NEW TAX REFORM IN COLOMBIA
IMPORTANT CHANGES IN 2019
On December 28, 2018, the Colombian Congress passed the Law 1943 of 2018 in order to introduce tax reform changes. In this document the most significant changes for our clients will be outlined.
- Corporate Income Tax
The general corporate income tax rate will be modified gradually:
*Financial entities with gross income greater than 120,000 UVT (1 UVT in 2019 = 34.270 COP ~ USD$ 11.40). These 120,000 UVT correspond to approx. USD$1,370,800.
- Alternate minimum income tax (“presumptive tax”)
The tax base of the alternative minimum tax will be gradually reduced down to 0% starting in the year 2021:
|Year||% of last year net equity|
Taxpayers applying to use the “simple tax regime” are not subject to the alternative minimum tax.
The tax for dividends will be increased for national companies as follows:
|Residents||Dividends taxed with corporate income tax within the company||7,5% tax for dividends|
The dividends tax applies only once at the moment dividends are distributed to the first Colombian shareholder.
Dividends distributed among national companies of a duly registered corporate group will be exempted.
The dividends distributed to foreign entities, individuals and permanent establishments will be increased as follows:
|Non-residents||Dividends taxed with corporate income tax within the company||7,5%|
- New Colombian Holding Company Regime
A preferential tax treatment for Colombian companies, whose main purpose is to invest or hold shares in foreign companies, is introduced.
Colombian companies whose main purpose is the holding of securities, investment or holding company of national or foreign shares or holdings, or the administration of said investments, have the possibility to access the new tax regime for Colombian Holding Companies.
Requirements for the access to the preferential tax treatment is that the national company must have:
- a) a direct or indirect participation in at least 10% of the capital of two or more national and / or foreign companies or entities for a minimum period of 12 months; and
- b) develops its corporate purpose in Colombia, counting with at least three (3) direct workers and one administrative office in Colombia.
If these requirements are fulfilled, the income accrued by Colombian Holding Companies for dividends or sale of shares in foreign companies will be exonerated of income tax and complementary taxes in Colombia and will not be subject to industry and trade tax.
For residents and national corporations, who receive dividends from a Colombian Holding Companies, these will be considered income from a taxed national source.
In order to access to the preferential tax treatment, the prior authorization from the Colombian tax authority (DIAN) is required.
- New regulation for permanent establishments
Following some recommendations from the OECD, the Law 1943 of 2018 establishes to widen the taxable income attributable to permanent establishments in Colombia.
Tax Reform establishes that in the determination of income tax and complementary of a permanent establishment in Colombia, the income from a foreign source is also included.
Currently, permanent establishments, including branches in the country of foreign companies, are only required to attribute national source income under the arm’s length principle.
In this sense, the study of attributions of income, costs and expenses of permanent establishments and branches of foreign companies will have to consider the assets, liabilities, functions and associated risks of their operations in Colombia to determine what income from national and foreign source, equally, will be attributable to them.
The new standard will represent for the permanent establishments and branches of a foreign company the need to evaluate their income attribution policies under the arm’s length principle.
- Presumptions in the regime of controlled entities from abroad
Clear rules on the presumptions of law in the characterization of passive or active income of controlled entities from abroad.
According to the Tax Reform, when more than 80% of the total income of a Controlled Foreign Company come from real economic activities it will be presumed that the total income, costs and deductions of the Controlled Foreign Company give origin to active rents for the controllers. On the other hand, if 80% of the income is passive, it will be presumed that the entire income and costs of the Controlled Foreign Company are passive income.
- Taxation of outbound payments
Some withholding tax rates for outbound payments have increased significantly. Below you find a summary of the applicable rates for outbound payments:
|PAYMENT||New Rate (Law 1943 of 2018)||Previous Rate|
|Royalties, personal services and exploitation of all kind of industrial property or know-how||20%||15%|
|Technical services and technical assistance services and consultancy rendered from abroad.||20%||15%|
|Payments related to software licensing||20%||26.4%|
|Financial interests from foreign loans for a period equal to or greater than 1 year; interest or financial costs of leasing fees derived from leasing agreements.||15%||15%|
|Payments or credits in account for premium granted by reinsurance.||1%||1%|
|Financial yields or interests obtained from loan agreements for a period equal to or greater than 8 years.||5%||5%|
|Payments made to foreign parent companies for management or administrative services, regardless of whether the income derived is domestic or foreign-sourced income.||33%||15%|
- Income tax rate of 9% for hotels
The Tax Reform introduces a 9% preferential tax rate for income derived from hotels that are built within the following 4 years as from the enactment of the law. The tax rate will apply for 10 years.
