Main Points of Colombia’s Latest Tax Reform

On December 13, 2022, Colombia enacted Law 2277, embodying the most recent tax reform which came into effect on January 1, 2023 with some exceptions. In this article, our new Head of Tax explains several topics of the reform of interest to our clients.

I.    Alternative Minimum Tax.

Inspired by the OECD BEPS global anti-base erosion (GloBE) rules Pillar Two recommendations, the tax reform introduces a new 15% alternative minimum tax for corporate taxpayers, including taxpayers operating in free-trade zones (“zonas francas”).  This minimum tax does not apply to non-resident foreign entities.

This minimum tax, called Net Tax Rate (Tasa de Tributación Depurada or “TTD” for its acronym in Spanish) is based on the taxpayer’s book profits (with certain adjustments), called Net Book Profit (Utilidad Depurada or “UD” for its acronym in Spanish).

The TTD paid by any given taxpayer, that is, its effective tax rate, is arrived at by dividing the taxpayer’s Net Income Tax (“ID”) by its Net Book Profit (“UD”).  It is expressed in the law with the following formula:

Whenever the TTD computed under the above formula is lower than 15%, taxpayers must determine the amount of Additional Tax Due (“IA”) by multiplying the Net Book Profit (UD) by 15% and subtracting the Net Income Tax (ID):

For purposes of these calculations:

The Net Income Tax (ID) is the actual income tax paid (“INR”), increased by tax discounts or credits originating from tax treaties and by foreign tax credits (“DTC”), minus the income tax paid on passive income from foreign controlled entities (computed by applying the general 35% corporate tax rate to the taxable passive income) (“IRP”).  The formula is:

The Net Book Profit (UD), in turn, is calculated under the following formula:

Where:

UC                   is the book profit before taxes.
DAPARLrefers to permanent differences set forth in the law that increase taxable income.
INCRNGOrefers to income that is neither taxable income nor capital gains income and which affects book profits.
VIMPPis the income determined under the equity method for the corresponding tax year.
VNGOthis is the net value of capital gains income affecting book profits.  
REstands for exempt income originating from tax treaties, income received under the Colombian holding regime, exempt income on certain sales of social interest and priority interest housing and income received under certain pension funds
Ccompensation of prior years’ net operating losses or excess of presumptive income, taken during the tax year and which did not affect the book profit for the tax year.

Special calculations apply for taxpayers consolidating financial results.  In essence:

  • The Net Tax Rate for the Group (“TTDG”) is calculated by dividing the sum of the Net Income Tax of each Colombian resident taxpayer in the consolidation (“SID”) by the sum of the Net Profit of each such taxpayer (“SUD”):
  • Where the result is lower than 15%, the Additional Tax Due for the Group (“IAG”) is determined by the difference between the sum of the Net Book Profit for each Colombian resident taxpayer in the consolidation (SUD) multiplied by 15% less the sum of the Net Tax of each such taxpayer (SID):
  • In order to determine the Additional Tax (IA) for each Colombian resident taxpayer, the above result is multiplied by the factor resulting from dividing the Net Book Profit of each taxpayer higher than zero (“UDB”) by the sum of the Net Book Profit of all taxpayers in the group with Net Book Profits higher than zero (“SUDB”):

These alternative minimum tax rules do not apply to the following taxpayers:

  • Taxpayers who do not consolidate financial results and their Net Book Profit (“UD”) is zero or lower.
  • Taxpayers who consolidate financial results and the sum of all Net Book Profits (“SUD”) is zero or lower.
  • Entities incorporated as Special Economic and Social Zones (“Zonas Económicas y Sociales Especiales or “ZESE”).
  • Certain government-owned entities engaged in gambling or alcohol and liquor monopolistic activities.

II.   Capital Gains

The rate for capital gains (“ganancias ocasionales”) generated by Colombian entities and by non-resident entities alike was increased from 10% to 15%.

III. Dividends

Dividends paid to nonresidents are subject to a 2-tier withholding tax calculation, as follows:

  1. If the dividends originate from earnings that have not been previously taxed, then they will be taxed at the general 35% corporate tax rate.
  2. The balance remaining after payment of the above tax is further subject to withholding tax.  Here the tax rate was doubled by the tax reform, increasing from 10% to 20%.

IV.  Free-Trade Zones

Entities carrying on operations in specified free-trade zones are entitled to a preferential 20% corporate tax rate, except for commercial users, to whom the general 35% tax rate applies.

