In 2016, the corporate income tax (CIT) rate was 40%, and would have increased to 42% (2017) and 43% (2018) if the reform had not passed. The 40% rate results from adding the income tax rate (25%) plus the income tax for equality "CREE" rate (9%) and the "CREE" surcharge (6%). For 2017 and 2018, the CREE surcharge was supposed to increase to 8% and 9% respectively.
The reform repealed the CREE tax, and increased the CIT rate to 33%, maintaining it transitorily at 34% for 2017. However, it also created a surtax of 6% for 2017 and 4% for 2018, for a combined rate of 40% and 37% respectively. The surtax will be eliminated as of 2019, leaving the CIT rate at 33%.
At 40%, Colombia has the second highest corporate income tax rate in the world, and the highest one in Latin America. Indeed, reducing it was necessary. It is unfortunate that the reduction was deferred to 2018.
The law also increased the income tax rate for free trade zone (FTZ) industrial users of goods and services from 15% to 20%. The increase in this rate could be considered unconstitutional for taxpayers that had already been qualified as FTZ users at the time of the enactment of the tax reform, as it could have breached the legitimate trust principle.
Under Colombian Constitutional Law, whenever a taxpayer has made positive actions to obtain a certain tax benefit, the said benefit cannot be eliminated or eliminated by the law. In order to be qualified as FTZ industrial users, companies need to comply with certain requirements (investments and employment).
The law eliminated the income tax exemption applicable on editorial companies and on hotel services that are now subject to a reduced 9% CIT rate. From a practical perspective, this change did not worsen their situation because, prior to the reform, these taxpayers were subject to the CREE at a 9% rate, and the CREE was eliminated. As a matter of fact, the situation of hotel services has improved, because the dividends that they distribute out from profits obtained in years 2017 and following would not be subject to transferred CIT.
Colombian tax law eliminates economic double taxation at the corporate level; unless expressly exempted, dividends paid out from exempted income are taxed on the hands of the recipients at full rate. So dividends paid to shareholders of companies that rendered hotel services were subject to transferred CIT, even if they were subject to CREE. With the reform, because of how the transferred CIT formula works, profits from hotel services that were subject to CIT at a 9% rate should not be subject to transferred tax in the hands of the shareholders of the entity that renders those services.
Additionally, the new law eliminated the income tax exemption that existed on different kinds of economic activities. Some of the beneficiaries of the income tax exemptions that were repealed could try to preserve the exemption invoking the legitimate trust principle.
New dividend tax
Until 2016 Colombia only applied dividend tax on dividends that were paid out from profits that had not been taxed in the hands of the company that distributed them. Pursuant to the reform, dividends paid out from profits obtained from 2017 shall be subject to dividend tax. Profits distributed to resident individuals shall be subject to dividend tax at a rate of 0%, 5% or 10%, depending on the amount of dividends that they receive; on the other hand, profits distributed to non-resident firms and individuals will be subject to a flat withholding tax rate of 5%. In those cases in which the dividends should be subject to a transferred tax, the new dividend tax would apply on the dividend payment, net of the transferred tax.
The new dividend tax shall apply only on dividends paid out from profits obtained as from 2017. The law does not establish an ordering rule for the distribution of dividends.
Use as tax basis the accounting profits of companies determined under IFRS, with some tax adjustments
Until 2017, tax rules were independent from accounting rules and relied on them only when a situation had not been regulated by the tax law, or when the tax law expressly deferred the regulation to accounting rules. As from 2017, assets, liabilities, income, costs and expenses have to be accrued based on Colombian International Financial Reporting Standards (IFRS), except for cases in which tax law provides a different treatment. In Colombia, the so-called essential elements of a national tax (taxpayer, tax beneficiary, tax basis, tax rate, and tax period) have to be established in laws approved by the Congress. Because accounting rules and their interpretation are not enacted by the Congress, the changes to the tax basis originated in changes in accounting rules could result in being unconstitutional.
Tax professionals are still struggling to understand IFRS and their impact on the businesses of their employers, and tax officials are not knowledgeable in IFRS either. Firms need to review carefully and in detail how the new system impacts their tax situation; there are many changes and we have witnessed that many of them have not been completely identified.
