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Principal Tax
A. At a glance
Corporate Income Tax Rate
Gains
(a)
Operating Losses
general corporate income tax rate from 2022 onward is 35%. Financial institutions with taxable income of more than 120,000 tax units (approxi mately USD1,140,000) are subject to a tax surcharge of three points between 2022 and 2025 (combined nominal rate of 38%).
(b) Dividends paid to nonresidents are subject to a 10% dividend withholding tax. In the case of dividends paid to resident individuals, the dividend tax rate is 0% or 10%, depending on the amount distributed. In addition, if the divi dends are paid to nonresidents out of profits that were not subject to income tax at the corporate level, a recapture tax applies at a rate of 35% for 2022 and future years; in this case, the 10% dividend tax is applied to the amount of the distribution after it is reduced by the recapture tax. A 7.5% dividend withholding tax on distributions between Colombian companies applies from 1 January 2019 (for further details, see Dividends in Section B).
(c) Interest paid or accrued on loans payable to foreign entities is generally sub ject to a 20% withholding tax. Interest paid on loans that have a term equal or greater than one year is subject to a 15% withholding tax. Interest paid on loans that have a term equal or greater than eight years and that are related to certain infrastructure projects are subject to a 5% withholding tax. Interest paid by Colombian financial institutions and interest paid by Colombian residents to foreign entities with respect to certain international trade opera tions are deemed to be foreign-source income and are accordingly exempt from withholding tax. Certain qualified loans executed before 31 December 2010 do not generate Colombian-source income. As a result, interest on such loans is exempt from withholding tax.
(d) The remittances of profits out of a branch are subject to the same tax treat ment as dividends. Consequently, if the distribution is made out of profits that were not subject to tax at the entity level, a recapture tax applies at a rate of 35% for 2022 and future years). In this case, the dividend tax (10%) is ap plied to the amount of the distribution after it is reduced by the recapture tax.
(e) For net operating losses generated until 2016, a grandfathering rule allows an unlimited carryforward.
B. Taxes on corporate income and gains
Corporate income tax. National corporations are taxed on worldwide income and capital gains. National corporations are corpo rations that have their principal domicile in Colombia or are or ganized under Colombian law or that during the respective tax year or period have their effective place of management in Colombia (holding board meetings in Colombia is not enough to qualify as a national company).
Foreign companies that obtain more than 80% of their income (other than passive income) in the jurisdiction of incorporation
are not considered to have their effective place of management in Colombia. These companies are known as “80% Foreign Income Companies.” Foreign companies that have issued stock or bonds in the Colombian stock exchange or in a recognized foreign stock exchange are not considered to have their effective place of man agement in Colombia. The subsidiaries of such companies are also not considered to have their effective place of management in Colombia to the extent they are consolidated in the financial statements of its parent; however, such subsidiaries can elect to be treated as a national corporation unless they are 80% Foreign Income Companies.
Branches of foreign corporations and permanent establishments are taxed on attributable worldwide income and capital gains. Attribution is generally based on accounting records, which should be supported by an analysis of functions, assets, risks and personnel.
Indirect transfers of Colombian assets or shares are subject to income tax in Colombia if the Colombian assets or shares account for 20% or more of the book value and/or the fair market value of the assets of the foreign entity that is being transferred.
Corporate income tax rates. The standard corporate income tax rate is 35% for 2022 and future years. Financial institutions with taxable income of more than 120,000 tax units (approximately USD1,140,000 for 2022) are subject to a surcharge of three points between 2022 and 2025 (combined nominal rate of 38%).
Foreign companies receiving Colombian-source income that is not attributable to a branch office or PE and that is not fully tax able through withholding tax are subject to income tax at the rates mentioned above.
A reduced corporate income tax rate of 20% applies to legal enti ties qualified as Industrial Users of Goods and/or Services in a free-trade zone. No surtax applies to these taxpayers. Commercial Users in a free-trade zone are subject to the general corporate income tax rate.
