This country-specific Q&A provides an overview of Tax laws and regulations applicable in Colombia.
How often is tax law amended and what are the processes for such amendments?
During the last 20 years, Colombia has had an average of 1.5 major tax reforms per year. The tax law-making process is comprised of several steps:
Initiative: Tax bills are usually proposed by the Government, specifically by the Ministry of Treasury and Finance.
Debate (by each chamber of Congress): Colombian Congress has to approve the proposed bill. Once the bill is approved by one chamber, it will undergo the same treatment by the pertinent standing committee and plenary sessions of the other chamber. Therefore, tax bills have to be discussed by Congress in four debates.
Voting: For tax bills to be enacted the majority of the votes are needed.
Sanction: The President has to sanction or promulgate any bill approved by Congress, propose amendments or ask for a reconsideration of any of its provisions.
Publication: The approved bill has to be published in the official journal (Diario Oficial).
Constitutional review: After the approval of the proposed tax bill, the Colombian Constitutional Court carries an examination, which determines whether the law is in accordance with the Colombian Constitution.
Tax bills are usually approved no later than by the end of the taxable year to assure its enforceability as of the following taxable year (this is especially relevant in annual / periodical taxes such as income tax).
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Taxpayers in Colombia are obliged to register before the Colombian Tax Office, file the tax returns on the dates set by the Colombian Government and pay their taxes accordingly. Income tax returns are filed on an annual basis and VAT returns are usually filed on a bimonthly basis.
Additionally, taxpayers, withholding agents and tax collectors are obliged to keep certain key information for 5 years, counted from the 1st. January of the year following its preparation, issuance or receipt. Such information must be provided to the Tax Office if requested. This information includes tax returns, payment receipts, information on operations and proof on income, costs, deductions, tax benefits, assets, liabilities, etc.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
There are three type of tax administrations in Colombia that manage and supervise the different levels of taxation:
The Colombian Tax Office (“DIAN” for its acronym in Spanish) overlooks national taxes (mainly, income tax, net worth tax, custom duties and VAT);
Municipal or city tax authorities overlook municipal taxes (industry and commerce tax, real estate taxes, among others);
Standard issues before DIAN, i.e., registrations, digital signature requests and certification requests, among others, may take frome one day to one week. Ruling requests are generally addressed between two to six months. Timing to address standard issues before municipal and departmental authorities vary depending on the authority, its infrastructure, work force and other factors that may impact its responsiveness capabilities.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Tax disputes take place at two different stages: the administrative stage and the judicial stage. The administrative stage hosts the discussion between the taxpayer and the corresponding tax office (DIAN, city or departmental tax office). Once the discussion is concluded, the taxpayer has the opportunity to continue the discussion before judicial courts (judicial stage). Generally, this is a two-instance procedure (i.e., an appeal is available to the defeated party) that may take between 6 to 8 years.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
The National Government and local authorities set the filing dates in which tax returns have to be filed and taxes paid. The amounts of tax in dispute should not be paid by the taxpayer until a definite decision is in place (whether administrative or judicial). If a final decision following a tax controversy is against the taxpayers, interests and penalties may be imposed.
However, the Colombian tax system includes the possibility for taxpayers to amend their tax returns and pay discussed amounts, but continue the discussion with the Tax Office. This, with the aim of avoiding the payment of higher interests and the possibility to apply a reduction of penalties.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government? Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Taxpayers and tax collector´s information in the Unique Tax Registry (“RUT” for its acronym in Spanish) is not confidential. On the contrary, this information should be disclosed to third parties. This information, however, is general and it includes items such as name of the taxpayer, tax ID, domicile, address, phone number, e-mail and other personal information. Additionally it contains the main tax qualifications and obligations (e.g. VAT collector qualification).
Other tax information, such as tax returns and private tax information sent to the Tax Authorities is confidential and safeguarded against disclosure to third parties, including other entities of the Government.
However, Colombia has a network of treaties that include an exchange of information clause, as well as several exchange of information treaties. Colombia is also a member of the Global Forum on Transparency and Exchange of Information for tax purposes and has ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Colombia’s network of information exchange mechanisms covers 90 jurisdictions including all relevant partners. Thus, Colombia is sharing tax information under that legal framework with other jurisdictions.
Colombia executed the multilateral agreement on Common Reporting Standard – CRS, which aims to automatically exchange tax information. The Colombian Congress approved the multilateral instrument in July 2013.
Colombian law in 2019 created the registry of beneficial ownership managed and supervised by DIAN.
What are the tests for residence of the main business structures (including transparent entities)?
Entities incorporated in accordance to Colombian Law, or having their main domicile in Colombia, or entities whose “place of effective management” (“POEM”) is located in Colombia are considered Colombian residents for tax purposes.
