On December 28, 2018, Colombia enacted Tax Reform Law 1943, developed under a very favorable perspective for the business environment. Although the reform’s fundamental purpose was to increase tax revenues, charging more tax on higher earners, several essential points should be noted:
Lower corporate rates
The most relevant income tax changes are the gradual reduction of the current general rate in order to lessen companies’ tax burden. Tax will therefore fall from 37% in 2018 to 33% in 2019, shrinking 1% per year from 2020 on, until hitting 30% in 2022.
The special rate of 9% for hotel services in municipalities of up to 200,000 inhabitants would also be extended to theme parks projects, ecotourism, agrotourism and marinas.
Starting in 2019, financial institutions will be subject to a special rate of 37%, which will be reduced to 35% in 2020 and to 34% in 2021.
In addition, the presumptive income tax rate is lowered from 3.5% to 1.5% in 2019 and 2020 and 0% in 2021.
Tax on dividends
Distributed among national companies
Dividends distributed between national companies are taxed at 7.5%. Dividends distributed between companies belonging to the same business group registered with the Chamber of Commerce will be exempt provided they are not established with the purposes of tax deferment. The tax does not apply if the distribution is to a Colombian entity qualifying for the new Colombian holding company regime.
In principle, both the ultimate individual and nonresident company could claim a credit for the withholding when paying their corresponding tax.
Distributed to resident individuals
The progressive dividend tax rate of 0%, 5% and 10% is modified to a single rate of 15% when dividends exceed 300 tax unit value (UVT) (COP 10,281,000). The rate will be applied through the withholding mechanism.
Distributed to non-residents
The tax on dividends to nonresidents increases from 5% to 7.5%, without prejudice of the treatment specified in double taxation treaties.
Tax on indirect sales
Following the reform, indirect sales of assets owned in Colombia will be taxed. In particular, the tax will be triggered when the change in ownership of assets located in Colombia results from the transfer of vehicles located abroad that own those assets. If the buyer is a Colombian resident, withholding tax must be applied on the payment under the general rules of payments abroad.
Taxation on permanent establishments
Permanent establishments will no longer be taxed on their Colombian-source attributed income alone, and instead on all worldwide income.
Withholding of payments abroad
Increase in the withholding rate from 15% to 20% of the value of foreign payments and to 33% for payments regarding back office services provided by head offices.
Deductibility of tax payments
Taxes, fees and contributions effectively paid during the year – except for income and complementary taxes – are now fully deductible for income tax purposes. 50% of the industry and commerce tax may be included as a deduction in the income tax return.
Special regime of mega-investments
Taxpayers making new investments in Colombia with a value of 30,000,000 TUV (around US$ 330 million) or more that generate at least 250 direct jobs may access the following benefits:
Income tax rate of 27% (except for hotel income, which shall remain at 9%).
Depreciation of fixed assets over a minimum period of two years, regardless of the asset’s useful life.
Presumptive income tax will not be applied.
Profits distributed by these companies will not be subject to tax on dividends. Profits taxed in accordance with articles 48 and 49 of the Colombian Tax Code will be subject to the rate of 27%.
They will not be subject to wealth tax.
In addition, tax law stability rules were created to allow these taxpayers to maintain the benefits in case of unfavorable changes to the regime. To that end, for a five-year period, 0.75% of the value of the investment made each year must be paid to the authorities.
Regime for Colombian holding companies
A new Colombian holding companies (“CHC”) regime is created for Colombian companies whose main purpose is the ownership of shares in companies or institutions in Colombia and/or abroad. Dividends distributed by nonresident entities to a CHC are reported as exempt income. Dividends paid by CHCs to residents are subject to tax on dividends, while those paid to nonresidents are considered foreign-source and not taxed in Colombia.
Changes in VAT
The simplified sales tax regime and the simplified excise tax regime are eliminated, leaving individuals and companies to be classified as either “VAT taxable” or “not VAT taxable”. Individuals who meet all the statutory requirements will not be taxable. Restaurants operating under franchise contracts will be VAT taxable and no longer subject to excise tax.
Nonresidents who provide taxed services from abroad must register as VAT taxable persons with the tax agency (DIAN) and report and pay VAT. The VAT triggered on electronic or digital services provided from abroad can be withheld by debit and credit card issuers, prepaid card sellers and cash collectors if the service provider does not voluntarily opt for the alternative tax payment system.
A wealth tax is created for 2019, 2020 and 2021. Colombian companies are not subject to wealth tax.
As with the wealth tax created in 2014, the liable parties are not determined based on whether they are subject to income tax. Individuals and non-resident companies owning property in Colombia (such as real estate, yachts, boats, motorboats, works of art, aircrafts and mineral or oil rights) are considered taxpayers.
In conclusion, the Tax Reform Law that came into effect on January 1, 2019 makes important changes in the Colombian tax system, with considerable impacts on the business environment. Nevertheless, the actual impact should be analyzed taking into account the opinions and regulations to be issued by the tax authorities.