Subject to certain conditions and requirements, a special reduced rate of 9% applies to certain activities, such as some services in new or refurbished hotels and new projects involving theme parks, ecotourism parks, agritourism and nautical docks.
Certain tax credits are available (see Foreign tax relief).
Colombian Holding Company regime. The Colombian Holding Company (CHC) regime applies to Colombian entities as long as they comply with the following requirements:
• They hold at least 10% of the capital of two or more Colombian or foreign entities during at least 12 months.
• They have three or more employees and have human and mate rial resources in Colombia.
To be included in the CHC regime, a request must be made to the tax authority.
Dividends distributed by foreign entities to CHCs are not taxed. When such dividends are distributed in turn by CHCs to Colombian residents, they are taxed, but when such dividends are distributed in turn to nonresidents, they are not taxed.
Income derived from the sale of shares or quotas in a CHC is generally exempt from income tax on the portion that relates to activities performed abroad. In addition, gain on the sale of for eign entities by the CHC is exempted in the hands of the CHC.
Mega investments. Taxpayers that generate at least 400 jobs and invest 30 million tax units (approximately USD285 million for 2022) or more over 5 years are considered to be engaged in mega investment projects. The investment requirement can be reduced to 2 million tax units (approximately USD19 million for 2022) for investments in the aeronautical sector if the investment began before 31 December 2021. Exceptionally, taxpayers that invest in sectors with a high technological component, with emerging technologies or with electronic commerce, may only be required to generate at least 250 jobs and satisfy the other requirement. These taxpayers may obtain the following special benefits during the subsequent 20 years:
• They are subject to a reduced income tax rate of 27%. Notwithstanding the rate mentioned in the preceding sentence, income derived from hotel services is taxed at a 9% rate or, if the activity is carried out in free trade zone by Industrial Users of Goods and/or Services, a 20% rate could apply.
• They may depreciate fixed assets during a minimum of two years (regardless of the asset’s productive life).
• Presumptive income is not applicable (currently the presump tive income rate is 0% as a general rule).
• Equity tax is not applicable.
• The 10% dividend tax is not applicable.
Oil and gas projects may not be considered mega investment projects.
Capital gains. The following gains are considered capital gains, which are subject to tax at a rate of 10%:
• Gains on the transfer of fixed assets owned for more than two years
• Gains resulting from the receipt of liquidation proceeds of cor porations in excess of capital contributed if the corporation existed for at least two years
Administration. The tax year is the calendar year.
Each year, the Colombian government sets the due dates for the filing of income tax returns and payment of taxes due. Tax pay ments are made in three installments between February and June for Large Taxpayers (large corporations, according to conditions set by the tax authorities) and in two installments between April and July for other legal entities.
Interest on the late payment of taxes is accrued at the daily effec tive rate of usury certified by the Superintendency of Finance for the consumption credits, less two points. A penalty for late filing is levied on the amount of tax assessed in the corresponding tax return at a rate of 5% or 10% for each month or a fraction thereof. The penalty for late filing cannot exceed 100% or 200% of the difference of the tax to be paid or the balance in favor, depending on the timing of the filing. The penalty for amending a return may be 10% or 20% of the difference between the amount shown on the original tax return and the correct amount, depending on the timing of the amendment.
Under certain circumstances, the applicable tax penalty can be reduced.
Dividends. Distributions of dividends to nonresidents are subject to dividends tax at a rate of 10%. The dividends tax rate for resi dent individuals is 0% or 10%, depending on the amount of the distribution. Effective from 1 January 2019, a 7.5% dividend withholding tax applies to distributions between Colombian companies. This dividend tax is charged only on the first distri bution of dividends between Colombian entities and may be credited against the dividend tax due once the ultimate Colombian company (the last Colombian company in an ownership chain) makes a distribution to its shareholders (nonresident entity or individual shareholders or Colombian resident individual shareholders). The dividend tax on local distributions does not apply if the Colombian companies are part of an economic group or controlled companies duly registered with the Chamber of Commerce or if the distribution is to a Colombian entity qualify ing for the new CHC regime.
