New 15% minimum tax and concept of significant economic presence introduced
A substantial tax reform enacted in Colombia in December 2022 includes measures that affect both resident and nonresident companies. Although most of the changes apply as from 1 January 2023, some measures have a later effective date. The most significant changes are as follows:
- A 15% minimum tax for companies;
- A surtax on the corporate income tax that applies to specific companies;
- Increase in the withholding tax rate on dividends and capital gains;
- Introduction of the concept of a “significant economic presence” or SEP;
- Restrictions on certain deductions;
- Reintroduction of the wealth tax; and
- New taxes on sugar-sweetened beverages and junk food.
The tax reform also contains measures that would impact Colombia’s oil and gas industry. These include a corporate income tax surcharge on the hydrocarbon sector, disallowance of a deduction for royalties paid for the exploitation of non-renewable natural resources and an extension of the carbon tax to apply to various types of fuels.
While the reform includes measures that affect individuals, this article focuses on the changes that impact companies.
- Minimum tax: The standard corporate income tax rate remains unchanged at 35%, but a new 15% minimum tax is introduced for legal entities that pay income tax and for entities operating in the duty-free zone. Among the companies to which the minimum tax does not apply are companies operating in the special economic and social development zones, companies operating under concession agreements and companies operating in areas afflicted by armed conflict. The tax rate is calculated by dividing the adjusted income tax by the adjusted profit, although some doubts remain about exactly how the minimum tax rate is determined (e.g., as regards the impact of temporary or permanent differences that decrease net income). It should be noted that the 15% minimum tax does not implement the global minimum tax under the OECD’s BEPS 2.0 project and the calculation of the tax may not be in alignment with the Pillar Two model rules.
- Special reduced rates: The special tax rate applicable to hotel services and publishers increased from 9% to 15%.
- Surtax: A surtax on the corporate income tax applies to financial institutions (including insurance/reinsurance companies and commission agents), the coal and hydrocarbon sector and the electric power (hydroelectric) sector. Financial institutions whose taxable income exceeds 120,000 tax units are subject to a 5% surtax, resulting in a total tax rate of 40%. A 3% surtax applies to companies in the coal and hydrocarbon sector whose taxable income exceeds 50,000 tax units and electric power generation companies whose taxable income exceeds 30,000 tax units, resulting in a 38% corporate income tax rate. The surtax on financial institutions applies until 2027 and that on hydro-electrics until 2026 but the surtax on companies in the coal and hydrocarbon sector is permanent.
- Dividends: The withholding tax on dividends paid by Colombian companies to Colombian resident entities out of profits taxed at the corporate level is increased from 7.5% to 10% and the rate on dividends paid to nonresidents is increased from 10% to 20% (although the tax rate in the latter case may be reduced under an applicable tax treaty).
- Capital gains: The capital gains tax rate increased from 10% to 15% for resident and nonresident legal entities (and resident and nonresident individuals). The capital gains tax exemption for gains derived from the sales of shares listed on a Colombian stock exchange continues to be available provided the shares disposed of do not exceed 3% (previously 10%) of the issuing company’s total shares in the taxable year of disposal.
- Duty-free zone industrial users: As from 2024, industrial users in duty-free zones will have to meet new requirements to qualify for the preferential 20% tax rate, e.g., such users will need to have their “internationalisation plan” approved for each year they are in the zone. However, industrial users that have experienced revenue growth of at least 60% in 2022 in relation to revenue derived in 2019 can continue to benefit from the 20% rate until tax year 2025. To the extent industrial users carry out activities other than the export of goods and services, they will be subject to the standard 35% corporate income tax rate.
Significant economic presence
Colombia has adopted the concept of a SEP, which will apply as from 1 January 2024, to expand Colombia’s rights to tax the profits of foreign companies that lack a physical presence in the country but have a connection with Colombia based on a digital presence or interaction with local customers. Under the new rules, nonresident persons or entities that have a SEP in Colombia because they generate income from the sale of goods and the provision of services—including digital services—to Colombian customers will be subject to a 10% withholding tax.
A SEP will exist if a nonresident (i) has “deliberate and systematic interactions” with Colombian customers and (ii) earns income of at least 31,300 tax units from such transactions. Deliberate and systematic transactions will be deemed to exist when the nonresident has at least 300,000 users or customers in Colombia, allows its prices to be displayed in Colombian pesos or allows its customers to pay in pesos.
As an alternative to the 10% withholding tax, the nonresident can elect to pay a 3% tax on the gross income from covered transactions and file an income tax return in Colombia. A nonresident that elects to pay the 3% tax must inform the Colombian tax authorities; otherwise, the 10% tax will be deducted.
The government is expected to repeal the taxes if a global policy is adopted with respect to Pillar One.
Other measures and taxes
- Limits on deductions and incentives: Certain deductions are limited to 3% of the taxpayer’s net income. The deduction for royalties paid for the exploitation of non-renewable natural resources is eliminated. The special deduction for investments in research, technological development and innovation is repealed, but taxpayers may be eligible for a 30% tax credit on the value invested in such projects for the relevant year (i.e., the year the investment is made).
- Wealth tax: The wealth tax is reintroduced at progressive rates based on a taxpayer’s net equity as of 1 January each year. The tax applies to foreign companies that are not taxpayers in Colombia and whose gross assets are equal to or greater than 72,000 UVT (about ARS 3 billion), as well as both resident and nonresident individuals. The wealth tax rate ranges from 0.5% to 1.5%, the latter of which will apply for 2026, and dropping to 1% as from 2027.
- Taxes on sugar-sweetened beverages and junk food: Starting on 1 November 2023, new taxes will apply to sugar-sweetened beverages and ultra-processed foods in an effort to discourage the consumption of both:
- The tax on sugar-sweetened beverages will apply to ultra-processed beverages, as well as concentrates, powders and syrups, with the amount of the tax based on the sugar content of the beverage. If a beverage contains more than six grams of added sugar per 100 ml, the amounts will range between $18 and $35.
- The tax on ultra-processed foods will apply to foods with a high amount of added sugar, sodium or saturated fat at an amount of ARS 10 per 100 mg where the food exceeds established sodium, sugar or saturated fat content.
- Tax on single-use plastic products: A new tax in the amount of 0.00005 UVT per gram of the product applies to single-use plastic products used for wrapping and packaging goods. The tax will be paid by the manufacturer or importer.
- Carbon tax: The scope of the carbon tax is expanded to apply to coal, fuel oil, jet fuel, kerosene, liquified petroleum gas and natural gas that are produced domestically or imported, with the amount of the tax based on a greenhouse gas emission factor for each type of fuel. It should be noted that the carbon tax on coal will be phased in through the end of 2027. Additionally, certified carbon neutrality now has the effect that only 50% of the carbon tax is payable; previously, carbon neutrality resulted in full exemption from the tax.
Claudia Marcela Camargo Arias