Withholding tax on payments abroad
There are several modifications to the withholding tax rates on payments made to non-residents (see Table 1).
In general, the modifications to the withholding tax rates were good. A note should be made though, in relation to levying with income tax overhead expenses paid to related parties. While we sympathise with the intention of avoiding charges that may erode without justification the taxable base of Colombian taxpayers, the fact is that multinational firms need to incur centralised management expenses. Imposing withholding taxes on management expenses incurred abroad will result in uncreditable withholding taxes for the said firms and will be difficult for global operations. Transfer pricing, exchange of information and tax auditing seem to be a more reasonable approach to confront base erosion.
|Technical services, technical assistance and consultancy services (rendered in Colombia or from abroad)||10%||15%|
|Other services rendered in Colombia||33%||15%|
|Interest||Debts with term under one year||33%||15%|
|Debts with term of one year or more||14%||15%|
|Transfer of reinsurance premium||Not subject||1%|
|Management and direction fees (provided in Colombia)||33%||15%|
|Management and direction fees (provided from abroad)||Not subject||15%|
|Others payments||Ordinary income||14%||15%|
|Payments made to non-cooperative jurisdictions and to entities benefiting from preferential tax regimes||33%||34%-2017|
Limits to the deduction of expenses related to intangible property
The tax reform imposes several limitations to the tax amortisation of intangible property and to the deduction of royalty payments related with said property. It also levies VAT on the transfer of industrial property.
Royalty payments made in relation to finished goods are now not deductible
This limitation is surreal. It seems that the original intention of the limitation was to avoid taxpayers taking a double deduction of these royalties, one as part of the acquisition price of the finished goods, and the other as a separate royalty payment. Notwithstanding, the rule came out simply denying the deduction of any royalty payment. Firms may need to review their supply chain structure to see if embedding the royalties in the cost of the imported or sold product is possible and makes sense from an economic perspective.
Royalty payments for the use of intangibles formed in Colombia
The reform establishes that payments made to foreign related parties and to related parties in FTZs, originated from the use of intangibles formed in Colombia, are not deductible. The law does not define "intangibles formed in Colombia".
Amortisation of intangibles acquired from related parties
Law 1819 establishes that payments to related parties for the acquisition of intangibles acquired separately or as part of a business combination are not amortisable. However, this limitation shall not apply when the transaction complies with transfer pricing regulations. Note that other limitations may apply to the amortisation of intangible property.
Deduction of tax losses
Taxpayers will be entitled to carry forward tax losses for a term of 12 years, and not indefinitely as under the previous regime. There is a grandfathering rule for losses incurred prior to 2017, which may continue to be carried forward indefinitely. There is no ordering rule for the use of the losses.
Non-cooperative jurisdictions with low or no taxation and preferential tax regimes
The law establishes a new legal framework that replaces the tax havens regime, and provides that certain jurisdictions, as well as some ring fence regimes, may be subject to tax haven treatment. The tax reform provides that these are regimes that are eligible only for non-residents of the jurisdiction that offers them. The new legal framework establishes a higher tax withholding rate on Colombian source payments to those jurisdictions and entities considered part of a preferential tax regime. The already existing tax haven jurisdictions list continues to apply, while the list of preferential tax regimes (ring-fence regimes) is pending to be issued by the government.
New controlled foreign companies (CFC) regime
The law establishes a CFC regime that applies to Colombian tax residents (individuals or entities) that directly or indirectly hold a stake equal to or greater than 10% of the capital of a foreign entity or its profits.
CFCs include investment vehicles, such as subsidiaries, trusts, collective investments funds, and private interest foundations that are not resident in Colombia for tax purposes, and that comply with the conditions to be considered as related parties for transfer pricing purposes.
For income tax purposes, net profits derived from passive income obtained by a CFC should be recognised by Colombian taxpayers immediately in proportion equivalent to their participation in the CFC's capital or profits, and not upon receipt of dividends or profits. Passive income includes, with some exceptions, the following: (i) dividend and other kinds of profit distribution; (ii) interest; (iii) income derived from the exploration of intangibles; (iv) income derived from the sale of assets in certain cases; (v) income from the sale or lease of immovable property; (vi) income derived from the sale or purchase of tangible goods acquired from (or sold to) a related party, when their manufacturing and consumption occurs in a jurisdiction different from where the CFC is located or is a tax resident; (vii) income from the performance of technical services, technical assistance, administrative, engineering, scientific, qualified, industrial and commercial services in a jurisdiction different from where the CFC is located or is a tax resident.