In addition, if the dividend distribution is made out of profits that were not taxed at the entity level, the distribution is subject to withholding tax at the applicable corporate income tax rate of the specific period of the distribution (recapture tax). For 2022, the recapture tax rate is 35%. In this case, the 10% dividends tax applies to the distributed amount after it is reduced by the recapture tax. This results in a combined tax rate of 41.5 %.
If the profits subject to tax at the corporate level in a given year are higher than the commercial profits of that year, the difference can be carried back for two years or carried forward for five years to offset the profits of such periods, in order to reduce or elimi nate the amount of the distribution subject to the recapture tax. These periods have a duration of 10 years for taxpayers engaged in concession agreements or public-private associations. This carryforward or carryback should not reduce the amount of the distribution to residents and nonresidents subject to the dividends tax of 7.5% or 10% (or the 0% or 10% dividends tax applicable for distributions to resident individuals).
Foreign tax relief. For national corporations and resident individu als, a credit for foreign taxes paid on foreign-source income is granted, up to the amount of Colombian corporate income tax payable on the foreign-source income.
An indirect tax credit is also granted for foreign taxes paid on income at the level of the foreign company that is distributing corresponding dividends to Colombian shareholders or quota holders. This tax credit equals the amount resulting from the ap plication of the effective income tax rate of the foreign company to the amount of distributed dividends. The sum of the direct tax credit and indirect tax credit may not exceed the corporate in come tax payable in Colombia on such dividends.
To be entitled to the direct and indirect tax credit, the domestic taxpayer must prove that the corresponding tax was effectively paid in each relevant jurisdiction. In addition, for the indirect tax credit, the investments must be qualified as fixed assets for the taxpayer. Consequently, indirect tax credits cannot be claimed on portfolio investments.
The tax credit may be claimed in the tax year in which the foreign tax is paid or in any of the following years.
C. Determination of taxable income
General. Taxable income is determined in accordance with the following calculation: gross income, minus non-taxable income, returns, rebates and discounts, equals net income, minus costs and expenses, equals taxable income. In the first instance, such values must be determined in accordance with the Colombian generally accepted accounting principles, which generally follow International Financial Reporting Standards and are subject to several adjustments provided in the tax rules.
In general, to be deductible, expenses must be related to the activ ity that generates taxable income and must be proportional and necessary with respect to the productive activity of the taxpayer. Some limitations and prohibitions may apply to the deductibility of certain expenses.
In determining taxable income, taxpayers may deduct all paid taxes related to their economic activity, except for certain items such as the debit tax (only 50% is deductible, regardless of whether the tax relates to an income-producing activity) and the equity tax, which is not deductible.
In addition, taxpayers can claim 50% of paid industry and com merce tax as a credit against their income tax liability.
Payments to entities resident outside Colombia are deductible if they meet the general rules above and, for expenses related to Colombian-source income, if the applicable withholding tax is paid. In general, if no withholding tax applies, the expenses are allowed as deductions, up to a maximum of 15% of the taxpayer’s net income before considering all costs and expenses abroad not subject to Colombian withholding tax. Costs or expenses in curred abroad that are related to foreign-source income subject to income tax in Colombia are deductible if the general requirements are met, even if withholding tax is not imposed, and the 15% limitation mentioned above does not apply.
Royalty payments between related parties for the use of intangi bles that were formed in Colombia and royalty payments related to the acquisition of finished goods are not deductible. However, in the latter case, deductibility can be accepted to the extent it is established that the royalty is not already included in the value of the acquired finished good.
Interest and other financial expenses resulting from liabili ties owed to foreign related companies are deductible if they comply with the transfer-pricing rules (see Section E) and thincapitalization provisions.
Payments made to foreign related parties that comply with the transfer-pricing rules (see Section E) may be deductible even if no income tax withholding is required. However, the 15% limita tion described above applies to such payments.
Management and direction (overhead) expenses are deductible for Colombian tax purposes if all of the following conditions are satisfied:
• They are related to services rendered.
