Executive summary

On 6 October 2022, the economic commissions of Colombia’s Senate and the House of Representatives approved the tax reform bill. Now the modified bill will be discussed in second debate by the plenary of both houses before it can become law.

The tax reform approved in first debate includes several changes, agreed between the Government and a group of congressmen, based on the preliminary comments to the tax reform bill submitted by the Colombian Government on 8 August 2022 (See EY Global Tax Alert, New Colombian Government submits tax reform bill to the Congress, dated 17 August 2022).

This Alert summarizes the most relevant changes in the modified tax reform bill from the initial bill submitted to the Congress.  

Detailed discussion

Corporate income tax (CIT) rates

The general 35% CIT rate would remain the same. However, some financial institutions, insurance companies, stockbrokers, among others, would be subject to a 5% CIT surtax (total CIT rate of 40%) until 2027, to the extent their taxable income exceeds 120,000 tax units (approx. US$989,000).

Companies that receive income derived from for the development of certain extraction activities of non-renewable resources, and whose taxable income is higher than 50,000 tax units (approx.US$412,000), also including the taxable income of related parties, would be subject to a CIT surtax as follows:

Taxpayers whose main economic activity is power generation from hydric resources and receive taxable income higher than 30,000 tax units (approx. US$247,000), including the taxable income of related parties, would be subject to a 3% CIT surtax (total CIT rate of 38%) until 2026.

Under the tax reform bill, a 15% CIT rate would apply to income of certain hotels and certain theme parks developed in some municipalities for 10 years. The application of this benefit would need to be approved by the Ministry of Commerce, Industry and Tourism. 

As of 2024, Industrial users of the free trade zones (FTZs) would continue benefiting from the 20% tax rate to the extent their net income derived from transactions concluded within the national customs territory (or activities different to the ones authorized as an FTZ user) is not higher than the annual thresholds set by the Colombian Government. The threshold cannot be higher than 40% for FY 2024, 30% for FY 2025 and 20% for FY 2026 and onwards.

Furthermore, industrial users that surpass the thresholds mentioned above for three consecutive years will lose their qualification as an FTZ user (even though they can be still located inside the FTZ).

The 20% CIT rate would still apply for offshore FTZs and its operators.

Based on the international tax agenda (including the global minimum tax of Pillar Two under the BEPS¹ 2.0 project), the bill would establish a new rule under which income taxpayers’ effective tax rate should be at least 15%. However, this rule would not apply to companies incorporated under the special economic and social development zones regime (Zese) since the CIT rate of these companies would be 0% for some years.

Dividends paid to nonresident entities out of profits subject to taxation at the corporate level would be subject to a 20% withholding tax rate.

The bill would increase the capital gains tax rate from 10% to 15% for the capital gains of nonresident companies and individuals, as well as Colombian residents (the initial bill suggested a tax rate of 30%).

Tax deductions, benefits and incentives

The tax reform bill would limit certain non-taxable income, special deductions, exempt income, and tax credits, to 5% of net taxable income, calculated without applying the special deductions subject to the limitation (the initial bill proposed to limit to 3%). The limitation would apply to non-taxable income, special deductions, exempted income and tax credits expressly provided by the law. Additionally, the limitation would not apply regarding donations for, and investments in, technology development research and innovation.

Taxation of nonresident entities with a significant economic presence in Colombia

The modified tax reform bill includes changes to the definition of the term “significant economic presence” which would be different to the local definition of permanent establishment, as it was drafted in the initial law bill.

According to the new proposal, a nonresident entity with a “significant economic presence” in Colombia would be subject to a 10% income tax withholding (unless another the withholding tax rate applies). Nevertheless, the nonresident entity may opt to assess its income tax liability at a 5% rate over the gross income, for such purposes, the nonresident entity should file an income tax return.

The bill would designate the credit and debit card issuers and prepaid card sellers, payment gateways and other entities as new withholding tax collection agents.   

The bill would allow a tax treaty to prevail over Colombian domestic law when foreign entities reside in a tax treaty jurisdiction. The bill would also establish that if Colombia signs an international agreement which forbids this form of taxation, the rules mentioned above would be repealed as from the taxable year following to the one when the international agreement enters into force (we understand that this rule is related with Pillar One of the BEPS 2.0 project of the OECD²).

A significant economic presence would be triggered if the following criteria are met:

In the case of a transfer of goods, a nonresident entity would trigger a “significant economic presence" in Colombia when the following conditions are met:

• Has an interaction or marketing activities with more than 300,000 users in Colombia during the prior year, or within the relevant tax year, or displays the price of goods in Colombian Pesos or allows the payment of the goods in Colombian Pesos.
• Its gross income from transactions with customers in Colombia is higher than 31,300 tax units (approx. US$297,000) during the prior year or the relevant tax year.

If the activities in Colombia are developed by different related parties, the criteria mentioned previously would take into account the transactions of all related entities.

In the case of digital services, rendered from abroad,³ a significant economic presence would be triggered (regardless of whether the above criteria are met).  

Other changes to Corporate Income Tax

• Profits on the sale of listed shares on the Colombian Exchange Market would be considered non-taxable income when the shares are held by the same final beneficiary and do not represent more than 3% (currently 10%) of the outstanding shares (the initial bill proposed to repeal such treatment).
• Share buy-back would be subject to taxation as ordinary income, regardless of the holding period. Therefore, gain would not be treated as capital gain.
• The tax reform bill would include additional restrictions for concurrent tax benefits. Currently, it is not possible to apply simultaneously a special tax deduction (not related with the income producing activity) and a tax credit. In addition, this restriction would also apply for non-taxable income, exempted income or a reduced income tax rate. For such purposes, non-taxable income which does not increase the equity of the taxpayer would not be considered for purposes of the limitation.
• Regarding the mechanism to pay the CIT in kind (e.g., building infrastructure), the same would include the projects developed in municipalities located in the Amazonas region with a population of less than 85,000 inhabitants. Further, the mechanism will no longer include projects developed in municipalities with a high poverty index, lacking public utilities infrastructure, located in isolated zones, and areas of development of innovative activities.

