Colombian Tax Expert Discusses Forming A Business In Colombia, Tax Ramifications
There are several ways by which a legal entity may be structured under Colombian law, depending upon the circumstances and needs of the foreign investor. In this sense, and even though the following are not the only ways by which a legal entity can be structured in Colombia, they do constitute the most common for foreign investors:
(1) A Joint Capital Stock Corporation (“SA”), consisting of a corporate structure under which shareholders are liable up to the amount of their contribution. Its name must be followed by the letters S.A. It must be created with at least 5 shareholders.
Courtesy of Oscar Jiménez, whose contact information is provided below.
The management functions are carried out by the shareholders during their general meeting, the board of directors, and the legal representative of the corporate entity. Each capital share represents one vote, and has an equal value to the other shares of the company. Decisions must be taken by absolute majority.
(2) Under a Simplified Joint Capital Stock Corporation (SAS) in which shareholders are liable up to their contribution amount under a more flexible standard than the above mentioned “SA”. Its name must be followed by the letters S.A.S. and it must be created with at least one shareholder. As for what happens in the SA, the management functions are exercised by the shareholders during their general meeting, the board of directors (optional), and the legal representative.
Each capital share represents one vote, but shareholders can approve different kinds of shares with different voting capability in the company’s bylaws. Decisions must be taken by absolute majority, but shareholders can approve a different majority within the company´s bylaws.
(3) Under a Limited Liability Company (LLC), in which partners are liable up to the amount of their contributions. Its registered name must be accompanied by the word “Limitada” or the letters “Ltda.” It cannot have more than 25 partners and requires at least 2 partners. Management corresponds to the Partner meeting and the legal representative. Decisions require approval by an absolute majority.
Partners’ liability is limited to the amount of their contribution, with the exception of tax and labor liabilities. In these items, partners are jointly and severally responsible for unpaid debts. Capital is represented in quotas of equal value, which must be paid in full at the moment of incorporation or any time the capital of the company is increased. Assignment of quotas implies the reformation of the by-laws of the company.
(4) Finally, a foreign company may set up a branch office in Colombia, for which the head office must register with the local chamber of commerce and provide information on the type of business the branch will conduct in Colombia, its capital, location, expected duration, possible reasons for termination of business in Colombia, and the names of its manager-designate and auditor, who must be Colombian. Proof that the branch’s assigned capital has been paid must be provided. A notary public from the chosen domicile of the branch must authenticate a copy of the head office’s bylaws and statutes.
A branch is legally an extension of the head office and thus considered the same legal person under the Colombian law. Branches in Colombia are subject to the standard Colombian corporate income tax rate.
Accounting, Filing and Auditing Requirements
Official books must be maintained in accordance with commercial and tax rules. All SA’s and SAS’ under the control of the Superintendence must submit annual balance sheets and pay a supervisory fee of 0.05% of total assets. An SA also must employ a statutory auditor to carry out internal control functions, including reconciling monthly bank statements and authorizing company balance sheets. An SAS or LLC must appoint a statutory auditor only if its assets or income exceeds specified limits established by law.
Financial statements must be prepared annually. Colombia has accepted IFRS (International Financial Reporting Standards), which is expected to apply as of 2014, depending upon the group on which the taxpayer is classified; however, for tax purposes, there will be some differences between accounting books and tax books, as the IFRS will not be applicable for tax purposes until 4 years after IFRS is implemented.
Colombia allows foreign investment in all sectors of the economy, except for sectors related to national security and the disposal of hazardous waste products. Foreign investors generally are treated the same as local investors, but the law requires reciprocity (Colombian investors must similarly be allowed to operate in the sector in the country of origin of the foreign investor). Foreign investors generally are treated the same as local investors.
A foreign investor may own up to 100% of the capital of a Colombian company, although limits can be imposed in certain cases. Investment in the banking and insurance sectors requires prior authorization by the Financial Superintendence and may be subject to special capital requirements. Authorization or registration may be required in certain cases.
According to the Exchange Regime, the following operations must be channeled through the official exchange market (i.e., through financial institutions):
- Importing and exporting goods.
- Borrowing amounts from and paying interest to persons outside of Columbia.
- Receiving investments from and paying profits to persons outside of Columbia.
- Colombian persons investing abroad and receiving profits from abroad, unless the investment is made with funds that do not have to be channeled through the exchange market.
- Issuing securities and guarantees in foreign currency.
- Derivative operations (forwards, futures, options, swaps, floors, caps and collars).
The above mentioned operations must be made through a foreign market intermediary and/or through a settlement account. The Central Bank may provide special exceptions to the above requirements through general regulations.
