On 10 September 2024, the Colombian government presented a broad tax reform bill to Congress that would affect both resident and nonresident entities doing business in Colombia and includes proposed changes to the corporate and capital gains tax rates, the income tax surtax and minimum tax, as well as various changes to the net wealth tax, VAT rules and tax procedures.
The draft tax reform bill will be discussed and voted on by the Congress. If approved, the measure will significantly impact the overall economic environment, especially the finances of Colombian entities, individuals and foreign investors.
General tax rate
The draft bill includes a gradual reduction of the current 35% corporate tax rate to 27%/30%/33% as from the 2029 taxable year and the introduction of a progressive rate structure. Entities affected by the proposed rate changes include domestic legal entities and their equivalents, nonresident companies (regardless of whether they are required to file a tax return) and permanent establishments of nonresident companies. The proposed rate structure would be as follows:
*TVU is used to determine limits and thresholds established in Colombian tax law. 1 TVU is equivalent to COP 47,065 for the 2024 taxable year.
** This is the figure used in the tax reform bill; however, it likely should be 6,285 since the 27% rate would apply to income up to 6,285. Hopefully a correction will be made during the debate in congress.
The above proposed rates would not apply to companies engaged in the extraction of hard and lignite coal and crude oil. Such entities would be subject to the current 35% corporate tax rate, plus up to 15 additional points if the taxable income is equal to or greater than 50,000 TVU for the taxable year.
Income tax surcharge rates
The draft reform bill proposes an additional 5% surcharge until the 2027 taxable year, which would apply to financial institutions, insurance and reinsurance companies, stock brokerage firms, agricultural brokerage entities and infrastructure suppliers to the stock and securities markets of the securities market.
Taxpayers whose main economic activity is the generation of hydropower energy would be subject to an additional 3% surcharge until the 2026 taxable year.
Alternative minimum tax
Since 1 January 2023, certain companies in Colombia have been subject to a 15% alternative minimum tax (for prior coverage, see the article in the February 2023 issue of Corporate Tax News). The draft bill would increase the alternative minimum tax rate to 20% and clarify that the calculation of the tax is based on accounting or financial profits or losses before taxes and does not include other comprehensive income. An analysis also should be undertaken at a group level by taxpayers that are required to consolidate and combine financial statements.
Other proposed changes
Changes are proposed to the deductibility of costs and expenses and the presumed interest rules:
The capital gains tax rate for domestic companies and individuals, as well as nonresident companies and individuals with Colombian-source assets, would increase from 15% to 20%. The current 20% rate on lotteries, raffles, bets and similar activities would increase to 25%.
The scope of the net wealth tax would be expanded to include legal entities and permanent establishments of foreign entities with respect to non-productive real fixed assets. (Non-productive real fixed assets are tangible assets that do not generate income permanently or are not related to an income-producing activity. Intangible assets that directly or indirectly have an underlying asset that meets the above criteria would be considered non-productive real fixed assets.) The taxable base would be the value of the non-productive real fixed assets at a tax rate of 1.5%.
For taxpayers other than those described above, the taxable event would be reduced from net equity equal to or greater than 72,000 TVU (COP 3,388,680,000 for 2024) to 40,000 TVU (COP 1,882,600,000 for 2024). The tax rates would be modified and could range between 0% and 2%, under a marginal structure.
Several changes are proposed to the VAT rules:
The tax reform project aims to reduce the tax burden on companies, but uncertainties remain regarding the actual impact on income tax. Although there would be a reduction in the income tax rate, the increase in the alternative minimum tax to 20% and the lack of adjustments in the formula should not be overlooked. Furthermore, the expansion of the wealth tax to include previously non-liable companies would require careful consideration as it seems that for nonproductive real fixed assets owned by companies, the taxable value is the patrimonial value without deducting associated debts.
Affected taxpayers should closely monitor the bill as it proceeds through congress and be aware of any changes that may be made during the legislative process.
Martha Reyes
BDO in Colombia
The draft tax reform bill will be discussed and voted on by the Congress. If approved, the measure will significantly impact the overall economic environment, especially the finances of Colombian entities, individuals and foreign investors.
Corporate Income Tax
General tax rateThe draft bill includes a gradual reduction of the current 35% corporate tax rate to 27%/30%/33% as from the 2029 taxable year and the introduction of a progressive rate structure. Entities affected by the proposed rate changes include domestic legal entities and their equivalents, nonresident companies (regardless of whether they are required to file a tax return) and permanent establishments of nonresident companies. The proposed rate structure would be as follows:
*TVU is used to determine limits and thresholds established in Colombian tax law. 1 TVU is equivalent to COP 47,065 for the 2024 taxable year.
** This is the figure used in the tax reform bill; however, it likely should be 6,285 since the 27% rate would apply to income up to 6,285. Hopefully a correction will be made during the debate in congress.
The above proposed rates would not apply to companies engaged in the extraction of hard and lignite coal and crude oil. Such entities would be subject to the current 35% corporate tax rate, plus up to 15 additional points if the taxable income is equal to or greater than 50,000 TVU for the taxable year.
