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Colombia: International tax measures in tax reform legislation

Colombia: International tax measures in tax reform

Tax reform legislation that includes “economic growth” provisions has been enacted as Law 2010 on 27 December 2019.

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The new tax law was necessary because certain measures of the predecessor legislation (Law 1943 of 2018) were declared unconstitutional by the Constitutional Court (Corte Constitucional) in October 2019. The new tax reform or “economic growth law” essentially preserves the goals outlined by Law 1943 by encouraging investment, fostering the formation of business, and reducing the corporate tax rate—but it also introduces a new set of international tax measures that are intended to protect the tax base and to address base erosion. 

In addition, the new law includes rules that are intended to provide value added tax (VAT) benefits for the general population—specifically measures that are aimed at providing relief for lower income members of the general population. Other measures provide additional or extra income tax deductions for companies that hire for the first time and employ younger workers.

In general, Law 2010 aims at reducing “effective corporate taxation” (corporate income tax plus dividend taxation) of non-treaty investors at rates of:

  • 38.8% for 2020
  • 37.9% for 2021
  • 37% for 2022 and later years

The new law also aims to provide tax stimulus measures to encourage investments in Colombia. The following discussion focuses on certain tax aspects of the economic growth law that may affect foreign investors in Colombia.


Corporate taxation (ordinary tax and presumptive minimum tax)

The new rules in Law 2010 preserve the intention of Law 1943 to reduce the corporate income tax “nominal rates” and the presumptive income nominal rates according to the following schedule:

 

FY 2020

FY 2021

FY 2022

Corporate income tax

32%

31%

30%

Corporate income tax – financial entities

36%

34%

33%

Presumptive income rate*

0.5%

0%

0%

*Rate applicable over previous year’s (31 December) net wealth. Presumptive income is net taxable income when higher than ordinary income.


Additional dividend taxation

The rate of dividend taxation is also changed. The new law increases the rate of “non-treaty residents” from 7.5% to 10% on dividend distributions. This rate also applies under the foreign capital portfolio investment regime.


Mega-investments tax regime

Qualified investments will continue to be subject to a special tax regime—that is, a corporate income tax rate of 27%, no presumptive income, no additional dividend tax, no wealth tax, and two years of accelerated depreciation—available under the option of entering into a 20-year stability agreement with the government concerning direct taxation. Furthermore, the new law clarifies the regime is eligible to be applied for projects located in free-trade zones.

One measure provides for a change to the employment requirements; the requirements for employment generation are increased from 250 to 400 workers or employees, except for technology and e-commerce companies for which the requirement remains at 250 employees.

This regime applies to applications that are approved before 1 January 2024.


Exempted income for certain growth sectors

Law 2010 preserves certain exempted income benefits for “qualified growth sectors” as previously provided under Law 1943, such as:

  • Technological value added and creative activities (seven years of exempted income)
  • Agriculture activities (covered by the 10-year exemption standard) now include activities such as forestry, wood extraction, fish farming, beverage production, and food products production.


Indirect alienation or disposal of shares / assets

This regime (enacted in 2019) aims to impose tax on any alienation or disposal of shares, participations, or interests in entities located abroad but with an underlying asset in Colombia. The new law simply reproduces the prior law’s measures but with clarification of certain topics with respect to:

  • Tax basis of the indirect seller: The prior rule only recognized the tax basis of the direct owner as the tax basis of the indirect seller. However, the new rule allows amounts previously paid by the indirect seller to the extent of a previous indirect sale transaction that was subject to tax.
  • Mergers and divisions/spin off of foreign entities with underlying assets in Colombia: The new rule provides that these transactions are subject to tax in Colombia, to the extent the underlying assets in Colombia are greater than 20% of the total outstanding assets owned by the parties (based on the consolidated financial statements of the parent company of each participating party).


Ultimate beneficial owner

A harmonized reference to ultimate beneficial owner for tax purposes includes:

  • Any individual who ultimately owns, controls or benefits directly or indirectly from a legal entity or a structure having no legal personality
  • Any individual is an ultimate beneficial owner, whenever that person: (1) has a 5% ownership directly or indirectly in the capital or voting rights; (2) directly or indirectly controls pursuant to requirements under the commercial law and transfer pricing rules; and (3) benefits from 5% of yields, profits or assets

An ultimate beneficial owner registry is created by the new law and will be managed by the Dirección de Impuestos y Aduanas Nacionales (DIAN). Regulations will be issued to develop the functioning of the registry.