The Colombian tax resident that recognises the passive income under the application of the CFC regime may deduct the costs and expenses related to said income, and also request a tax credit for taxes paid abroad in relation to it.
Dividends and benefits that are distributed by a CFC and have already been taxed in Colombia should be considered non-taxable income for the Colombian taxpayer.
Value added tax
The reform increased the general rate from 16% to 19%, with some goods taxed at a 5% rate.
The transfer of intangible goods related to intellectual property and real estate is now subject to VAT, unless expressly excluded.
Until 2017, only some services rendered from abroad were subject to Colombian VAT, as they were deemed to be rendered inside Colombian territory. As from 2017, any service rendered from abroad to a Colombian beneficiary, unless expressly excluded, triggers VAT.
The reform taxes certain digital services, such as streaming media content, app distribution, online advertisement and teaching.
VAT on the acquisition or importation of capital goods may be deducted for income tax purposes in the period in which the acquisition or importation was made.
Incentives for investments in territories affected by the armed conflict
Significant investments will have to be made in vast areas that have remained underdeveloped due to the Colombian armed conflict. The law includes tax benefits for companies that initiate economic activities in the territories that have been more affected by violence. Companies that classify as small companies will be exempt from income tax between 2017 and 2021, subject to a rate equal to 25% of the general corporate rate from 2022 to 2024, and to a rate equal to 50% of the general corporate rate from 2025 to 2027. Medium and big size companies that initiate activities in the conflict area will pay 50% of the general corporate tax rate between 2017 and 2021, and 75% of said rate between 2022 and 2027.
Works for taxes
Taxpayers may decide to invest up to 50% of their resulting income tax for a relevant year in developing directly certain works (e.g. infrastructure) to be developed in the ZOMAC. The projects must be approved by certain governmental entities.
Modernisation of the tax function
Several non-governmental entities have concluded that the capacity of the Tax Office to manage the tax function, including the possibility of efficiently auditing taxpayers is severely limited by the lack of technological and human resources. The reform establishes that within six months following its enactment, the tax director must present a five-year plan for the technological modernisation of the Tax Office.
Senior Tax PartnerBusiness Tax Services Leader Latin America North
Tel: +57 1 4847590
Jaime Vargas is EY Colombia's senior tax partner, business tax services leader of EY Latin America North, and EY Andean market tax leader. He joined EY Colombia on November 2014. Prior to joining the firm, Jaime was a partner at Baker McKenzie (2010-2014), corporate and international tax manager of Coca-Cola Femsa (Mexico, 2007-2010), managing tax partner of Deloitte Colombia (2002-2007), managing tax partner of Andersen Colombia (2000-2002) and partner of Baker McKenzie (1995-2000).
Jaime has been advising companies for more than 25 years in tax matters. He has substantial experience in mergers and acquisitions, national and international tax planning, and taxes applied to the oil and gas industry.
He advises or has advised companies such as Advent, Brookfield, Enel, Telefónica, Chevron, British American Tobacco, Coca-Cola Femsa, Cemex, Jeronimo Martins, Cemex, Pepsico, SAP, AT&T, Apple, amongst others.
Jaime is professor of tax planning in the tax prograduate programme of Universidad Externado de Colombia. He has also lectured in tax prograduate studies of Universidad Javeriana and Universidad del Rosario. He is a member of the International Fiscal Association and of the Colombian Institute of Tax Law.
Jaime is a lawyer of Universidad Externado de Colombia (Bogotá, Colombia) with a specialisation in tax law at Instituto Tecnológico Autónomo de México (Mexico City, Mexico).
Since many years ago, Jaime has been consistently recognised as one of the leading tax advisers in Colombia by specialised publications such as Chambers Law, International Tax Review, Euromoney, and Which Lawyer, amongst others.