Income tax surcharge rates
The draft reform bill proposes an additional 5% surcharge until the 2027 taxable year, which would apply to financial institutions, insurance and reinsurance companies, stock brokerage firms, agricultural brokerage entities and infrastructure suppliers to the stock and securities markets of the securities market.
Taxpayers whose main economic activity is the generation of hydropower energy would be subject to an additional 3% surcharge until the 2026 taxable year.
Alternative minimum tax
Since 1 January 2023, certain companies in Colombia have been subject to a 15% alternative minimum tax (for prior coverage, see the article in the February 2023 issue of Corporate Tax News). The draft bill would increase the alternative minimum tax rate to 20% and clarify that the calculation of the tax is based on accounting or financial profits or losses before taxes and does not include other comprehensive income. An analysis also should be undertaken at a group level by taxpayers that are required to consolidate and combine financial statements.
Other proposed changes
Changes are proposed to the deductibility of costs and expenses and the presumed interest rules:
- For income tax purposes, the deductibility of costs and expenses would be subject to a requirement that appropriate tax was withheld by the relevant deadline.
- Cash loans between companies or their permanent establishments and their partners or shareholders would be considered to generate presumed interest. The presumed interest rate would be double the fixed-term deposit rate that applies on 31 December of the prior taxable year (currently, the interest rate is the fixed-term deposit rate).
Capital Gains Tax
The capital gains tax rate for domestic companies and individuals, as well as nonresident companies and individuals with Colombian-source assets, would increase from 15% to 20%. The current 20% rate on lotteries, raffles, bets and similar activities would increase to 25%.
Net Wealth Tax
The scope of the net wealth tax would be expanded to include legal entities and permanent establishments of foreign entities with respect to non-productive real fixed assets. (Non-productive real fixed assets are tangible assets that do not generate income permanently or are not related to an income-producing activity. Intangible assets that directly or indirectly have an underlying asset that meets the above criteria would be considered non-productive real fixed assets.) The taxable base would be the value of the non-productive real fixed assets at a tax rate of 1.5%.For taxpayers other than those described above, the taxable event would be reduced from net equity equal to or greater than 72,000 TVU (COP 3,388,680,000 for 2024) to 40,000 TVU (COP 1,882,600,000 for 2024). The tax rates would be modified and could range between 0% and 2%, under a marginal structure.
Value Added Tax
Several changes are proposed to the VAT rules:
- Online gambling (except for lotteries) would be subject to VAT at the 19% standard rate and the taxable base for games such as slot machines, electronic slot machines, gaming tables and bingo would be modified.
- Hybrid and plug-in hybrid vehicles would be taxed at the 19% standard rate (currently these vehicles are subject to a preferential rate of 5%), although the 5% rate would be maintained for electric vehicles.
- The VAT exemptions on the purchase of new vehicles used for the transport of passengers by owners of up to two vehicles and for cargo transport exceeding 10.5 tons would be extended until 2029.
- A VAT exemption would apply to hotel services and related economic activities (accommodation services, travel agencies, tour operators, convention and trade show organisers, and amusement and theme parks) provided in municipalities with fewer than 200,000 inhabitants.
- VAT on the acquisition of goods and services for the development of non-conventional energy source projects and efficient energy management would no longer be excluded from VAT but rather exempt, which would allow suppliers to deduct input VAT.
Other Measures
- Carbon tax: Carbon tax would apply uniformly to gas, coal and petroleum derivatives, with the tax rate based on TVU rather than Colombian pesos. The draft bill also provides that the full tax rate would be applicable as from 2026 (rather than 2028) and for 2025, the rate would be 75% of the full rate. Finally, a zero-rate would apply to gasoline, diesel and jet fuel for the Archipelago of San Andrés, Providencia and Santa Catalina.
- Procedures and penalties:
- The simplified tax regime would be abolished.
- The limitation of the deductibility of cash payments would be limited to the lesser of 20% of the amount paid without exceeding COP 941 million and 18% of total costs and deductions.
- Penalties for taxpayers that fail to comply with the e-invoicing rules and that voluntarily disclose the noncompliance would be reduced.
- The “fictitious supplier” rules, which disallow deductions for income tax purposes and the deduction of input VAT when payments are made to individuals or legal entities that invoice the sale of non-existent goods or services would be expanded and enhanced. The rules would apply to legal entities, as well as their direct or indirect partners or shareholders and ultimate beneficiaries, provided they have direct or indirect control over a taxpayer. It is also proposed that the rules apply to companies directly or indirectly controlled by these beneficiaries.
- A reward would be granted to persons providing information on tax avoidance, evasion or smuggling.
Comments
The tax reform project aims to reduce the tax burden on companies, but uncertainties remain regarding the actual impact on income tax. Although there would be a reduction in the income tax rate, the increase in the alternative minimum tax to 20% and the lack of adjustments in the formula should not be overlooked. Furthermore, the expansion of the wealth tax to include previously non-liable companies would require careful consideration as it seems that for nonproductive real fixed assets owned by companies, the taxable value is the patrimonial value without deducting associated debts.Affected taxpayers should closely monitor the bill as it proceeds through congress and be aware of any changes that may be made during the legislative process.
Martha Reyes
BDO in Colombia