Effective 2024, the tax reform sets the following distinctions:

Industrial users:

  • The ratable portion of taxable income corresponding to exportation of goods and services will be taxed at the preferential 20% rate.  This will include health services provided in certain specific free-trade zones to patients residing outside Colombia.

    This benefit is subject to the industrial free-zone users signing, with the Ministry of Commerce, Industry and Tourism, in 2023 or 2024, an internationalization and annual sales plan for each tax year, setting forth maximum goals for net income from operations of any kind within Colombia and income from activities other than their authorized activities. 

    Such a plan will be mandatory for entities securing free-trade zone authorization as from 2025.

    Failure to sign the plan or to reach the maximum income goals will result in the benefit of the preferential tax rate being lost and thus being subject to the general 35% rate.
  • The ratable portion of all other taxable income will be subject to the general 35% corporate tax rate.

Commercial users:

Commercial free-zone users will continue to be taxed at the general 35% corporate tax rate.

Rules of Exception:

  • Industrial free-zone users with an increase of at least 60% in gross revenues in 2022 as compared to 2019 shall be entitled to apply a 20% tax rate through 2025.
  • Free-trade zone users who have signed with the Colombian government a so-called “legal stability agreement” (agreements basically freezing the tax provisions in place at the time they are signed and thus protecting against future changes in the tax law) will be subject to the tax rate called for in such agreement.
  • The preferential 20% corporate tax rate also applies to the following: offshore free-trade zones; industrial users of special permanent free-trade zones of port services, industrial users of port services in free zones (“zonas francas”), industrial users of special permanent free zones (“zonas francas”), whose main corporate purpose is refining of petroleum-derived fuels or refining of industrial biofuels; industrial users of certain qualifying logistics services and free zone (“zona franca”) operator users.

V.   Research and Development Investments

The tax credit for investments in qualifying research and development is increased from 25% to 30%.

Cost and expenses qualifying for this tax credit cannot be capitalized or claimed as costs or deductions.

VI.  Amnesties

The reform includes the following few amnesties:

  • Late-payment interest: the late payment interest on overdue taxes and customs dues paid on or before June 30, 2023, and on extensions granted by the tax administration on or before that same date is reduced by 50%.  Applications for extensions must be filed not later than May 15, 2023.
  • VAT returns: VAT returns filed up to November 30, 2022, stating an incorrect tax period and thus null and void, may be filed up to April 30, 2023, with no late-filing penalty and no late-payment interest. 
  • Taxpayers may, before May 31, 2023, file returns not filed up to December 31, 2022, paying the corresponding amounts due, with a reduction of 60% of the penalty that would apply after the reductions in Article 640 of the Tax Code and a 60% reduction in the interest rate.  The same benefits apply where, in lieu of payment, these taxpayers request a payment agreement with the tax administration before May 31, 2023, and sign such agreement before June 30, 2023.
  • Taxpayers who have been served notices to file or amend tax returns or to pay taxes assessed, may pay the corresponding amounts on or before June 30, 2023, with a 20% reduction of the amount assessed. The reduction also applies to taxpayers who file for a payment agreement with the tax administration no later than May 15, 2023, and sign the corresponding agreement by June 30, 2023.

Should you have any questions, do not hesitate to contact us.

Meet BéndiksenLaw Colombia’s New Head of Tax

Seeking to provide a more complete and comprehensive service to our clients, we are proud to announce that our founding partner, Jaime G. Béndiksen, will head the Tax Practice area of ​​our Colombia office. Throughout his more than 50-year professional career, Mr. Béndiksen has accumulated extensive experience in the tax law area, advising a wide variety of clients in Colombia, Mexico and the U.S. which is why we are confident that his appointment will allow us to further strengthen and consolidate our office in Colombia. For this reason, we present his resume below:

Education

Mr. Béndiksen graduated in 1970 from Universidad Nacional Autónoma de México (Mexico City), receiving an LLB, also received a Masters in Comparative Jurisprudence (diploma) from New York University in 1974 and a JD from ICFES in Colombia in 1982.

Jurisdictions

Admitted to practice in Mexico and Colombia (South America).

Practice

Practiced with the law firm of Baker & McKenzie from 1970 through 2011, elected international partner in 1977.  With this firm he practiced from 1978 through 1992 in Colombia.

Founding partner of BéndiksenLaw.

