Tax Bulletin No. 18

We share our Tax Bulletin No. 18 from December 2019, with the latest changes introduced by Law 2010 of 2019 (“tax reform”), recently enacted by the Colombian Congress. Law 2010 reenacts most of the dispositions that were previously approved by Law 1943 of 2018, which was declared unconstitutional by the Colombian Constitutional Court due to procedural flaws, but also includes several tax changes which will be highlighted below.

The complete Bulletin is found only in Spanish in the below PDF, because of many domestic tax terms we are unable to translate for you. However, please find below the main subjects we will be speaking of in the Bulletin. If you are interested to find out more information, do not hesitate to contact us.

1.Income Tax

• The tax reform maintains the progressive reduction of the income tax rate that was previously approved in Law 1943 of 2018. In this sense, for legal entities, the income tax rate for fiscal year 2020 and subsequent years will be as follows: 

• Regarding financial institutions, tax reform sets forth that this type of entities must liquidate a surtax in addition to the general corporate income tax rate when its taxable income exceeds approximately USD 1.2 million. The surtax will be as follows:

• The tax reform reduces the presumptive income tax rate for 2020 from 1% to 0.5%. For year 2021 and thereafter, the tax rate will be 0%.

• In addition, the tax reform establishes a deduction equivalent to 120% of wages paid to employees as long as the following requirements are met: (i) the employee must be under 28 years old; (ii) being employed for the first time and; (iii) that the job for which the new employee is hired is considered as a new job. The monthly maximum deduction per employee may not exceed 115 Tax Value Units (“UVT” per its acronym in Spanish).

• According to the provisions established in Law 1943 of 2018, taxpayers that carried out Mega Investments in Colombia will have an income tax rate of 27%, as long they fulfilled several requirements. Among the requirements tax payers had to comply were, among others, the generation of 250 new direct jobs. In this regard, the tax reform increases the number of jobs a company must create to qualify for Mega Investment benefits from 250 to 400. However, for investments in high technological industries, the tax reform maintains the employment requirement at 250. Finally, the tax reform also indicates that Mega Investment projects could take place in free trade zones, and that the term of five (5) years a company has to carry out the Mega Investments will run from the day in which the project was approved by the competent authority.  

• In respect to indirect transfers of Colombian assets, the new tax reform adds a new paragraph to section 90 – 3 of Colombian Tax Code (CTC), which sets forth that, indirect transfer of Colombian assets performed through mergers and demergers between foreign companies will be subject to section 318 – 9 of CTC. The above means that, these operations will be taxable, unless certain requirements are met.

2. Individuals

The tax reform modifies the withholding tax for labour income. According to the new chart, marginal rates go from 0% to 39%, depending on the withholding tax basis expressed in Tax Value Units as is explained as follows:

3. Dividends Taxation

In this regard, tax reform increases the dividend withholding tax rate applicable to foreign nonresidents (individuals and companies) from 7.5% to 10%. On the other hand, for Colombian individuals, the tax reform decreases the withholding tax rate from 15% to 10%.

4. Equity Tax

Law 2010 of 2019 mantains the equity tax for years 2020 and 2021, for individuals whose net equity is greater than COP$5,000 million (approx. US$1.6 million). The applicable rate for this tax is 1%. In addition, it is important to highlight that, for nonresidents entities, the possession of shares in Colombian companies do not trigger this tax.   

5. Normalization Tax

The Colombian Congress through Law 2010 of 2019 included once again the Normalization tax. This tax has been included in several past tax bills and it is focused to allow Colombian taxpayers to amend their equity if they have uncleared assets or non-existing liabilities. This tax reform indicates that the tax rate is equivalent to 15% and that it also includes taxpayers that are under the Colombian simplified Tax Regime.

6. Value Added Tax (VAT)

The tax reform included several modifications to the VAT regime. One of the main changes consist on the addition of new goods and services excluded from this tax. In the same direction, the Colombian Congress identified new tax headings that are from now on exempted from VAT. Finally, the new tax reform also maintains the disposition that was introduced by Law 1943 of 2018, regarding the tax treatment of the VAT paid in the acquisition of fixed assets, which must be treated as a tax credit in the income tax return.