Colombian companies is a taxable event for their shareholders. The applicable tax is calculated on the excess of the distribution over the adjusted equity contributions – the rate is 33 per cent if the stake has been owned for less than two years and 10 per cent if the stake has been owned for two years or longer.Capitalisation requirements
The funding of operations in Colombia through debt implies that interests earned by foreign companies are subject to a zero per cent to 20 per cent withholding tax, depending on the features of the financing facility and, if between related parties, are also subject to the transfer-pricing regime.
Thin capitalisation rules were reformed by the 2018 tax reform to limit the deductibility of interests originated in debts with related parties exceeding two times the net worth of the Colombian taxpayer. Before this modification, the thin capitalisation rule was applicable as a limit to the deductibility of interests originating in debts with any debtor exceeding three times the net worth of the Colombian taxpayer.Double tax agreements
Currently Colombia has double tax agreements (DTAs) with 17 jurisdictions. The application of DTAs is a valuable tool to prevent double taxation and reduce the tax liability of foreigners undertaking business in Colombia. The following table summarises the main features of Colombia's DTA network.
|Income tax treaties|
|Canada||Up to 15%||10%||10%||Yes|
|Chile||Up to 7%||Up to 15%||10%||Yes|
|Czech Republic||Up to 15%*||10%†||10%||Yes|
|France||Up to 15%*||10%†||10%||No|
|Italy||Up to 15%||Up to 10%†||10%||No|
|Japan||Up to 15%||Up to 10%||Up to 10%||No|
|Mexico||0%*||Up to 10%†||10%||Yes|
|South Korea||Up to 10%||10%†||10%||Yes|
|Spain||Up to 5%||10%†||10%||Yes|
|Switzerland||Up to 15%||10%†||10%||Yes|
|United Arab Emirates||Up to 15%*||10%||10%||No|
|United Kingdom||Up to 15%*||10%†||10%||No|
* These DTAs provide a higher withholding rate when the company distributing the dividends is a Colombian company and the profits out of which the dividend is distributed were not taxed at the corporate level, as follows: 25% for the Czech Republic; 15% for India; 33% for Mexico; 33% for Portugal; 15% for South Korea; 15% for France; 15% for the United Kingdom; and without limitation for United Arab Emirates.
†These Treaties to Avoid Double Taxation provide the non-taxation at the source of the interest paid to the other state or to certain public entities of the other state. The following treaties also provide the non-taxation of certain other activities: Spain – sale on credit of merchandise and loans granted by banks; Switzerland – sale on credit of merchandise and loans granted by banks; Czech Republic: – sale on credit of merchandise and loans granted by banks for a period not exceeding three years.
Through the most recent tax reforms, Colombia established mechanisms to avoid the base erosion and profit shifting of multinational companies operating in Colombia, in accordance with the OECD guidelines. Among other measures, Colombia has implemented a controlled foreign corporation regime applicable to foreign entities controlled by Colombian tax residents, and a general anti-avoidance rule.
Colombian legislation establishes two types of tax regimes applicable to operations with foreign companies operating in low-tax jurisdictions: non-cooperative jurisdictions and preferential tax regimes. These operations are subject to severe tax effects such as a 33 per cent withholding tax regardless of the nature of the income (interests, dividends and others). In addition, all operations performed by Colombian taxpayers within non-cooperative jurisdictions or preferential tax regimes are subject to the transfer-pricing regime, whether or not they are related parties.
Likewise, since 2004, Colombia has a transfer pricing regime applicable to operations with foreign related parties that follows the OECD guidelines and aims to ensure that intercompany transactions are arm's length.ii Common ownership: group structures and intercompany transactions
There are no consolidated group taxation mechanisms under Colombian tax law, however, groups of companies shall take the following into account when evaluating their tax-planning strategies:
- Dividends distributions – As previously mentioned, as a general rule, dividends distributed by a Colombian subsidiary to another Colombian company are subject to a 7.5 per cent withholding tax. This can be avoided if the dividend distributions is made to a Colombian holding company (CHC) or if is made within a group of companies duly registered with the Chamber of Commerce.
- CHC Regime – Further to the 2018 Tax Reform a new holding regime was adopted in Colombia. This regime, as further explained below, is highly attractive for foreign companies or individuals investing in various jurisdictions through Colombia. It is, therefore, a very interesting tax-planning tool for multinationals.