POEM is the place where all the necessary commercial and management decisions of an entity as a whole are carried through. In addition to this, POEM rule states that all the relevant factors have to be taken into account to determine whether the entity is effectively managed in Colombia, but it provides some criteria: (i) the place where the senior executives carry on their entity-related responsibilities; (ii) the place where the senior day-to-day management of the entity is usually carried out and (iii) the fact that the board of directors meets in Colombian territory, does not automatically imply the existence of a POEM.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Yes, there has been a trend in audits specifically focused in transfer pricing and cross border transaction. These audits have increased during the COVID era and are likely to continue and intensify post COVID.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Colombia tax system does enshrine a Controlled Foreign Companies (“CFC”) regime. Income taxpayers are obliged to include on their income tax return any passive income derived by CFCs. CFC’s net profits from passive income must be recognized by Colombian taxpayers in proportions equivalent to the participation in the CFC’s capital or profits on accrual basis and not on cash basis.
Colombian tax system also enshrines a thin capitalization regime. Income taxpayers may deduct interest arising from related loans, which do not exceed the result of multiplying by two the net equity determined at December 31 of the immediately preceding taxable year. The proportion of interest that exceeds the 2:1 limit are not be deductible.
In addition, Colombian tax system includes a transfer pricing regime consistent with OECD standards. It also establishes the possibility to negotiate and execute an advance pricing agreement with the Tax Office.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
Colombian tax system does have a GAAR. Tax law provides that the Colombian Tax Office may re-characterize or reconfigure any operation or series of operations that constitute abuse for tax purposes and, consequently, disregard its effects. To accomplish this, it may issue the corresponding administrative acts in which it proposes and assesses the taxes, interests and penalties.
According to this rule, an operation or series of operations will be tax abusive if it involves the use or implementation of one or several artificial acts, without apparent economic and / or commercial purpose to obtain tax benefits. In the case of a re-characterization of the transaction, an inaccuracy penalty of 100% of the higher tax liability could be imposed.
Due to its relatively recent enactment, disputes and controversies originated on the application of the GAAR are limited.
Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?
The BEPS recommendations that have been adopted include:
CFC regime and rules on the obligation to report of omitted assets;
Thin capitalization rule;
Exchange of information standards and beneficial ownership rules;
Standards on tax havens and preferential regimes;
Rules that prevent the abusive use and implementation of tax treaties, such as treaty shopping and limitation of benefit (“LOB”) rule;
Country-by-country report and transfer pricing rules that seek the analysis of value creation; and s
The Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting.
In your view, how has BEPS impacted on the government’s tax policies?
BEPS recommendations have affected and influenced Colombian´s Government tax policies. This, mainly because Colombia was in the process of becoming a new member of the OECD and now has been accepted as one. Thus, its recommendations will still be part of the Colombian´s tax policies in the future.
Does the tax system broadly follow the recognised OECD Model? Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties. If so, what are the current rates and are they flat or graduated?
Colombia´s tax system broadly follows OECD standards. In addition, Colombia has continued to increase its tax treaty network, following the OECD model convention.
The general income tax rate applicable to resident entities is 32% for FY 2020; 31% for FY 2021 and as from FY 2022, it will be 30%. Thus, business profits from a Colombian resident are taxed according to these rates. Dividend distribution are also subject to taxation at a 10% rate.
Individual’s income tax rate is progressive ranging from 0% to 39%, depending on the amount of taxable income.
Capital gains rate is 10%.
VAT general tax rate is 19%.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes. Colombia follows International Financial Reporting Standards (IFRS) and these rules are crucial when assessing business taxes.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Legal entities such as partnerships, corporations are taxable entities. Trusts, unincorporated partnerships and investment funds are transparent for tax purposes. Transparent entities are not subject to taxes and these are imposed on their settlors, constituents, beneficiaries, investors, etc. as if they had carried out the transactions directly.
Some tax transparent vehicles such as investment funds allow for a tax deferral if certain conditions are met. This tax deferral benefit may influence or encourage the use of these vehicles.
Unless characterized as a CFC, transparency rules do not apply to non-resident vehicles, meaning that these may be subject to taxes in Colombia only if certain conditions are met (e.g. realizing Colombian source income).
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
Colombia´s tax system is based on residence and source principles. Resident entities and individuals are subject to income tax in Colombia on their worldwide income and capital gains. Non-resident entities are subject to income tax in Colombia only on sourced income and capital gains, regardless of permanent establishment’s rules.
Source income is income arising from the rendering of services inside Colombian territory, the transfer of assets located in Colombian territory at the time the title transfer takes place, and the exploitation of tangible or intangible assets located inside the country.
In addition, those non-residents, which have a permanent establishment in Colombia, are subject to tax on world-wide income and capital gains attributable to the permanent establishment.
