Colombian taxation of investments is mainly comprised of two taxes: corporate income tax, which is applied to the profits generated by the operation of the respective entity in Colombia (income minus admissible costs and expenses), and a dividend tax, calculated on any distribution made from available balances.
To maintain a responsible fiscal policy and avoid a widening of the fiscal deficit, these two taxes were adjusted in the latest tax reform, in December 2022. The intent was to increase tax collection, so that the new government could deliver on its promise to boost social spending and thereby reduce the wealth gap that was exacerbated by the COVID pandemic.
Among the strategies to accomplish increased tax revenue, Law 2277 of 2022 reduced or eliminated the various preferential tax regimes that were available before its enactment and imposed a series of thresholds to limit the tax planning that taxpayers were previously able to conduct.
Although the general corporate income tax rate remained unchanged (35%), the latest tax reform included several adjustments to the way in which the tax is determined. Among the most relevant, it revoked the tax-exempt treatment applicable for several items of income and simplified the tax rates system by eliminating several of the differential tax rates available.
Tax exemptions
For the benefit of investment security, even though certain items of income are no longer exempt, the law expressly stated that companies that were granted any preferential treatment prior to the law coming into effect were entitled to keep benefiting from these special regimes until their term elapses. This is relevant for, among others:
Colombian technology companies and those that performed any creative activity (known to be part of the ‘orange economy’);
Companies associated with investments made in the Colombian countryside which were intended to increase the productivity of the agricultural sector; and
Companies related to the exploitation of new forestry plantations.
The law did not revoke or adjust the tax-exempt treatment applicable to income from the sale of electric energy generated from wind, biomass or agricultural waste, geothermal systems, or the seas, upon meeting certain requirements, or the income generated from social housing projects, including the sale of the land where they will be built, the first sale of housing units, and the sale of land intended for urban renovation projects.
Corporate tax rates
The law unified the applicable corporate income tax rates into a single 35%, with the intent of equilibrating the tax burden of the different players operating in the Colombian market.
From 2023, high-value investments (mega-investments) are subject to the ordinary 35% income tax (previously, they were subject to a 27% rate).
Additionally, the law introduced a new corporate taxation regime for free trade zone users, through which they will continue to be subject to a 20% tax rate but only on income produced through exports of goods and services, whereas income generated by local sales would be taxed at 35%. Hospitality projects still have a preferential rate, of 15% (it was 9% before), if they are developed in municipalities with fewer than 200,000 inhabitants.
The law also introduced a surcharge to the income tax rate for income taxpayers in certain industries, in light of the volatility of the prices of their products and their income stream, as follows:
Sector | Surcharge | Tax rate | |
Financial entities (until 2027) | 5% | 40% | |
Coal extraction (per average price of the product) | Percentile < 45 | 0% | 35% |
Percentile ≥ 45 to ≤ 60 | 5% | 40% | |
Percentile > 60 | 10% | 45% | |
Oil extractions (per average price of the product) | Percentile < 30 | 0% | 35% |
Percentile ≥ 30 to ≤ 45 | 5% | 40% | |
Percentile > 45 to ≤ 60 | 10% | 45% | |
Percentile > 60 | 15% | 50% | |
Hydraulic energy generators (until 2026) | 3% | 38% | |
Deductions and benefits
The new legislation restrained the deductibility of royalties paid out of the exploitation of non-renewable resources for income tax purposes, regardless of whether they are paid in cash or in kind. However, the legality of this provision is being assessed by the Constitutional Court and a ruling is expected by the end of 2023.
Additionally, the law introduced two limitations in the calculation of the corporate income tax due: one associated with the maximum amount of tax benefits that taxpayers are allowed to factor in at the time of calculating the tax and another establishing a minimum presumptive tax calculated on the accounting profits of the respective entity.
The limitation of benefits established in the tax reform sets forth that the sum of the tax benefits that a taxpayer can take advantage of shall not exceed 3% of the net taxable income. This limitation applies to the following, among others:
Education payments made to employees or payments for the financing of their education;
Tax credits for environmentally friendly investments;
Tax credits for educational scholarships;
Deductions for expenses incurred for the protection of cultural heritage;
Exempted income for payments in shares to employees;
The special deduction for the labour of women who were the victims of violence; and
The deduction of investments made for the benefit of scenic arts.