Colombian companies with a minimum 10 per cent participation in the capital of at least two subsidiaries can opt in, provided that one of their main activities is investing in securities, investing in shares of foreign or Colombian companies, or the management of such investments.
The CHC Regime provides tax benefits for (1) the shareholders of the CHC, and (2) the CHC itself, as summarised in the following tables.
|Tax benefits for the shareholders of the CHC|
|CHC distributes dividends to||Colombian tax resident||Foreign tax resident|
|Taxed in Colombia, with right to a foreign tax credit on any tax paid abroad by the company that distributed dividends to the CHC.||Exempt from dividends tax in Colombia, provided that: (1) the income out of which the dividends were distributed is attributable to activities carried out by foreign entities; (2) the income out of which the dividends were distributed is not covered by the Colombian Controlled Foreign Entities Regime; and (3) the shareholder is neither resident in a non-cooperative jurisdiction, nor subject to a preferential tax regime|
|Sale of shares of the CHC by||Exempt from capital gains tax and CIT in Colombia, provided that: (1) the price received in consideration for the shares is attributable to value created by foreign entities; and (2) the company from which the CHC is selling the shares does not qualify as a Colombian controlled foreign entity.||Exempt from capital gains tax and CIT in Colombia, provided that (1) the price received in consideration for the shares is attributable to value created by foreign entities;1 (2) the company from which the CHC is selling the shares does not qualify as a Colombian Controlled Foreign Entity; and (3) the shareholder is neither resident in a non-cooperative jurisdiction, nor subject to a preferential tax regime.|
|Tax benefits for the CHC|
|Dividends received by the CHC from||Colombian company||Foreign company|
|Taxable in Colombia with CIT, but not subject to dividends tax.||Exempt from CIT in Colombia, provided that the income out of which the dividends were distributed (1) is attributable to activities carried out by foreign entities; and (2) is not covered by the Colombian Controlled Foreign Entities regime.|
|CHC sells its shares in a||Taxable in Colombia, under the capital gains tax or CIT, as applicable, depending on the circumstances.||Exempt from capital gains tax and CIT in Colombia, provided that the income out of which the dividends were distributed (1) is attributable to activities carried out by foreign entities; and (2) is not covered by the Colombian Controlled Foreign Entities Regime.|
Under the Colombian Controlled Foreign Entities Regime (the CFE Regime), individuals and companies that are tax residents in Colombia and directly or indirectly control a foreign entity and hold participation equal or higher than 10 per cent are deemed to have accrued the income, costs and deductions relating to passive income obtained by the Controlled Foreign Entity (CFE), in the same taxable year in which such income, costs and deductions accrued in the CFE. This tax recognition is made by each Colombian tax resident proportionally to his or her participation in the CFE.
It is important to highlight that the applicable provisions explicitly forbid the use by the controlling Colombian tax resident of any tax losses accrued at the level of the CFE and that for purposes of the application of this regime, passive income is deemed to comprise: (1) income from the alienation or rental of immovable property; (2) certain income from the trade of goods; and (3) certain income from intercompany services.Domestic intercompany transactions
Although there are no special transfer pricing rules applicable to domestic intercompany transactions, there are special rules for the assessment of the corporate income tax or capital gains tax levied in the sale or exchange of assets in all domestic transactions. These rules include statutory pricing thresholds that use criteria to assess the fair market value, aimed at ensuring that, for tax purposes, the assets are not alienated for a value that varies in more than 15 per cent from their market value.
Under Colombian tax regulations, if certain statutory requirements are met, intercompany reorganisations such as contributions of property, mergers and spin-offs, can be tax-free, which means that the taxable event can be deferred.Contributions of property
Property transfers to companies, as capital contributions, can be deemed tax-free events, provided that the tax cost is maintained both in connection with the transferred property and the stock issued in consideration for the contribution.Mergers and spin-offs
The tax-free treatment is achieved if the statutory requirements are met. These requirements include a tax cost rollover concerning both the transferred assets and the new shares issued to the shareholders, a continuity of interest and a continuity of business enterprise.International intercompany transactions
There are various provisions of Colombian tax regulations that are relevant when planning international intercompany transactions. Most of them are aimed at preventing tax abuse. Below we refer to the ones we consider are the most relevant.Transfer pricing regime
The Colombian transfer pricing regime follows the OECD guidelines and is applicable to transactions between a Colombian party and (1) a foreign related party; or (2) a related party located in a free trade zone. Colombian transfer pricing regulations also apply to all transactions involving a person or entity located, resident or domiciled in a non-cooperative jurisdiction (tax haven), even if the parties are not related. Under this regime, the prices or profit margins shall be set at arm's length. It is expected that arm's-length remuneration will be obtained for the transfer of functions, assets or risks within a group of companies. This provision is based on the OECD report on business restructurings. As part of the formal obligations arising from the Transfer Pricing Regime, the Colombian taxpayer shall prepare supporting documentation that includes a master file containing all relevant global information in connection with the multinational group, as well as a local report with all information regarding the operations carried out by the taxpayer.Tax-free reorganisations
As a general rule, reorganisations involving a foreign party are eligible for tax-free treatment only if the entity receiving the assets is a Colombian tax resident and the previously mentioned statutory requirements are met.
