The president of Colombia, Gustavo Petro, sanctioned on 13 December the tax reform promoted by his government, which has become law and will start to be in force as of January 2023.
The new law, centrepiece of new president economic policies, will raise an additional 20 trillion pesos ($4 billion) annually for the next four years.
As a result, it will increase taxes on individuals and resident and non resident entities. It’s also planned a 15% minimum tax rate in line with the OECD’s agenda to prevent profit shifting (BEPS) by multinational enterprises.
Three ways to increase revenues have been established: in addition to duties of up to 10% on coal and up to 15% on crude oil when prices go above a certain level, the law will impose higher taxes for wealthier population and corporates, as well as duties on single-use plastics, sugary drinks and ultra-processed foods.
The reform bill was subject to multiple changes throughout the legislative process and will have significant consequences not only for Colombian companies and citizens, but also for non-resident individuals and foreign investors operating in the country.
The underlying concept is that while Colombian resident individuals will be taxed on their worldwide net worth, non-resident (individuals and entities) will be taxed only on their Colombian assets, such as bank accounts, real estate, artworks, yachts, boats, planes, rights over mines or oil wells. Exceptions will be applied for shares in Colombian companies, accounts receivables from Colombian debtors, special financial investments and leasing agreements.
The bill will also establish a permanent equity tax, which will be levied on January 1 of each year starting in the next three-year period (from 2023 to 2026) with a variable rate starting at a minimum of 0.5 percent and rising to a maximum of 1.5 percent.
For this tax to apply, the net equity of the taxpayer must be at least of 72,000 tax units (approximately USD 611,000) as of 1 January of each year. From 2027 onward the maximum rate will decrease and will be capped at 1 percent from capitals above 122,000 tax units (1 Million Usd).
The reform will raise capital gains tax (CGT) and dividend withholding tax. The CGT will increase from current 10% to 15% for both resident and non-resident companies. Also individuals resident in Colombia would be subject to the same rate.
For dividend distributions between Colombian entities, the current withholding rate of 7.5% will increase to 10%. The current 10% withholding tax on dividends paid to non-residents will double, rising to 20%.
As regards to the Corporate income tax (CIT) the current rate of 35% will remain the same. However, the bill wants to introduce a 5 percent surcharge (total CIT rate of 40%) only for certain entities, including financial institutions, insurance companies and stockbrokers, provided their taxable income exceeds 120,000 tax units (approximately USD 989,000).
As of 2024, industrial users of the free trade zones (FTZs) will continue to benefit from the 20% tax rate applied to income derived from the exportation of goods or services; the 35% CIT rate will apply to income derived from other types of activities. To apply the 20% rate, industrial users of FTZs must sign an internationalization plan with the Ministry of Commerce, Industry and Tourism. Otherwise, the 35% rate will apply over the overall income received by the industrial user.
Finally, the new legislation suggests implementing a minimum effective income tax rate of 15 percent, in line with the OECD’s Pillar Two agenda to prevent base erosion and profit shifting (BEPS) by multinational enterprises.
This rule will not apply to nonresidents companies incorporated under the special economic and social development zones regime (Zese) over the period in which such companies are subject to a 0% rate, companies whose main domicile and whole activity is carried out in zones affected by armed conflict (ZOMAC), companies engaged exclusively in publishing activities, hotel services subject to a 15% tax rate and concession agreements.