The preferential tax rate will also apply to hotels subject to restauration or expansion, as long as the value of the project exceeds 50% of the value of the building. The municipal authorities have to approve the restauration or expansion in order for the taxpayer to obtain the preferential tax rate.
- Taxes, stamp taxes and contributions paid will be tax deductible.
Taxes, stamp taxes and contributions paid by taxpayers will compute as tax deductible. Furthermore, 50% of the industry and trade tax will be a tax credit for income tax purposes.
In the case of the taxation on financial transactions (GMF), 50% of it can be computed as tax deductible, regardless if it is related to the income-producing activity.
- VAT as a tax credit.
VAT paid in the importation, formation, building or acquisition of fixed assets will be treated as a tax credit for income tax purposes.
Law 1943 of 2018 allows the taxpayers to offset as tax credit the VAT paid in the acquisition, import, formation or construction of fixed assets, including the VAT paid for rendered services.
- Tax credit for taxes paid abroad
The Law 1943 of 2018 eliminates the time- restriction to offset tax credits. Tax credits may be carried forward to be offset in the following years, provided that it will not exceed the limits set-forth in section 259 of the Colombian Tax code.
With regard to the indirect tax credit on dividends derived from foreign entities, it is necessary to present a statutory auditor certificate to the tax authorities (DIAN). The certificate must contain:
- a) the amount of the financial profit;
- b) the amount of the tax profit if different;
- c) the applicable tax rate in such jurisdiction; and
- d) the tax paid by the foreign entity.
On the application of the controlled foreign corporations regime, when the Colombian tax resident does not attribute all the income of the controlled foreign corporations, the tax credit will correspond to the tax actually paid by the CFC on the same income, which must be certified by the controlled foreign corporations and may not be higher than the percentage of the income attributed on the total value of the controlled foreign corporations income.
- Income tax for individuals
A general schedule will be established for individuals. It will include any item of labor income, capital income and non-labor income and will be progressively taxed up to a maximum rate of 39% that would be applicable to individuals whose income exceeds COP$1.027.836.000 (in 2019).
The new tax law establishes to unify the items of income from labor, capital and non-labor into a general income schedule, to have an independent schedule for pensions and to deal in a different schedule with the income derived from dividends and participations.
The applicable rates depending on the level of income are the following:
|UVT RANGE||Marginal Rate||Tax|
|>1.090||1.700||19%||(tax basis in UVT minus 1.090 UVT) x 19%|
|>1.700||4.100||28%||(tax basis in UVT minus 1.700 UVT) x 28% + 116 UVT|
|>4.100||8.670||33%||(tax basis in UVT minus 4.100 UVT) x 33% + 788 UVT|
|>8.670||18.970||35%||(tax basis in UVT minus 8.670 UVT) x 35% + 2296 UVT|
|>18.970||31.000||37%||(tax basis in UVT minus 18.970 UVT) x 37% + 5901 UVT|
|>31.000||onwards||39%||(tax basis in UVT minus 31.000 UVT) x 39% + 10352 UVT|
Conversely, the tax rate applicable for income associated to the schedule for dividends and participations would vary as follows: the applicable corporate income tax rate for dividends to be distributed as taxed in 2019 and to a progressive rate between 0% and 15% for those dividends and participation that can be distributed as non-taxable.
|UVT Range||Marginal rate||Tax|
|>300||onwards||15%||(Dividends in UVT minus 300 UVT) x 15%|
- Changes in the presumptive income tax base for individuals
The presumptive income tax will gradually be reduced:
Please note that the basis for calculating the presumptive income would be compared only with the income resulting from the general schedule, without including the income corresponding to pensions and dividends.
- Increase of income tax for labor and pension payments.