A minimum income tax
A new standard has been introduced to calculate a minimum income tax. Under the new rule, all income taxpayers are subject to a minimum income tax equivalent to 15% of their adjusted financial profits, which would be applicable if the tax calculated under the ordinary system results in a lesser value. For the purposes of this rule, financial profits before taxes should be adjusted as follows:
Permanent differences that increase the tax shall be added; and
The following items shall be subtracted:
Non-taxable income;
Income realised by the application of the participation method;
Financial income associated with capital gains (ganancias ocasionales);
Exempt income from investments made in countries of the Andean community and Colombian holding companies; and
Compensation of tax losses.
Companies of corporate groups which are compelled to consolidate their financial statements shall apply this minimum tax in an aggregate fashion, considering the activities deployed by the different entities.
Foreign investors
The tax reform also increased the taxation rate for dividends distributed to foreign investors, from 10% to 20%. In this vein, the effective taxation for corporate investments is currently set at 48% (considering the corporate income tax applicable to legal entities – generally 35% – plus the 20% dividend tax).
This effective taxation rate, though, might be alleviated by the application of a tax treaty. Indeed, depending on the country from which the investment is made, the dividend tax can be reduced to 0%, 5% or 10% if participation thresholds and other conditions enshrined in the treaties are met. As an example, dividends distributed out of profits that were subject to tax would be exempt if distributed to a Spanish tax resident (substance is required to apply the provisions of the treaties).
These tax treaties can also be applied with the various free trade agreements and bilateral investment treaties that Colombia has agreed to, meaning the investment is still competitive within the region.
It is important to note that even though a wealth tax was created, as a general rule, it does not apply to foreign investors or legal entities. It is only intended to tax individuals whenever their assets’ worth exceeds $750,000.
Nonetheless, there are cases where foreign persons are subject to the wealth tax. It applies to non-Colombian legal entities that own assets in Colombia whenever the assets are not shares in Colombian companies, receivables against Colombian debtors, or portfolio investments. If the foreign investor owns a different kind of asset (for example, real estate in Colombia) whose value exceeds $750,000, it would have to register before the Colombian tax authority and pay the relevant tax.
Foreign companies
For foreign companies, the tax reform included two sets of rules that are relevant if they are subject to tax in Colombia, adopting some of the recommendations and guidelines of the OECD. One relates to the place of effective management and another relates to the implementation of the concept of significant economic presence of foreign operators in the country for tax purposes.
From January 1 2023, all companies incorporated and organised under the laws of a foreign country would be considered Colombian tax residents, for the purposes of income tax, if the daily administrative activities are conducted from Colombia. This is a change of the former paradigm, which was linked to the place where strategic decisions are taken.
In an effort to tax mainly the digital economy, the Colombian Congress incorporated the concept of taxation of foreign entities whenever they have a significant economic presence in Colombia.
From 2024, foreign entities will be subject to income tax on any income realised from the sale of goods or the rendering of services to clients or users physically located in Colombia. According to the rule, any foreign entity would be deemed to be a Colombian taxpayer when it interacts in a deliberate and systematic fashion in the Colombian market, and meets any of the following conditions:
Generating income in excess of approximately $330,000;
Having contact with more than 300,000 users; or
Pricing its product in Colombian pesos or allowing payment in this currency.
Any Colombian-sourced income of a foreign entity that falls within the concept of significant economic presence would be subject to a withholding tax of 10% or, if registered before the Colombian tax authority, a 3% tax on its income. This income tax would add to the tax burden that the entity may have in Colombia through VAT when the service is subject to it (in which case, the foreign entity may also have to be registered before the tax authority).
Capital gains
Finally, the new legislation increased the taxation of capital gains from 10% to 15%. This adjustment would affect the sale of any fixed asset that has been held for longer than two years, such as a participation in a Colombian company or a specific asset. This taxation may be alleviated by an applicable tax treaty, which, depending on the treaty and the conditions of the sale, may result in a tax exemption for the sale in Colombia.