Residence: A corporation is resident if it is organized under Colombian law or has its main domicile in Colombia or if its place of effective management are located in Colombia. When foreign companies conduct their corporate activities in Colombia through a fixed place of business, they are deemed to have a permanent establishment (PE) in Colombia. The Colombia-source profits earned by the PE will be subject to the income tax and the income tax for equality.
Taxpayers need to be registered before the Colombian Tax Authority, which will assign a Unique Tax Register (RUT). The RUT is the ID card for tax purposes of all corporations incorporated in Colombia.
Taxable Income and Rates: The corporate income tax rate is 25%, which applies to all Colombian entities and to foreign companies, including corporations and foreign branches. The rate does not apply to consortia, which generally are part of administrative contracts with government agencies; instead, the individual partners in the consortia pay tax. Companies located in free trade zones are subject to a special 15% corporate income tax rate.
To compensate for the reduction in the corporate income tax rate, the CREE (income tax for equality) is levied in addition to the corporate tax, at a rate of 9%. CREE taxpayers are exempt from the payroll fees on wages and other payments (about 9% of wages/salaries included in payroll) with respect to payroll for employees that earn 10 minimum wages or less per month.
Taxable income is defined as gross income less returns, rebates, discounts, all ordinary costs incurred in obtaining net income and all allowable deductions. Corporate taxpayers may deduct costs that are “necessary and proportionate to the activities performed” in computing taxable income.
Colombian companies and legal entities are subject to income tax on worldwide income. In contrast, branches of foreign corporations and PE are subject to income tax only on their Colombian source income. In general terms, the following is considered as Colombian-source income:
- Profits derived by Colombian companies;
- The transfer or exploitation of tangible and intangible goods located in Colombia;
- The transfer of goods produced in the country, regardless of the place of transfer;
- The rendering of services in Colombia; and
- The rendering of technical assistance and consulting services, and the execution of turnkey contracts, within or outside Colombia.
On the other hand, foreign source income includes any revenues arising from the transfer or exploitation of tangible and intangible goods located outside of Colombia, and the rendering of services abroad. Furthermore, income generated upon certain foreign loans is not deemed as local source income.
All expenses incurred in the normal course of business generally are deductible. Deductible expenses include normal business expenses, depreciation, losses, interest payments, wages and social security payments, industrial and commercial tax, the real estate tax and 50% of the financial transactions tax. Interest and financing payments made to other firms may be deducted in an amount that does not exceed the maximum loan interest rate established by the Superintendence of Finance.
Capital gains taxation: Capital gains are taxed at a rate of 10%. Gains derived from the sale of assets held for at least two years and gains on the liquidation of a company that has been in existence for at least two years are considered capital gains. The incomes produced from lotteries, raffles, betting and similar, are subject to a 20% rate.
Double Taxation Relief
Tax credit: A foreign tax credit is available to prevent international double taxation. A taxpayer may credit the amount of foreign tax paid on foreign-source income, provided the foreign tax does not exceed the Colombian tax that would be due on the same income received from abroad. For the credit to apply, the taxpayer must be a company resident in Colombia, its foreign income must be taxable in Colombia and the income taxes paid abroad may not exceed the Colombian tax attributable to the income.
Double Taxation Treaties – DTT: Colombia has signed several DTT with different countries in order to prevent double taxation. Colombia has entered into this type of agreements with Switzerland, Canada, Ecuador, Peru, Mexico, South Korea, Spain, Chile and India, amongst others.
Transfer pricing: Colombia’s transfer pricing rules use the arm’s length principle and apply to transactions between Colombian taxpayers and foreign related parties. Such transactions must be determined according to the prices and profit margins that would have been used in comparable transactions between independent parties. The transfer pricing rules also are used to determine assets and liabilities between related parties.
Parties are deemed to be related if there is any subordination or control or the parties are members of an entrepreneurial group within the meaning of the Tax Code and Commercial Code. Control can be individual or joint, without participation in the stock of the subordinated company or by a principal head office established abroad.
Taxpayers are required to maintain records of all transactions involving nonresident related parties for five years and must report to the tax authorities annually all transactions with such parties that meet certain thresholds. A taxpayer can obtain an advance pricing agreement from the tax authorities.
Thin capitalization: Thin capitalization rules are introduced as from 1 January 2013.Taxpayers can only deduct from the income tax, the interests arisen from debts, which total amount during the corresponding taxable period does not exceed the result of multiplying by three (3) the taxpayer’s net equity determined on December 31 of the immediately preceding fiscal year. Interest exceeding this amount is nondeductible. The rules apply to domestic and foreign loans and regardless of whether the loan is from a related or unrelated party.
