On October 31st, a new tax reform bill has been introduced in Colombia aimed at increasing tax revenues while reducing the current deficit.. The reform is addressing VAT and corporate income tax while offering multiple investment incentives. The bill should pass by the end of the year.
In order to generate increased tax revenue the tax base will be increased while reducing the VAT tax rate from 19% to 17% by 2021. At the same time, currently existing tax exemptions or cuts will be reduced or canceled. Additionally, the rules for VAT taxation will be changed for non-residents with view to electronic and digital services. Banks can now choose to withhold VAT on such services. Furthermore, the amount of VAT that has been paid on capital goods can now be credited towards the income tax.
Corporate Income Tax
The corporate income tax rate will be reduced from 33% to 30% by 2022 in order to attract investors, incentivize economic growth and create new jobs. Instead, a withholding tax of 5% will be introduced for exchange transactions between Colombian companies. At the same time, the tax on presumptive net worth of currently 3,5% will be canceled or at least suspended until 2022.
Changes to Colombian international tax rules
While the withholding tax on dividends remains at 5% the one on royalties will be raised from 15% to 20%, respectively 33% for payments on management fees.
The taxation of subsidiaries changes from a territorial to a global system, whereas certain financial expenses cannot be credited anymore.
Additionally, a tax on the indirect transfer of shares of Colombian companies will be introduced. Exceptions are planned for shares traded on the regular stock exchange as well as shares limited to 20%.
If the active income of a controlled foreign company (CFC) reaches 80% the entire income will be viewed as active income.
A new holding company regime will be introduced which incentivizes multinational companies (MNEs) in terms of tax gifts with view to foreign dividends, the sale of foreign subsidiary shares and CFC shares.
Tax incentives and changes
The reform includes further reductions:
- Crediting of tax paid on income generating activities
- Crediting of 50% of the municipal turnover tax (ICA) and financial transactions tax (GMF)
- Arm`s length valuation of domestic sale of goods and services
Further tax incentives are created for specific taxpayer groups:
Mega investors: reduced income tax, accelerated depreciation, and exemption from the payment of dividend withholding tax
Private investors in conflict zones: tax credits for public projects
High tech and agricultural investments: 5 respectively 10 years tax free
Newly built or significantly renovated hotels: 9% income tax for 20 years