Practice Areas

Mr. Béndiksen has over 50 years of experience in Mexican and Colombian tax law in general, with emphasis in tax treaties, competent authority proceedings, international tax planning, supply-chain restructuring, oil exploration, production and services, taxation of software, wealth management, mergers and acquisitions, permanent establishments, cross-border transactions, transfer pricing, employee stock plans and value-added tax.  In tax litigation he has secured landmark decisions on complex tax issues, overturning previous tax court positions.

Public Service

Advisor to the Colombian Tax Administration (DIAN) in 2000-2001 to introduce transfer pricing in Colombia, illustrating the DIAN on this area of tax law and its benefits of the system, drafting the first statutory provisions, drafting the bill submitted to Congress and persuading Congress of the benefits to Colombia in approving the system.

Expert Witness

Has acted as an expert witness on Mexican tax law for the US Internal Revenue Service (IRS).

Also acted as expert witness on Mexican tax law in a US arbitration proceeding between two US multinational entities.

Coordinating Counsel for Multinational Clients

Mr. Bendiksen has extensive experience serving as coordinating counsel for multinational clients, first as Head of the Tax Practice Group at Baker & McKenzie Mexico, and, since 2011, at BéndiksenLaw.

Publications

Writes widely on domestic and international tax topics.  Among many other publications, Mr. Béndiksen:

  • Wrote the Colombia/Mexico national reports for the International Fiscal Association Annual Congresses in Amsterdam (1988), Delhi (1997) Mumbai (2014).
  • Has published several pieces in the Colombian Tax Law Institute Magazine (Revista del Instituto Colombiano de Derecho Tributario).
  • Has written two reports for the Colombian Tax Law Institute (Instituto Colombiano de Derecho Tributario) Annual Tax Law Conferences. 
  • Co-authored the section on Mexico in CCH’s “International Transfer Pricing Laws”. 
  • Directed and co-authored CCH’s “Mexican Tax Guide”. 
  • Was the editor of “Practical Mexican Tax Strategies” published bi-monthly by World Tax Executives, Inc./Thomson Reuters. 
  • Co-authored the Mexico country profile for the Global Tax Guide, published by BNA International.
  • He is a correspondent in Mexico for Tax Notes International.

Presentations

Frequent speaker at local and international fora, on domestic and international tax matters, including:

  • American Bar Association.
  • Asociación Nacional de Industriales (ANDI).
  • Bloomberg BNA.
  • Bogota Chamber of Commerce.
  • Calgary Oil.
  • Canadian Tax Foundation.
  • Colombian Tax Law Institute (Instituto Colombiano de Derecho Tributario).
  • Council for International Tax Education.
  • D. C. Bar.
  • Executive Enterprises Institute.
  • International Fiscal Association, Annual Congresses of Amsterdam (1988), Delhi (1997), Uruguay (2012).
  • Petroleum Equipment Suppliers Association.
  • The Society of Trust and Estate Practitioners (STEP).
  • Tax Executives Institute.
  • Universidad de los Andes.

Recognitions

  • Consistently listed in the Guide to the World’s Leading Tax Advisers, published by Euromoney Publications of London. 
  • Ranked regularly as a leading advisor on Mexican tax matters in the annual poll of 1000 corporate tax directors conducted by International Tax Review.
  • Named as one of the top tax lawyers in Latin America by Latin Lawyer.
  • Recognized as a leading individual on cross-border structuring matters by International Tax Review. 
  • Recognized as “Tax Advisor of the Year” by “Defensa Fiscal”, a specialized Mexican tax publication, in 2005.
  • Recognized regularly by Chambers & Partners in its Global Guide as one of the best tax lawyers in Mexico, dubbing him as “a phenomenal tax lawyer, especially in consulting and litigation”, adding “He is a leader in the field and ‘highly skilled and responsive’ according to clients”.   
  • Regularly listed by Who’s Who Legal, published by Law Business Research, Ltd.
  • Listed yearly as a recommended lawyer by PLC Which Lawyer?
  • Regularly ranked as a Top Tax Lawyer in Mexico in Chambers Latin America Guide.
  • Chambers and Partners top 5% of lawyers globally.

Memberships

  • Member of the International Fiscal Association (IFA), where he was President of the Colombia chapter. 
  • Member of the Precedents and Legislation Committee of the International Fiscal Association (IFA), Mexico Branch.
  • Member of the Transfer Pricing Committee of the International Fiscal Association (IFA), Mexico Branch.
  • Honorary member of the Colombian Institute of Tax Law (Instituto Colombiano de Derecho Tributario) since 1992.

Languages

Spanish, English, Italian

In case you need legal counsel on tax matters, do not hesitate to contact us.