According to the Tax Reform’s purpose to increase the marginal and progressive rate of income tax for individuals for labor, pension, capital and non-labor items of income with rates from 0% to 39%, the withholding tax rate on labor and pension payments will also consider these percentages between 0% and 39%.
- Equity tax
The Law 1943 of 2018 introduces an equity tax for years 2019, 2020 and 2021 for individuals whose net equity is greater than COP$5,000,000,000 (approx. US$1.667.000). The applicable rate for this tax is 1%.
Foreign companies or entities that are not income taxpayers in Colombia but own assets located in the country would also be subject to this tax. However, foreign investors with shares in Colombian companies will not be subject to this tax.
In order to determine the taxable base of the equity tax, taxpayers will be allowed to offset 13.500 UVT of the value of their place of residence (house, apartment, etc.).
- Omitted assets
Those who wish to benefit from this assets regularization should file the corresponding return before September 25, 2019. No amendments or late filing would be accepted.
Taxpayers owning assets which have not been reported in Colombia as of January 1, 2019 could regularize them by paying a voluntary tax at the rate of 13% over either:
- a) the tax basis of the non-declared assets; or
- b) the fair value of the assets with a technical support.
The taxable base of the tax will be reduced by 50% in case the foreign assets are reported and invested in Colombia for longer than two years.
Structures that were created with the purpose of transferring unreported assets to entities with an artificially low tax basis shall not be recognized and the taxable base will be determined based on the tax basis of the underlying assets. There is a personal liability for banks and advisors involved in the creation of these structures.
- New simple tax regime
A simple tax regime is introduced in order to simplify tax compliance in Colombia.
The Unified Tax is an optional system that seeks to unify in one simple tax, the: a) income tax; b) consumption tax; and c) industry and commerce tax.
Taxpayers subject to the unified tax regime may be individuals, as well as legal entities, but they have to fulfill the following requirements:
- Gross income during the last taxable year equal to or greater than 1,400 UVT and less than 80,000 UVT;
- Individuals developing an enterprise or companies with individuals that are Colombian or foreign tax residents in Colombia as shareholders;
- If a shareholder has one or more enterprises or companies registered as taxpayers of the unified tax regime, to determine the threshold limit of gross income, the taxpayer has to consider the consolidated gross income of all the enterprises or companies in the proportion of the participation;
- In the event that one of the shareholders owns more than 10% of a company not registered in the unified tax regime, the maximum limits of income will be checked on a consolidated manner and in proportion to the participation;
- If a shareholder is manager of other companies, the maximum income limit will be reviewed in a consolidated manner with the companies that the shareholder manages;
- The company must be a) in compliance with its tax obligations and social security contributions; b) have its tax registry (RUT) updated; and c) have electronic signature and electronic invoice mechanisms;
Foreigners or permanent establishments of foreign entities, factoring companies, asset management companies, financial advice providers, certain energy activities, among others, cannot apply to this regime.
The tax depends on the annual gross income and the business activity and is ranged between 1,8% and 7,0%.
Taxpayers of the unified tax regime will be responsible for VAT or the national consumption tax, but will not be subject to withholding income tax, and shall not act as withholding agents.
III. REAL ESTATE
Consumption tax is levied on the transfer of title to real estate. Responsible for the payment of the consumption tax is the seller.
This rate will be applied to the full price of the asset when its price exceeds 918,436,000 Colombian pesos (approx. USD$300,000). The taxpayer will be the purchaser, although the person directly liable for the payment of the tax will be the seller. This tax is not applicable to the sale of:
- a) rural land destined to agricultural activities,
- b) land for the development of social interest housing projects and
- c) real estate destined to public amenities of social interest sold to state entities or non-profit entities.
It is recommendable to declare in the public deed by the Notary that no other than the purchase price is agreed between the parties.
- TAX PROCEEDING
As of July 1, 2019, the current methods of notification will become subsidiary to the notification via email.
The measure proposed by the Colombian government will imply that administrative acts regarding tax, customs and foreign exchange matters will be sent to the email which the taxpayer has registered previously in the tax register (RUT).
For more information, please contact:
Alexander von Bila Luisa Buchhagen
Tel.: +57 (1) 629 1904 ext. 104 Tel.: +57 (1) 629 1904 ext. 106