Individual taxation

The bill would subject dividends obtained by Colombian resident individuals to the ordinary income progressive rates ranging from 0% to 39%. However, a 19% tax credit on the value of the dividends would be granted (thus the dividends themselves would be subject to a tax rate of up to 20%, but such dividends would be considered to determine a higher tax bracket applicable to the ordinary income).

The 40% limit for exempted income and deductions related to income in the general basket would be reduced to 1,340 tax units (approx. US$11,000) per year (the initial tax bill set the limit at 1,210 tax units (approx. US$9,900)).

Equity tax

From 2023 to 2026, a temporary 1.5% equity tax rate would apply on the portion of the equity that exceeds 239.000 tax units (approx. US$1.9m). As of 2027, the highest equity tax rate would be 1% when net worth exceeds 122.000 tax units (approx. US$1m) (The initial bill set a tax rate range from 0.5% to 1%). Note that the bill would establish a new permanent equity tax on Colombian resident individuals’ worldwide net worth (nonresident individuals would be taxed only on their Colombian assets). Nonresident entities would have to pay this tax on their assets in Colombia, such as real estate, yachts, artwork, boats, planes, and rights over mines or oil wells, among others.

Additional tax measures

The bill would make changes applicable to specific sectors or activities as follows:

• Tax on single-use plastics. The definition of single use plastics was modified to align it with environmental law which refer to those intended to be used once and with a short useful life. The bill would not levy the tax on single-use plastics when the taxpayer obtains the Circular Economy Certification (CEC), which will be regulated by the Ministry of Environment.
• Tax on sugary beverages. The effective tax rate would be progressively increased until 2025.
• Tax on ultra-processed foods. This tax was subject to several changes regarding the first version of the tax reform bill. Ultra-processed foods would be subject to tax when they have added sugar, salt, sodium and/or fats (the initial bill only covered ultra-processed foods with sugar). The tax rate would be increased progressively from 10% (FY 2023), to 15% (FY2024) and to 20% (from FY2025 onwards) (the initial bill only set a tax rate of 10%).
• Value-added tax (VAT) exemption for courier and urgent shipment: The new bill repeals the VAT exemption for courier and urgent shipments whose value does not exceed US$200.
• A 1.5% stamp tax would be introduced on public deeds to document the transfer of immovable property with a value in excess of 20,000 tax units. The stamp tax would also apply on public deeds that document the transfer of ships, or mortgages on such immovable property or ships.
• Certain eliminations to benefits for the film and publishing industries, as well as for activities related to low income-housing, have been withdrawn from the current bill approved in first debate.
• Some measures to avoid the duplication of debit tax when payment processors are involved have been included.

Finally, the new bill modified the additional measures for the oil and gas, and mining sectors:

• Repeal of the windfall tax proposal on the exportation of certain customs subheadings of oil, coal and gold (the initial bill proposed to incorporate a 10% windfall tax).
• Royalties paid to the Government for the exploitation of non-renewable natural resources could not be deducted for income tax purposes, regardless of the accounting record.
• The tax reform bill keeps the VAT exemptions well as, tariff and national tax exemption on gasoline and ACPM in border municipalities (the initial proposal was to repeal such treatment).
• The certificate of tax credit (CERT) for new investments in oil and gas and mining would be repealed.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young S.A.S. Bogota

• Luis Orlando Sánchez | luis.sanchez.n@co.ey.com
• Juan Torres Richoux | juan.s.torres@co.ey.com
• Andrés Millán Pineda | andres.millan.pineda@co.ey.com
• Amalia Borja Gonzalez | amalia.borja@co.ey.com
• Isabel Rodriguez Daniels | martha.i.rodriguez.daniels1@co.ey.com
• Zulay Andrea Arevalo | zulay.arevalo@co.ey.com

Ernst & Young LLP (United States), Latin American Business Center, New York

• Ana Mingramm | ana.mingramm@ey.com
• Lucas Moreno | lucas.moreno1@ey.com
• Enrique Perez Grovas | enrique.perezgrovas@ey.com
• Pablo Wejcman | pablo.wejcman@ey.com
• Pablo Angel | pablo.angel@co.ey.com

Ernst & Young LLP (United Kingdom), Latin America Business Center, London

• Lourdes Libreros | lourdes.libreros@uk.ey.com
• Claudia V León Campos | claudia.v.leon.campos1@uk.ey.com

Ernst & Young Tax Co., Latin America Business Center, Japan & Asia Pacific

• Raul Moreno, Tokyo | raul.moreno@jp.ey.com
• Luis Coronado, Singapore | luis.coronado@sg.ey.com

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Endnotes

Base Erosion and Profit Shifting.

Organisation for Economic Co-operation and Development.

According to the tax reform bill the services that would trigger a significant economic presence include: (i) Online advertising services, (ii) digital services, (iii) streaming services, podcasts, broadcasting services (including TV, music, films and any other digital content), (iv) activities in e-markets which monetizes the information or data of users located within Colombian territory, (v) intermediation platforms, (vi) digital subscriptions to audiovisual media (news, newspapers, games among others), (vii) data management including web hosting, online data, file sharing or cloud hosting), (viii) licensing of standardized search engines including “customized” software, (ix) Education, training services, (x) provision of the right of use or exploit intangibles, and (xi) other electronic or digital services.