In a draft decree (decree) issued June 29, 2023, the National Government defined various terms used in the SEP rule, which taxes nonresidents with SEP in Colombia on income from digital services in the country. The decree also specifies when clients or users will be considered located in Colombia and how to elect to file a tax return and pay 3% tax on income from digital services, rather than 10% withholding tax.

Interested parties may submit comments and/or recommendations regarding decree until July 15, 2023, before the final regulation is issued.

Background

Under Law 2277 of 2022, nonresidents selling goods and/or certain digital services (listed in the Law) to clients and/or users in Colombia may trigger a SEP in the country. If a SEP exists, income from those goods or services will be subject to either (i) a 10% withholding tax on gross income, which applies at the time of sale or service, or (ii) a 3% tax on gross income, which must be included on an income tax return to be filed by the non-resident annually. SEP rules will apply beginning January 1, 2024.

A SEP would be triggered if the nonresident:

• Obtains over 31,300 UVT (US$297,000 approx.) in gross income from transactions carried out with clients and/or users located in Colombia
• Has a systematic and deliberate interaction with the Colombian market

Related parties should be aggregated when determining whether these criteria are met.

Nonresidents are presumed to have a SEP when they (i) interact or market to 300,000 or more clients and/or users in Colombia, or (ii) display prices in Colombian pesos (COP), or (iii) allow payments in COP.

The SEP rules may not apply under current income tax treaties or under future international treaties on taxation of the digital economy, namely under Pillar One rules.

Draft decree

Definitions

The decree defines terms that the Law does not. These include:

• "Digital services": The decree defines this term as services that (i) are provided through the internet or an electronic network, in an automated manner, with minimal human participation, and (ii) cannot be rendered without information technology. Some services would be excluded from the definition of digital services, such as technical services, consulting services, technical assistance, and education services, even when provided through the internet, as they are taxed under different rules.
• "Clients" and "Users": These terms refer to individuals, legal entities or structures without legal personality. "Clients" would be those paying or contracting for the acquisition of goods or services offered by non-residents. "Users" would be those acquiring or accessing and using a digital interface by identifying themselves with a username and password.
• "Digital interface": The decree defines this term as any type of technological program that allows users and/or clients to interact and/or communicate digitally with nonresident persons or entities not domiciled in the country.

Sales of goods and/or rendering of services in favor of clients and/or users in Colombia

The decree considers clients and/or users to be located in Colombia when:

• The domicile or habitual residence of the customer/user is in Colombia
• The payment is made through cards, vouchers or other payment mechanisms located in Colombia
• The credit or debit card used for the payment was issued in Colombia
• The shipping address of the goods sold is in Colombia
• The Internet Protocol (IP) address of the device used by the client and/or user is located in Colombia at the time of the transaction
• The customer and/or user is located in Colombia according to the mobile location information (MCC and SIM)

Election to file a return and pay the 3% tax, rather than apply the 10% withholding tax

The decree permits nonresident sellers with SEP to elect to file a return and pay the 3% tax on their income from digital services. These nonresidents must submit the election request to the tax authority. To make the request, the nonresidents must already have a Colombian Tax ID. The tax authority will issue an official act granting or denying the election.

Nonresidents whose election requests have been accepted should make advance payments on a quarterly basis. These advance payments are based on 2% of the nonresident's net quarterly income from its SEP. These advance payments can be credited against annual SEP income tax liability.

Nonresidents with SEP that do no elect to file a tax return and pay the 3% tax will be subject to the 10% withholding tax. A nonresident's other Colombian source income — which differs from SEP income- would be taxed under general sourcing rules.

Considerations for Colombian acquirers

To deduct cross-border payments, Colombian taxpayers generally must be subject to withholding tax on those payments. A nonresident's election to file a return and pay the 3% tax should not, however, affect the deductibility of the Colombian taxpayer's payment. Other deductibility limitations might, however, apply.

Next steps

Nonresidents that may be impacted by the decree should consider sending comments and/or recommendations for the final decree. They should also consider consulting with their EY advisors as part of their comment-development process.

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Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor