The Colombian tax system comprises taxes at the national, departmental and municipal levels.  Resident individuals and companies are taxed on worldwide Income and assets.  Non-resident Individuals, non-resident companies and permanent establishments of foreign companies are subject only to their Colombian-source income. The corporate Income tax (CIT) rate is 35% for Colombian companies and foreign entities for 2023 and onwards.

The general withholding rate for payments is 20%, whereby the Colombian taxpayer must collect the withholding tax, but there are reduced rates under double taxation treaties entered into by Colombia.

The main territorial taxes (departmental and municipal taxes) are industry and commerce tax, real estate tax and registration tax.  As for avoiding double taxation and preventing tax avoidance, Colombia has increased the number of signed double taxation treaties and has implemented certain Base Erosion and Profit Shifting (BEPS) measures.

In this chapter

• Legal system
• Taxation authorities
• Business vehicles
• Financing a corporate subsidiary
• Corporate income tax
• Cross-border payments
• Payroll taxes
• Indirect taxes

Legal system

The Colombian legal system is based on codes and laws rather than jurisprudence as a result of civil legal traditions.  However, some decisions made by high courts in Colombia are considered a source of law for the interpretation of controversial matters.  The legislative authority is the Congress, which makes law for the entire nation.  Additionally, Colombia is divided into territorial entities called departments, municipalities and districts that have the right to regulate some tax matters.

Taxation authorities

The Colombian tax system is administrated by National Tax and Customs Directorship (DIAN, in its Spanish acronym), a national entity ascribed to the Ministry of Finance. National taxes such as corporate tax and value-added tax (VAT) are administered by the DIAN. Local tax agencies or municipalities are responsible for collecting local taxes such as real estate tax, industry and commerce tax, among others.

Business vehicles

A foreign investor may use Colombian business entities or operate directly through a foreign entity (with or without a permanent establishment). For permanent activities in Colombia, a foreign investor may incorporate a company (limited liability or unlimited liability), or establish a branch or partnership agreement.

Partnership or joint venture agreements

Partnership agreements have neutral tax effects. The partners are subject to income tax and must report the assets, liabilities, incomes, costs and deductions in accordance with their participation. Non-resident partners pay specific rates of income tax which is generally 35%, but reduced rates can apply under specific circumstances.

Corporations

Corporations are required to have at least five shareholders, none of whom may have 95% or more of the outstanding shares of the company. A board of directors must have a minimum of three members, with their respective alternates. There is no minimum capital to incorporate a corporation, but the shareholders are required to subscribe for at least 50% of the authorized capital and to pay at least one-third of the subscribed shares at incorporation. The remaining balance must be paid during the year following the incorporation.

Simplified stock companies

The most used business vehicle in Colombia is the simplified stock company, which does not require a minimum number of shareholders to be incorporated. The subscribed shares can be paid during the two years after the incorporation. A board of directors is not required, nor is any minimum amount of subscribed shares. The incorporation and amendment of bylaws may be made by a private document. The shareholders are liable only up to the amount of their capital.

Limited liability companies

Limited liability companies must have at least two partners and no more than 25. The total amount of the contributions shall be paid when the company is incorporated. Unless otherwise agreed at the time of incorporation, all partners carry out the representation of the company. Partners are liable up the amount of their contribution; however, they are jointly and severally liable for labor and tax obligations.

Branch of foreign entity

The branch of a foreign entity is considered a commercial establishment that must be registered in Colombia by means of a public deed, which includes (i) the activities that the branch will perform in the country; (ii) the capital assigned to the branch; (iii) the domicile of the branch; (iv) the term during which the branch will conduct business in the country and the grounds to terminate them; (v) the appointment of a general proxy, with one or more alternates; and (vi) the external auditor, who shall be an individual residing in Colombia. The assigned capital must be paid entirely before the branch starts its operation. Additional capital may be assigned as supplementary investment. 

Private equity funds investments

Foreign entities may participate as investors in private equity funds investments. Securities brokerage and trading companies, trust management companies or investment managing companies supervised by the Superintendence of Finance are the only types of entities allowed to manage these funds, but may appoint an independent manager to undertake investment decisions. The funds are required to invest at least two-thirds of their resources in non–publicly traded securities (startups and infrastructure, among others). The minimum investment is 600 minimum monthly wages (approximately US$155,000). Private equity funds are required to have at least two investors, an investment committee and an audit committee. Private equity funds may be comprised by more than one separate investment compartment.

Foreign corporations

A permanent establishment of a foreign company or individual is defined as a fixed place in Colombia where the foreign entity has a level of permanence and performs all or part of its activities. The permanent establishment will be taxed on its income, assets and capital gains of Colombian and foreign sources attributable to the permanent establishment.

Foreign corporations are taxed on their Colombian-source income and capital gains only. 

Financing a corporate subsidiary

Equity financing

Contributions for shares

The capital of a company can be increased in cash or in kind. In both cases the investor receives shares.

Contributions without taking additional shares

It is necessary to issue shares when the investor makes contributions. Contributions may be made for a higher value than the face value of the shares if the shares are issued at a premium.

Capital contributions are subject to a 0.7% registration tax on the amount contributed, and the premium is subject to a 0.3% registration tax.

Distributions of paid-up capital

The reimbursement of paid-up capital to non-resident shareholders must be made in accordance to commercial laws and is not taxable. Nevertheless, the distribution of any amount in excess of the paid-up capital is subject to a capital gains tax at 15% when the liquated company had existed for two years or more.

Debt financing

Withholding tax implications

The payment or accrual of interests should be subject to withholding tax and comply with Colombian exchange rules. Withholding tax rate will be 15% for loans with a term longer than one year and 20% if less. The rate of withholding tax can be reduced or eliminated under an applicable double taxation treaty signed by Colombia.¹

There is a 5% withholding tax rate for the interest paid on loans with a term of eight years or more for financing public private partnerships (PPP).  Furthermore, if the loans are granted by a non-resident related party or an entity located in tax havens, the loans would be subject to the Colombia transfer pricing regime.  Loans granted by an entity located in a tax haven will be subject to a withholding tax rate equal to the corporate income tax rate.  Tax havens are currently the countries listed by the Colombian government in article 1.2.2.5.1. of Decree 1625 of 2016 In general, payments made to tax havens will only be deductible when withholding tax is carried out.

Thin capitalization

According to regulation, there is a limit on the deduction of interest on debt in favor of related companies that exceeds two times the tax equity of the taxpayer (as of December 31 of the previous year). The interest that exceeds the cap referred to above is not deductible.

Stamp tax

Stamp tax is accrued on properties with value equal or higher than 20.000 tributary units (which for 2024 are equivalent to COP$941,300,000) with rates ranging from 1.5% to 3%.

Corporate income tax

Corporate income tax rate

The corporate income tax rate is 35% for Colombian companies and foreign entities.

For companies located in free trade zones that are industrial users of goods and services, the CIT rate is 20%.

Financial entities with a tax base of 120,000 UVT, or Tax Unit Value, (approximately US$1,411,000) or more are subject to a 40% rate for years 2023 up to 2027, provided that a 5% surcharge will be applicable. It should be noted that said surcharge must be paid in advance (in two installments) calculated by taking into consideration the income tax of the previous year.

Hydroelectric facilities are subject to a 38% rate for years 2023 up to 2026, provided that a 3% surcharge will be applicable.

For entities carrying out coal and oil exploitation, a surcharge will be applicable from 5% to 15% depending on the average sale price.

Minimum tax

It must be noted that a minimum tax rate was introduced by Law 2277, 2022. Paragraph 6 of article 240 of the Tax Code, which states that income tax paid cannot be lower than 15% of the ratio between adjusted income tax and adjusted profit:

Adjusted tax rate = Adjusted income tax / Adjusted profit.

Significant economic presence (PES)

According to referred article 57 of law 2277 of 2022 that adds article 20-3 of the Tax Code, non-resident individuals or entities not domiciled in the country that have a significant economic presence in Colombia are subject to income tax that is based on income from the sale of goods and/or rendering of services in favor of customers located in the Colombian territory.

In the case of companies that provide digital services, the activities contemplated for the application of this regulation include: online advertising services; digital content services, whether online or downloadable, including mobile applications, electronic books, music and movies; transmission services, including television programs, movies, streaming music, multimedia transmission podcasts and any form of digital content; any form of monetization of information and/or data of users located in the Colombian territory and that have been generated by the activity of such users in digital markets; online services of intermediation platforms; digital subscriptions to audiovisual media including, among others, news, magazines, newspapers, music, video, and games of any kind; administration or management of electronic data including web storage, online data storage, file sharing or cloud storage services; online search engine licensing services, standardized or automated, including customized software; provision for right of use of intangibles; other electronic or digital services with destination to users located in the Colombian territory.

There will be significant economic presence in Colombia, by maintaining deliberate and systematic interaction in the Colombian market with customers located in the country. This means maintaining an interaction or marketing deployment with 300,000 or more clients located in the Colombian territory during the previous taxable year or the current taxable year, and obtaining gross income from the sale of goods to customers located in the Colombian territory equal to or greater than 31,300 UVT (approx. US$282,500) during the previous taxable year or in the current taxable year.

If the above conditions are fulfilled, the non-resident with PES may choose to file an income tax return and pay a 3% rate on the total gross income derived from the sale of goods and/or rendering of digital services, from abroad, sold or rendered to users located in the Colombian territory. Otherwise, payments received from Colombian customers will be subject to a 10% withholding.

Capital gains

Income sources that constitute capital gains are specifically defined in tax law, including:

1. Sale of fixed assets held for more than two years
2. Gifts, inheritances and legacies
3. Income from lotteries, prizes or similar events
4. Gains from gratuitous agreements between living parties
5. Gains from liquidation of companies.

The current capital gains tax rate is 15%.  In the case of income from lotteries, prizes and similar events, the rate is 20%.

Branch tax

The profits paid by a Colombian branch to a foreign parent are subject to a 20% withholding tax rate when the profits have been taxed at the branch level. If the profits were not taxed at the branch level, they are subject to a 48% rate. Double taxation treaties should be considered in each individual case as the withholding tax rate and rate for profits not taxed at the branch level, could differ.

Computation of taxable income

Taxable base

Resident entities are taxed on worldwide income, while permanent establishments as branches of foreign companies are taxed only on their Colombian-source income attributable to the permanent establishment. The attribution of income to permanent establishment depends on several criteria, including functions, assets, risks and personnel involved in obtaining the income.

Taxpayers are subject to corporate income tax on their ordinary and extraordinary revenues. Returns, rebates and discounts are subtracted from revenues. The costs are expenditures directly attributable to such income. These costs are deductible from income tax as long as they are necessary, proportionate, related to the company’s activities and accrued or paid during the taxable year.

The following amounts may be deducted from this base: (i) net equity value of contributions or shares held in Colombian entities; (ii) net equity value assets affected by events of force majeure; (iii) net equity value of assets associated with companies undergoing the initial unproductive stage.

Deductions

Some expenditures are permitted to be deducted if they meet the criteria of having a cause and effect relation with the income, proportionality and necessary under a business purpose criteria. The tax system establishes the following costs and expenses as deductible:

1. Salaries paid to employees when the employer has paid all payroll taxes and social security contributions
2. 100% of real estate tax as long as the payment of this tax is related to the taxpayer’s income-producing activity
3. Amortization of investments
4. Depreciation of fixed assets used in producing income
5. Certain expenses incurred abroad when they have been subject to withholding taxes, if they correspond to Colombian source income
6. Foreign exchange rate gains and losses
7. 50% of the financial transactions tax (GMF).

Royalties paid for exploitation of natural resources were  not deductible as of 2023 as determined by article 19 of Law 2277 of 2022 (Tax Reform). Nevertheless, this article was declared unconstitutional by the Constitutional Court in 2023 and currently, there is uncertainty about the implications and when the deductibility will be reinstated.

The following expenditures may be used as a credit for corporate income tax:

1. VAT paid for the acquisition of fixed productive assets.
2. Taxpayers who receive income from foreign sources subject to income tax in the country of origin, have the right to include that amount as a foreign tax credit in the Colombian income tax return.
3. Gifts made to non-profit entities that have been classified under the special regime of income tax and complementary taxes, will not be deductible but will have a tax credit equivalent to 25% of the gifted amount.

Income tax reporting

Colombian resident companies and non-resident corporations with permanent establishments in Colombia must file an annual income tax return. The National Tax Authority annually establishes the deadlines, which usually are between the months of March and April of the year following the end of the tax year to be reported. If resident entity is liquidated during the taxation year, income tax is reported and payable for a portion of the year. The penalty for late filing is 5% per month of the tax payable, up to 100% of the tax payable or withholding tax due. The taxpayer is responsible for computing and paying any interest incurred for late filing.

Dividends

The distribution of dividends to foreign individuals or companies from profits not taxed at the corporate level is subject to a 48% income tax rate, as of 2023.

If the dividends are paid from profits that were taxed at the corporate level, the tax rate is 20%. Inter-corporate dividends distributed to a local company from profits taxed at the corporate level are subject to withholding tax at a rate of 10%. This withholding rate may be used by the final beneficiary (individual or foreign entity). If the inter-corporate dividends were paid from profits not taxed at the corporate level, the withholding tax will be 44.75%, as of 2023.

Cross-border payments

Transfer pricing

The transfer pricing regime is based on the arm’s length principle of the Organisation for Economic Co- operation and Development (OECD). Colombian entities that, during a fiscal year, carried out transactions with related entities located abroad, related entities located in free trade zones, and/or related entities or third parties located in non-cooperating jurisdictions or in low- or no-tax jurisdictions, must determine their revenues, deductible costs and expenses.

Entities must use prices and profit margins that would have been used in comparable transactions with or between unrelated parties.  Taxpayers have to file an annual transfer pricing return and prepare a transfer pricing analysis.  Law 1819 of 2016 determines that some taxpayers have to file the master file and country-by-country report.

Withholding tax on passive income

Royalty and rent payments made by Colombian resident entities to foreign companies are subject to withholding tax at a rate of 20%.  In the case of dividends paid to a foreign company, the withholding tax rate is 20%.  The distribution of dividends to foreign individuals or companies from profits not taxed at the corporate level are subject to a 48% rate.

Withholding tax on service fees

Fee payments for consulting, technical assistance and technical services are subject to a 20% withholding tax rate.  Under a double taxation treaty, a non-resident may be able to claim an exemption from Colombian income tax if the entity does not have a permanent establishment in Colombia.  A higher withholding tax rate will apply to payments related to management services (33%) or to payments made to non-cooperating jurisdictions or low- or no-tax jurisdictions (35%).

Multilateral Instrument

Colombia is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). However, Colombia has not yet ratified the MLI. Thus, the MLI has not entered into force yet. 

Colombia has provisionally listed the treaties entered into with Canada, Chile, Korea, Spain, France, India, Mexico, Portugal, Czech Republic and Switzerland. However, Switzerland did not list this agreement.