Tax haven: The tax haven rules where incorporated in 2002, but only as of the time of the enactment of Decree 2193 of 2013 was possible to enforce those rules, considering that the tax haven rules where subject to the issuance of the list of tax havens by the Colombian Government. The regulation was enacted on October 7th, 2013. The Decree 1966 of 2014 sets forth a list of 37 countries deemed as tax havens for Colombia tax purposes.
In this sense, it should be noted that the application of the tax haven rules under the Colombian tax law gives way to different effects. As such, the payments or debits to an account that constitute as taxable income for the payee, and the latter is a resident or is located, constituted or functioning within a tax haven jurisdiction, will be subject to a withholding tax of 33%, the deductibility of the costs and expenses incurred abroad will be subject to the fulfillment of certain requirements and these operations will be subject to the transfer pricing regime.
General anti-avoidance rule: This rule introduces the substance over form principle. The rules allow the Colombian tax authorities to disregard (or re-characterize) a transaction in cases where abuse is present.
Filing and payment: “Major taxpayers” (which the tax authorities list each year) must file a tax return by a specified date. Major taxpayers must pay income tax in three installments, according with a due date provided by the National Government. The first installment cannot be lower than the 20% of the total income tax, 50% in the second and third installments.
All other companies must file a tax return between March and May of each year, depending on the last digits of their tax identification numbers, and they must pay their first installment at that time. Returns may be filed electronically.
Statute of limitations: The general statute of limitations for assessment purposes is two years from the last day of the period to file the tax return. The period is extended to five years if the return reports tax losses or the utilization of tax losses. The statute of limitations for the collection of tax is ten years.
Tax authorities: The Colombian tax authorities (DIAN) are responsible for the collection and enforcement of the tax laws.
Rulings: There is no ruling process in Colombia.
TAXES ON INDIVIDUALS
Residence: An individual is considered a Colombian resident for tax purposes if he/she stays in Colombia for more than 183 days during a 365-day period.
Taxable income and rates: A resident individual is taxed on its worldwide income; a nonresident is taxed only on Colombia-source income. A foreign resident individual will be taxed on worldwide income as from the first year he/she resides in the country.
As from 1 January 2013, a new national minimum alternative tax (IMAN) applies to individuals, which adjusts the income tax rate tables. Additionally, a simple minimum alternative tax (IMAS), which allows certain taxpayers to prepare their tax returns electronically.
Most income, including employment income, business income, investment income and capital gains, is subject to tax.
Interest paid to an authorized financial institution on a residential loan is deductible and is calculated in terms of an indexed accounting unit, up to 1,200 units annually. Taxpayer can deduct from its income tax donations done during the taxable year, as long as it fulfills the requirements set up for this deduction.
For Colombian residents and for foreign residents income tax rates are progressive. The maximum tax rate is thirty-three percent (33%) and is applicable to taxable income in excess of four thousand and one hundred (4.100) UVT. For Colombian individuals who are not residents and for non-resident foreign individuals the income tax rate is 33%.
Capital gains are taxed at a rate of 10%.
Every payment made by a legal entity is subject to withholding tax at source. In the case of a resident recipient of such payments, the tax is in practice an advance payment of the recipient’s income tax liability and is creditable against the recipient’s total annual tax due. In the case of a nonresident recipient, the withholding tax is usually a final tax.
The withholding agent is responsible for issuing withholding certificates, filing returns and paying over the withheld amounts to the authorities within the following month. Withholding tax certificates are issued by the withholding agent to taxpayers that have been subject to withholding tax. For example, a corporation purchasing professional services from a consulting firm in Colombia will withhold tax on its gross payment for such services at the rate of 10%. At year-end, the withholding agent in Colombia will issue a certificate to the consulting firm reflecting the amount of tax withheld and paid to the tax authorities on its behalf. This certificate is the withholding tax certificate. The withholding agent is required to file a withholding tax return on a monthly basis with the Colombian tax authorities; these returns serve as the basis for issuing the withholding tax certificate.
Withholding tax returns must be filed and the tax paid on the dates set by the Tax Calendar. If tax is not withheld, or only partially withheld, or it is not paid over to the authorities, the withholding agent is charged a penalty plus interest on a monthly basis. Nonpayment of tax withheld may constitute a criminal offense. Below is a schedule of the basic withholding tax rates.
Payments made to a person or legal entity that is not domiciled or resident in Colombia, and that does not constitute as foreign source income will be subject to a withholding tax at the rate corresponding to the concept of the payment. Amongst others, the following withholding tax rates will be applicable, depending upon the reason of the payment:
Payment of Dividends: If the profits from which dividends are paid were taxed at the corporate level, no taxes will be triggered when remitting the dividends abroad, including remittances made by branches of foreign companies. Dividends paid to a foreign company or entity not domiciled in Colombia may be remitted abroad free of tax if the profits out of which the dividends are paid already have been taxed at the corporate level. Otherwise, income tax is imposed at the 33% corporate rate.
