7 changes to consider after the Tax Reform in Colombia

by | Feb 6, 2019 | Knowledge Center | 0 comments

On December 28th, 2018 president Duque signed the new tax reform (‘ley de financiamiento’). The reform is expected to collect COP 8.1tn (approx. $2.5bn) in 2019, significantly less than the COP 14tn (approx. $4.3bn) originally targeted by the government. This cutback is the result of a broad opposition to many reforms and taxes proposed by Duque’s finance minister, even from Duque’s own party. The resulting tax deficit will most likely trigger another tax reform for 2020 and create a fiscal uncertainty that might result in the downgrading of Colombia’s credit rating.

The tax deficit resulting from this new Tax Reform will most likely trigger another tax reform for 2020.

The following 7 aspects are the most relevant for foreign companies and investors:

1. Reduction in Income Tax

The corporate income tax (CIT) for branches and permanent establishments of foreign companies and entities will be gradually reduced as follows:

  • 33% in 2019
  • 32% in 2020
  • 31% in 2021
  • 30% by 2022

A reduced CIT rate of 9% applies for projects in the hotel and tourism sector that meet certain requirements. The 20% corporate income tax for entities based in free trade zone (FTZs) remains unchanged.

2. Increase in Withholding Tax for payments abroad

Unless provided for in Double Taxation Treaties, withholding tax increases from 15% to 20% for the following payments abroad:

  • Interest, commissions, fees, royalties, leases, compensation for services, exploitation of any kind of industrial property or know-how, provision of services, benefits or royalties derived from literary, artistic and scientific property, exploitation of cinematographic films and software exploitation.
  • Consultancies, technical services and technical assistance provided by non-residents.

3. Permanent establishments shall be subject to income tax on their worldwide income

Permanent establishments of foreign individuals, companies or entities of any nature, located in Colombia, will be taxed with CIT and occasional profits from domestic and foreign sources attributable to it.

4. Decrease of the Presumptive Income Tax

Presumptive Income Tax (used to calculate the tax base for companies that do not declare income) will be gradually reduced as follows:

  • Reduction to 1.5% in the years 2019 and 2020
  • Reduction to 0% from 2021 onwards

5. Tax exemptions for the Orange Economy

Newly established companies belonging to the so-called Orange Economy (i.e. activities using intellectual property in the fields of creativity, arts and culture) that meet certain conditions will be CIT exempt for the first 7 years.

6. CIT discount for value added tax (VAT) paid on the acquisition of productive fixed assets

VAT paid on the acquisition, construction, production or import of productive fixed assets may be deducted from CIT (subject to certain conditions).

7. Harsher sentences for Tax Fraud and Tax Evasion

Taxpayers and their facilitators found guilty of fraud, tax evasion, omission of assets or inclusion of non-existent liabilities face prison sentences of up to 15 years and substantial fines. This last point shows the ever-increasing importance of Corporate Compliance when doing business in Colombia.

If you have any questions regarding the new tax reform or any other legal, tax or accounting topic don’t hesitate to contact Daniel Breitenmoser at colombia@ongresso.com

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