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December 4, 2023
2023-1997

Colombia issues regulations on Significant Economic Presence

  • A new National Government Decree will regulate "Significant Economic Presence" (SEP) as of 1 January 2024.
  • Nonresidents selling goods or services into Colombia may trigger SEP.
  • Affected taxpayers will want to become familiar with the Decree.

The National Government, in issuing Decree 2039 of 2023, has regulated the Significant Economic Presence (SEP), which applies beginning on 1 January 2024.

Background

Law 2277 of 2022 introduced the SEP, under which nonresidents who sell goods and/or provide certain services to customers and/or users located in Colombia, may trigger an SEP and, therefore, be obliged to pay taxes in Colombia either via: (i) a 10% withholding tax or (ii) by filing an income tax return and apply a 3% rate on the gross income obtained in the country.

SEP will exist when the nonresident (or its related parties):

  • Obtains gross revenues of more than 31,300 Tax Value Unit (approximately US$297,000) from transactions carried out with customers and/or users located in Colombia
  • Has a systematic and deliberate interaction with the Colombian market, which is presumed to occur if: (i) an interaction or marketing deployment is maintained with 300,000 or more customers and/or users located in Colombia, or (ii) there is the possibility of displaying prices in Colombian pesos (COP) or payment in COP is allowed

Potentially, SEP rules could not apply under double-taxation treaties and future international treaties on digital economy taxation.

Regulatory Decree 2039

I. Definitions

  • "Digital Services": The Decree points out that Digital Services include those listed in the law (section 2 of article 20-3 of the Colombian Tax Code (CTC)), namely services provided through the internet or an electronic network, in an automated way, with minimal human participation, and impossible to guarantee in the absence of information technology. Excluded from the definition of digital services are "services that have a tax treatment established in other provisions such as technical services, consulting services, technical assistance, and education services," even if they are provided through an electronic network or platform.
  • "Clients" and "users": These refer to individuals, legal entities or persons without legal status located in national territory. "Customers" are those who pay for or contract for the acquisition of goods or services offered by nonresidents. "Users" acquire or make use of a digital interface, identifying themselves with a username and password, to access the aforementioned interface.
  • "Digital interface": This would be any type of technological program, including websites or parts thereof, or applications (including mobile applications) or any other means that allows users/customers to interact/communicate digitally with nonresident persons or entities not domiciled in the country.

II. Criteria to determine when customers/users are located in the national territory

Criteria to consider in determining when customers/users are located in the national territory include:

  • The domicile or where the client and/or user habitually resides or lives is in Colombia.
  • Payments are made through credit, debit or other types of cards or vouchers or through any payment mechanism, located in Colombia.
  • The credit or debit card through which the payment of the transaction is made was issued in Colombia.
  • The shipping address for the sale of goods is located in Colombia.
  • The Internet Protocol (IP) address of the device used by the customer and/or user is located in Colombia, at the time of the operation.
  • The country's mobile code (MCC) of the international identity of the mobile service subscriber stored on the SIM card used by the customer and/or user places is in Colombia.

With regard to the sale of goods, the location of customers/users located in the national territory is established when at least two of the above criteria are met.

III. Choice to declare and pay 3% tax, and nonapplication of withholding tax at source

The nonresident with SEP must choose between declaring and paying income tax (at a 3% rate on gross income from SEP) or having the tax collected via a 10% withholding tax.

If a taxpayer choses to file and pay tax returns, it must register to obtain a tax identification number ("RUT" per its acronym in Spanish). If the nonresident is already liable for VAT from providing services from abroad, the nonresident must update its RUT to include the SEP obligation and provide certain documentation established in the regulation.

If the nonresident with SEP has registered, the nonresident may delete the obligation reference from the RUT, as long as certain assumptions contemplated in the regulation are met.

Nonresidents with SEP who choose to be a filer must make advance payments every two months. These advance payments will be 2% on "bi-monthly gross income per SEP." The payments may be credited against the value of the income tax payable according to the annual return filed.

IV. Priority of withholding agents

If a transaction with the nonresident with SEP is subject to withholding tax, and several withholding agents concur, the following order of priority is established.

Order

Withholding agents

1

General withholding agents (according to article 368 of the CTC): For a direct acquisition of goods or services

2

The financial institution issuing the card (debit or credit), provided that it has the necessary information to apply the withholding: When the means of payment is a card

3

Payment platforms: When payments are made through the platforms

However, this does not exempt the payment platform from sharing the information with the issuing financial institution so it is the one that makes the withholding.

4

Entity that provides the financial product or service: If the transaction is different from payment by debit and credit card and corresponds to other financial services

5

Third-party cash collectors

6

Prepaid card sellers

7

Other withholding agents designated by the Colombian Tax Administration

It is noted that under category 1, the withholding agent will not withhold 10% when the foreigner states under oath that he or she does not meet the criteria for generating a SEP, or when he or she has chosen to file a return.

V. Some considerations regarding Colombian acquirers

If nonresidents with SEP choose not to issue electronic invoices or equivalent document, the purchasers of the goods or services must bear their costs (i.e., expenses), deductions and deductible taxes. The current regulations require purchasers to issue electronic support documents for acquisitions made from sellers that are not obliged to issue a sales invoice or equivalent document.

Taxpayers who acquire goods/services from nonresidents with SEP could claim the costs, deductions and creditable taxes derived from such transactions without being obligated to prove that they withheld income tax at the source, to the extent that the goods/services supplier has chosen to file the income tax return, which will be attributed to the applicable taxpayer using the RUT.

VI. Other topics

The Decree states that when a nonresident SEP filer invoices the service in a currency other than the COP, the filer must consider the rules on foreign currency exchange (articles 288 of the CTC and 1.1.3. Decree 1625 of 2016) to determine the applicable exchange rate for the income tax return.

Additionally, for nonresident filers with SEP, remitting the declaration and the bimonthly payment is accomplished by making a transfer to the appropriate international account of the National Treasury. Payment can also be made in COP at authorized banks in Colombia. Payment via the international account must be made in US dollars, based on the representative market exchange rate on the payment day, certified by the Financial Superintendence of Colombia.

The Decree also modifies certain rules of the RUT to align them with the registration and identification for nonresident persons providing services from abroad responsible for VAT and/or with SEP in Colombia. Likewise, the Decree proposes to regulate matters related to documents and formalization of registration, updating and requesting cancellation of the RUT.

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

Ernst & Young S.A.S. Bogota

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

 
 

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