Colombia’s position adopts the minimum provisions of the MLI, although i) it made a reservation under Article 6(4) with relation to France’s treaty and ii) accepted the application of Article 7(1) alone as an interim measure. Furthermore, Colombia adopted Article 4 (dual resident entities), Article 8 (dividend transfer transactions), Article 9(4) (capital gains), Article 11 (Application of tax agreements to restrict a party’s right to tax its own residents), Article 12 (Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements and Similar Strategies), Article 13 (Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions), Article 14 (Splitting-up of Contracts), Article 15 (Definition of a Person Closely Related to an Enterprise), Article 16 (Mutual Agreement Procedure), and Article 17 (Corresponding Adjustments). 

International tax reform

Although Colombia is noted on the list of “Members of the OECD/G20 Inclusive Framework on BEPS joining the October 2021 Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy as of 9 June 2023,” legislation has not yet been proposed to adopt the Pillar One and Two rules.

Payroll taxes

Colombian general pension system

Employers and employees are liable to make contributions to the general pension system.  The employer’s contribution is equal to 12% of the employee’s monthly salary.  The employee contributes up to 4% of their monthly salary. In addition, employees with a salary greater than four minimum legal wages have to contribute an additional 1% (and up to 2%).The employer is responsible for withholding the employee’s contribution.  The maximum contribution base is COP$29 million.

Health care contributions

Contributions to government health care entities are paid on a monthly basis and are equal to 12.5% of the employee’s salary, of which 8.5 % is paid by the employer and 4% by the employee.

Payroll taxes

Employers must contribute 9% of their total payroll every month into payroll taxes, which includes 3% to the Instituto Colombiano de Bienestar Familiar “ICBF” (Colombian Institute of Family Welfare) 2% to the Servicio Nacional de Aprendizaje “SENA” (National Apprenticeship Service) and 4% to the Caja de Compensación Familiar (Family Compensation Bureau).  Under specific circumstances, payroll tax is not applicable for employees who earn less than 10 minimum legal monthly wages, which is approximately US$2,500.

Indirect taxes

Value-added tax (VAT)

Value-added tax is an indirect national tax on (i) services rendered in Colombia and from abroad; (ii) sales and imports of physical movable goods; (iii) sales or transfers of intangible assets related to industrial property; and (iv) gambling sales and operations, except for lotteries and online gambling. As a general rule, VAT does not apply to the sale of fixed assets and export of goods and services.

The general VAT rate is 19%. However, some goods or services are subject to rates of 5% or 0%. VAT is not applicable when the goods/services have been expressly excluded (not taxed) or exempted (0% rate). In the case of exporters and producers of exempt goods/services, input VAT can be recovered via a tax refund.

Annual property tax

There is an annual property tax on the ownership of real estate; the rate will vary depending on the value and authorized use of the land.

The annual property tax varies by municipality, but it typically ranges between 0.3% and 1.6%. If the land is not urbanized, a maximum of 3.3% tax rate might apply.

Industry and commerce tax

Industry and commerce tax accrues on the performance of commercial or industrial activities or the rendering of services within a municipal jurisdiction. The taxable base of the Industry and commerce tax is the total revenue of the taxpayer. The rate varies depending on the activity or service involved. The highest rate is 1.4% on total revenues.

Financial transactions tax

Financial transactions tax is accrued by the performance of financial transactions any time there is a debit in an account held in a local bank. The financial transaction will be subject to a tax rate of 0.4%.

Registration tax which applies to documents

Legal acts registered with the Chamber of Commerce are subject to a tax of 0.3% to 0.7% on transaction amounts stated in the document. Documents registered with the Register of Public Deeds are subject to a tax and official fees of approximately 2% on the transaction amounts stated in the document or the value of real estate.

1. Colombia has signed double taxation treaties with Italy, Japan, Canada, Chile, the Czech Republic, France, India, Mexico, Portugal, South Korea, Spain, Switzerland, the United Arab Emirates, Uruguay and the United Kingdom. The treaties signed with  Uruguay and the United Arab Emirates are not yet in force. ↩