Profits remitted abroad by a branch of a foreign company that have not been subject to tax at the corporate level are subject to a 33% withholding tax.
Payment of Interests: Interest paid to a foreign entity or an individual is subject to a 33% withholding tax if the term of the loan does not exceed 12 months. The rate is 14% if the term of the loan exceeds 12 months.
Interest derived from the following is exempt from withholding tax: short-term import credits and overdrafts; credits to finance or pre-finance exports; credits obtained by a financial corporation or authorized bank; and credit for trade transactions obtained through a financial corporation or authorized bank.
Royalties: Royalties paid for the exploitation of intellectual property and other intangible assets is subject to a 33% withholding tax. Royalties derived from the exploitation of software are subject to the 33% rate, but only on 80% of their amount (a total amount of 26.4% on the payment).
Value added tax: VAT is imposed on the sale of goods and the provision of services in Colombia and on imports. The standard VAT rate is 16%, with lower rates of 5% and 0%. Certain goods and services are exempt or zero-rated, depending upon the nature of the good or service rendered.
As a general rule, VAT is computed in bimonthly periods using the subtraction method, crediting taxes paid on purchases against tax liabilities arising from sales. Special rules apply to small taxpayers.
The basis for calculating VAT is the total value of the transaction, whether it is financed or not, including the expenses of financing, accessories, transportation and installation, insurance, warranties, and commissions. VAT imposed on the importation of goods is calculated based on the customs value as per the applicable regulations, plus the corresponding customs duties.
Registration tax: Registration with the Chamber of Commerce or the Registry of Public Deeds, of legal acts, contracts and other legal documents is subject to registration tax, where a private legal entity or an individual is a party or beneficiary. If a document or act is subject to registration with both the Chamber of Commerce and the Registry of Public Deeds, the registration tax will be triggered only on registration with the latter. Furthermore, if a document or act is subject both to stamp tax and registration tax, the stamp tax will not be imposed.
The basis for the calculating the registration tax is the amount established in the document, act or contract. In the case of incorporation or changes affecting a corporation, the tax base is the subscribed capital of the corporation. In the case of immovable goods, the tax base is the appraised value of the property.
The applicable rate is determined by the local authorities within a range from 0.5% to 1% in the case of acts or documents to be registered with the Registry of Public Deeds and from 0.3% to 0.7% in the case of acts or documents to be registered with the Chamber of Commerce.
Real estate tax: The municipalities levy an annual real estate tax on the owner or occupier of land. The rate depends on the use made of the property and the tax generally is deductible for corporate income tax purposes.
Consumption tax: The taxable event for consumption tax purposes is the sale to a final consumer or import by the final consumer. The tax applies to mobile phone services at a rate of 4%, the sale of certain movable property and food/beverages prepared in restaurants, etc. at a rate of 8%.
Financial transactions tax: A 0.4% financial transactions tax is imposed on disposition of funds from current and savings accounts, including accounts with the central bank, amongst others. Pursuant to article 1 of Law 1694 of 2013, from year 2015 on, the progressive removal of the levy on financial transaction is established, as follows: 0.2% for years 2015 and 2016; 0.1% for years 2016 and 2017 and 0% for 2018 on.
There are certain exemptions established by the Tax Code.
Municipal industry and trade tax: Industry and commerce tax is levied by the municipalities on all commercial, industrial and services activities performed within a municipality, whether directly or indirectly, by individuals, corporations and other legal entities.
Each municipality or district can define its own applicable tax rate, as long as such rate falls within the following ranges provided by Law: In Bogotá: 0.2% – 3%. Other municipalities and districts (industrial activities): 0.2% – 0.7%. Other municipalities and districts (commercial activities): 0.2% – 1%.
The Industry and Commerce Tax paid throughout the fiscal year is fully (100%) deductible for income tax purposes.
Oscar Jiménez received his Colombia law J.D. from Universidad del Rosario (2004) and LL.M degrees from Universidad del Rosario in Colombia in Colombian taxation (2006), Universidad del Externado in Colombia in custom law (2007) and University of Florida in the United States of America in international taxation (2009). Finally, he did a Master in Business Administration (MBA) in Universidad de los Andes (2013). He has experience in the fields of Business Tax, International Tax, Tax Management Consulting and M&A. [email protected]
This publication contains general information only and it is not professional advice. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The author is not responsible for any loss whatsoever sustained by any person who relies on this publication.