Mergers and spin-offs between two or more foreign entities entailing the transfer of assets located in Colombia imply, as a general rule, a taxable event in Colombia, unless the assets owned in Colombia that are transferred as a consequence of the reorganisation represent 20 per cent or less of the worldwide combined assets of the participating entities. In the latter case, the resulting transfer of the Colombian assets could be eligible for tax-free treatment observing the statutory requirements and related rules, as previously discussed.
Conversely, all capital contributions of property where the transferor is a Colombian tax resident and the transferee is a foreign entity are a taxable event in Colombia, without exception. Moreover, these contributions are subject to the Colombian Transfer Pricing Regime, even if the parties are not related, hence, the value attributed to the contributed property shall be arm's length.Withholding tax on cross-border payments
Colombian subsidiaries and branches of foreign companies are allowed to deduct payments made to their home offices only if such payments were subject to (1) withholding tax in Colombia and (2) the Colombian Transfer Pricing Regime. Moreover, whenever the payment is made in consideration for a service, the Colombian taxpayer shall be able to demonstrate to the tax authorities that the service was real (i.e., it was rendered).
Further to the 2018 Tax Reform the withholding tax rate applicable to payments made to the Home Office in consideration for management services increased from 15 per cent to 33 per cent.Limitation on deductibility of tax losses
Any tax loss generated in the sale of assets between related parties, or between a corporation and its shareholders is not deductible in Colombia.Thin capitalisation rule
With only very few exceptions, interest paid to a related party is deductible only if the Colombian entity's total indebtedness has an average value not exceeding twice its net equity (on 31 December of the preceding year). This limitation to the deductibility of interest applies on both cross-border inbound indebtedness and local indebtedness.Dividends received by the Colombian entity
In the absence of tax treaty relief, dividends received from a foreign affiliate are fully taxable in Colombia, unless the Colombian holding company is subject to the CHC Regime, as previously discussed.
It is worth noting that, in any case, the Colombian entity has the right to a foreign tax credit, which means that the tax paid abroad in connection with the dividends can be credited towards the entity's corporate income tax liability in Colombia.iii Third-party transactionsSales of shares or assets for cash
The gain generated in the sale of assets or shares for cash is taxable in Colombia, as follows:
- if the alienated asset or stock is a fixed asset for the taxpayer and the taxpayer has held it for a minimum two-year period, the sale generates capital gains tax at a 10 per cent rate; and
- if the alienated asset or stock is not a fixed asset for the taxpayer, or if the taxpayer has held the asset or stock for a period shorter than two years, the gain is deemed a regular item of income, subject to income tax at a 33 per cent rate.
As previously explained, Colombian tax regulations establish that, for tax purposes, alienations shall be made at a value that shall not vary by more than 15 per cent from the fair market value of the asset, and set forth some criteria to determine the market value of different types of assets.
With regard to real estate, some criteria relevant in determining the fair market value may be the cadastral appraisal and the self-appraisal. If stock is not traded in a recognised stock exchange, there is a presumption that their fair market value cannot be lower than 130 per cent of the 'intrinsic' value. Tax losses generated in the sale of stock are not deductible.
It is also worth highlighting that the sale of stock that is traded in the Colombian Stock Exchange is not a taxable event in Colombia, regardless of the tax-residency status of the seller, and provided that the shares that were alienated during the calendar year do not represent more than 10 per cent of the share capital of the listed company.Tax-free or tax-deferred transactions
As explained in Section II.ii, if certain statutory requirements are met, tax-free contributions of property, mergers and spin-offs are available. This also applies to third-party transactions.