• The withholding tax has been applied.
• They are supported by transfer-pricing studies.
Income generated from the following activities is exempt from income tax (specific requirements, conditions and limitations apply in each case):
• Income received from another country in the Andean Community (Bolivia, Ecuador and Peru)
• Certain entrepreneurial, creative and technological activities (so-called orange economy)
• Certain agricultural activities
• Energy generated from nontraditional sources
• Construction and financing of low-income housing
• Certain new forest plantations
• Fluvial transportation services
Inventories. Inventories are generally valued using the permanent or periodic inventory methods.
Provisions. Provisions are not allowed as deductions in determin ing taxable income, except for provisions for accounts receivables, which are subject to special tax rules.
Depreciation. Depreciation for tax purposes should follow the depreciation for accounting purposes. However, the annual depre ciation rate for tax purposes cannot exceed certain percentages, depending on the type of asset.
If machinery and equipment are used daily in 16-hour shifts, the taxpayer may request an additional 25% on the depreciation rate. If the use exceeds 16 hours, proportional additional depre ciation can be requested. Land is generally not depreciable or amortizable.
The balance of the assets pending to be depreciated as of 31 December 2016 should be depreciated under the old rules ap plicable before 2017.
Amortization. In general, amortization of ordinary and necessary investments used for the purposes of the business is allowed under certain requirements. The amortization of the investments should be made during the time that the related income is expected to be earned, but the amortization period may not be less than five years.
Advance payments should be amortizable as the prepaid services are received.
Acquired identifiable intangibles can be generally amortized to the extent they have a useful limited life. Certain limitations on amortization may apply to identifiable intangibles acquired from related parties.
Goodwill is not amortizable.
Amortizable costs and expenses for the oil industry can be amor tized using the units-of-production method. If investments in ex ploration are unsuccessful, the costs and expenses may be claimed as deductions in the year in which this is determined or in the following two years. Investments made between 2017 and 2027 with respect to the evaluation and exploration stages are amortiz able using a five-year, straight-line method.
Assets and investments pending to be amortized as of 31 December 2016 should be amortized under the old rules applicable before 2017.
Relief for tax losses. Tax losses may be carried forward for 12 years. Tax losses generated up to 2016 can be carried forward with no time limitation.
Restrictions apply to the transfer of losses in mergers or spin-offs (tax-free events for the participating companies for Colombian tax purposes if certain requirements are observed). The surviving entity can offset losses originated in the merged entities (includ ing the surviving entity itself), but only up to the percentage of the equity participation of the merged entities in the surviving entity’s equity. Similar rules apply to spin-offs of companies.
The special treatment of tax losses in mergers and spin-offs ap plies only if the economic activity of the companies involved re mains the same after the merger or spin-off occurs.
Inflation adjustment. An optional tax readjustment of fixed assets may be applied. This readjustment is calculated by applying the percentage certified by the government for the adjustment of the tax unit. The readjustment affects the tax basis for the transfer of fixed assets and the determination of taxable net equity. Although the inflation adjustments were eliminated, the accumulated infla tion adjustments can be depreciated.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax Rate
Value-added tax; imposed, unless expressly excluded by law, on sales of tangible assets and intangibles related to industrial property, on imports of movable tangible assets and on most services rendered in Colombia or from abroad to a Colombian recipient of the services General rate 19% Basic products, such as coffee and wheat 5% National consumption tax; imposed on, among other items, food services in restaurants, mobile phone services and certain cars 4% to 16% Industry and commerce tax; a municipal tax on annual or bimonthly gross revenue (other tax periods may apply, depending on the jurisdiction); rates vary depending on the company’s activity and municipality; tax effectively paid during the year is a 100% deductible expense or 50% tax credit for income tax purposes
Bogotá
0.414% to 1.38%
0.2% to 1% Signs and Posters Tax; imposed on enterprises with advertisements in public places; tax rate applied to the industry and commerce tax due 15%
Municipalities other than Bogotá