VAT basis applicable to free-trade zone importation involving exported national component

The new law adds rules to serve as guidance to determine the basis for VAT purposes of goods having an embedded national component as previously exported:

  • When the client or customer is located within national customs territory (TAN)—in such instance, the VAT basis is the amount invoiced plus custom duties.
  • Entities in free-trade zones are allowed to subtract raw material and services on which they already have paid VAT.


Other international tax measures preserved under Law 2010

The new law effectively reproduces certain international tax measures of Law 1943, as show in the following table:

Measure

Law 1943

New Law 2010

Holding company regime

Foreign tax credit (new basis)

Permanent establishment: worldwide reach / interest limitation deduction rule

80% active income rule that benefits controlled foreign company (CFC) entities to be considered as CFC income

VAT over digital services*

Thin capitalization rules: 2 to 1 ratio over net wealth / anti-abuse measure over related-party transactions

Withholding tax rates for payments made abroad

Interest in certain foreign loans considered as not being sourced in Colombia – no withholding applicable but deductible

*Law 2020 provides that digital services are exempt from invoicing as a formal requirement for tax purposes. However, the tax authorities have preserved the right to impose electronic invoicing


Other tax or tax-related rules enacted

  • Social package: Several measures were approved: (1) VAT refunds for lower income population; (2) a three-day VAT holiday on selected products; (3) a special 20% additional deduction on wages paid (subject to a cap) to promote the hire and first employment of young people under 28 years of age; (4) reduced health contribution (from 8% to 4%) for lower income retired populations; and (5) changes in domestic withholding tax for employees in the lower brackets as an effective tax rate reduction.
  • VAT exemption over medication and other health products: New rule changes the category from excluded goods to exempted goods. Exempted goods allow the responsible party to claim input VAT credits.
  • Income tax credit in lieu of tax paid: The benefit under Law 1943 is preserved, thus granting a 50% tax credit in 2020 and 2021, and a tax credit of 100% in 2022.
  • Income tax credit in lieu of VAT paid in the acquisition or importation of fixed assets
  • Repeal of the 2% immovable goods consumption tax
  • Statute of limitations: The time that the tax authorities have to review certain income tax returns is reduced to five years in examinations concerning taxpayers in a loss position or loss compensation, or taxpayers with transactions subject to transfer pricing rules.
  • Audit benefit: For 2020 and 2021, income tax returns showing a net tax increase of 30% (compared to the previous year) will be “closed” for tax audit at six months. In situations of a net tax increase of 20%, the income tax return audit will be closed at 12 months.
  • Tax evasion offense: The prior law provisions relating to criminal tax offenses have been adjusted to allow for termination of a criminal action (even in high value cases) when the tax return is filed or amended. The subject offenses include non-filling, non-income inclusion, as well as claiming non-existing deductions, inadmissible tax credits, withholdings, and advances.
  • Tax settlement: A new opportunity is allowed with regard to existing tax disputes. Applications must be filed before 30 June 2020.
  • Voluntary disclosure program to report unreported assets or to correct non-existing liabilities (tax normalization). The new program applies for 2020, subject to a 15% tax rate with a 50% deduction on repatriation. The foundation under Law 1943 essentially remains unchanged.
  • Assets omitted or non-existing liabilities offense: The rule concerning tax offenses under Law 1943 is adjusted to allow for termination of criminal action even in high-value cases when the tax return is filed or amended.
  • Assets abroad tax return (2020 and successive years): Compliance applies if the assets have a value greater than approximately U.S. $21,580. The applicable penalties are reduced.

 

For more information, contact a tax professional with KPMG’s Latin America Markets Tax practice or with the KPMG member firm in Colombia:

Christian Athanasoulas | + 1 (617) 988-1015 | cathanasoulas@kpmg.com

Alfonso A-Pallete | +1 (212) 954-3852 | apallete@kpmg.com

Ricardo A. Ruiz | +57 161 88 126 | ricardoaruiz@kpmg.com

Eric Thompson | +57 161 88 000 | ericthompson@kpmg.com

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