As a consequence of mergers and spin-offs, either between related or third parties, part of the tax losses is transferable to the beneficiary entities. Nonetheless, tax losses are only transferable if the corporate purpose or economic activity of the merging or dividing entity was the same as that of the beneficiary entities before the transaction.International considerations
Further to the 2018 Tax Reform, indirect sales of shares of Colombian companies and assets located in Colombia via the sale of stock in a foreign holding company are now taxable events, unless: (1) the company whose stock is sold is listed in a recognised stock exchange, provided that no more than 20 per cent of the stock is owned by the same real beneficiary; or (2) the underlying assets located in Colombia represent 20 per cent or less of the book and market value of the total assets owned by the alienated entity.iv Indirect taxes
The Colombian tax regime establishes a general VAT applicable on the sale of goods and the provision of services in Colombia or from abroad. In addition, a consumption tax is applicable to certain businesses and has recently been extended to the purchase of immovable property.
Since 2017, the general rate of VAT has been 19 per cent. This tax is applicable to the sale and import of movable tangible property, intangible property associated with industrial property and the provision of services in Colombia and from abroad. Many basic consumer goods and services are subject to a reduced 5 per cent rate, a tax exemption (giving right to VAT credit) or a tax exclusion (not giving right to VAT credit). Exports are VAT exempted. As a general rule, all VAT paid to suppliers of goods and services that constitute a cost or expense of the taxpayer's income-producing activity, is creditable towards the VAT collected by the taxpayer from its clients.
The 2016 tax reform established that services provided in Colombia or from foreign countries to persons located in Colombia are subject to VAT in Colombia. In addition, that tax reform introduced a presumption under which services rendered from abroad but with beneficiaries located and resident in Colombia are deemed services rendered inbound, and are therefore subject to VAT. This presumption affects digital services rendered to Colombian beneficiaries. The enforcement of this measure caused controversies related to the imposition of formal and substantial tax obligations in Colombia to foreign providers of digital services. Indeed, this has been subject to polemic as it aims at extending formal duties to foreigners. In any case, the Colombian regime provides a VAT withholding tax mechanism if the foreign providers are not registered before the national tax authorities. According to this mechanism, credit card issuers and entities receiving payments on behalf of the foreign providers of services are obliged to withhold the VAT.
The 2018 Tax Reform introduced an income tax credit for VAT paid on the import, formation, construction or acquisition of real productive fixed assets. Before this tax reform, taxpayers were only able to deduct the VAT paid in the acquisition or import of capital assets. The introduction of this full credit of VAT is one of the most important measures that the government has taken to promote investment in the country.
The VAT regime provides particular incentives, such as:
- the exclusion of VAT on the temporary importation of heavy machinery and equipment not produced in Colombia for basic industry;
- the exclusion of VAT on the importation of machinery and equipment that is not produced in Colombia used for recycling and other environmental activities including environmental monitoring and control systems; and
- the exclusion of VAT on the imports of ordinary industrial machinery that is not produced in Colombia used for the transformation of raw materials by qualified exporters.
Besides the incentives mentioned above, the regulation provides three special regimes with benefits related to VAT:
- The Free Trade Zones regime excludes from custom duties and import VAT the 'introduction' of foreign goods to the free trade zone and exempts from VAT the sale of goods from the rest of the Colombian territory to free trade zones users.
- The Plan Vallejo is a special imports regime to promote Colombian exports that provides a special draw-back mechanism. By using this regime, exporters can temporarily import raw materials and other goods without triggering custom duties and enjoying a preferential deferral of VAT.
- The International Trading Companies regime is applicable to companies whose main purpose is the commercialisation and sale of Colombian products in the international market. This regime allows international trading companies that are duly registered before the Colombian authorities to buy goods in the national market to issue a special certificate to the seller, without paying VAT. In exchange, the company must export the products acquired within six months.
Certain economic activities such as mobile phone and internet services, restaurants and sale of cars are subject to consumption tax at a rate of 4 per cent, 8 per cent or 16 per cent, instead of being subject to VAT. Contrary to VAT, consumption tax is non-creditable. The 2018 Tax Reform extended the consumption tax to the purchase of immovable property exceeding approximately US$250,000. The applicable regulation also provides that the sale of immovable property through the transfer of fiduciary rights is also subject to consumption tax. This recent reform is causing controversy in Colombia as it is expected to negatively affect the construction sector.
In general terms, a smart planning of indirect taxes in Colombia for companies should be focused on understanding the VAT regime and consumption tax, as well as the particular benefits for certain sectors or businesses. The sale of shares or participation rights is not subject to indirect taxes.