Registration by itself does not trigger a tax liability.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
There are special tax regimens in Colombia, for example: (i) users of Free Trade Zones are subject to a special corporate income tax rate of 20% and customs duties exemptions; (ii) Taxpayers qualified as megainvestors are subject to a preferential income tax rate of 27% and other tax benefits related to property and equipment; (iii) Income taxpayers pertaining to the hospitality and tourism sector may apply preferential tax income rates. Specifically a 9% applies to those who construct, rebuilt and expand hotels; and (iv) a participation exemption or holding regime, which objective is to offer tax incentives on dividends and capital gains.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
Colombia does not have particular tax regimes applicable to intellectual property.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Fiscal consolidation or recognition of corporate groups is not employed in Colombia, nor can losses be relieved across company groups.
Are there any withholding taxes?
Colombia does have an income tax withholding system, which is, usually, a prepayment of income tax. Rates depend on the type of payment or accrual.
Non-resident entities are subject to income tax based on the Colombian sourced income and capital gains. Income tax derived by non-resident entities is collected through withholding mechanisms, the filing of an income tax return or by the combination of these two. The applicable collection mechanism depends on the income tax characterization and whether the appropriate income tax withholding is applied.
Are there any recognised environmental taxes payable by businesses?
Yes and these include: (i) Consumers of plastic bags are obliged to pay a fixed fee on each purchase. For 2020 is 50 Colombian pesos; (ii) Carbon tax is payable on the carbon content of all fossil fuels, including all petroleum derivatives and all types of fossil gas that are used for energy purposes, provided they are used for combustion. Rates depend on the type of fossil and amounts of CO2; (iii) Taxes on gasoline and ACPM consumption.
It is worth mentioning that Colombia offers a wide range of tax incentives for the development of renewable energy projects.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Dividend income received from resident and/or non-resident companies is taxed in Colombia as follows:
Dividends distributed from abroad to Colombian companies are taxed at the general income tax rate (32% for FY 2020).
Dividends distributed by local entities out of taxed profits at the corporate level are subject to an income tax withholding of 7.5%, which is transferable and attributable to the resident individual or foreign investor. Dividends paid out of untaxed profits are taxed at the general income tax rate, depending on the period in which they are paid or accrued, in which case the income tax withholding of 7.5% is applied after this tax.
The 7.5% WHT is only applicable in relation to the resident company that receives dividends for the first time.
Dividends paid to resident individuals by resident entities out of previously taxed profits are subject to income tax as follows:
Ranges in Tax Units (Approx 11 USD)
(Dividends in TU minus 300 Tax Units)*10%
Dividends paid out of untaxed profits are taxed at the general income tax rate, depending on the period in which they are paid or accrued, in which case the income tax withholding of 10% is applied after this tax. The same rate applies to dividends received from foreign companies and entities.
Colombia has a participation exemption regime or regime of holding companies. It is applicable to those Colombian companies whose main purpose is holding of securities, investment or holding of shares or participations in Colombian companies and / or abroad, and / or the administration of such investments. The tax benefits are: (i) dividends distributed by non-resident entities to a CHC are exempt from income tax; (ii) Later, if the CHC distributes dividends to non-residents, such dividends will be understood as foreign sourced income not subject to tax in Colombia. This regime also enshrines a tax exemption from income tax on profits from the transfer of the investment abroad.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by your jurisdiction?
Colombia is an emerging economy with investment opportunities. From a tax perspective, Colombian tax system offers different tax regimes that are relevant and attractive when investing in the country, for example:
Colombian tax law offers a progressive reduction in corporate income tax from 33% to 30% for companies from diverse sectors that invest in Colombia. It also foresees a progressive reduction of the applicable rate in terms of presumptive income from 3.5% to 0%.
Colombia has executed several double tax treaties with key jurisdictions. This network for tax treaties is rapidly growing.
Colombia has a Free Trade Zone regime, which establishes a preferential income tax rate of 20%. The introduction of goods into FTZ does not trigger custom duties, including VAT.
Colombia has a special regime for the so-called “megainvestments”. Taxpayers qualified as megainvestors are subject to a reduced income tax rate of 27%, accelerated asset depreciation, exclusion from presumption income, an exemption from net worth tax and an exemption from dividends tax where profits are taxed at the corporate level.
Colombian tax system also includes a participation exemption regime or holding regime. This tax regime applies to national companies whose main purpose is to hold securities, shares and/or investments in shares abroad. It establishes income tax exemptions for dividends distributed by Colombian companies, as well as non-resident entities, and on the sale of their shares, among others.
In addition, a special tax regime is applicable to Orange Economy companies, agricultural entities, renewable electricity projects, social-interest and priority housing projects, new forest plantations, among others.
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