Colombia passes major tax reform effective January 1

The Tax Reform Law includes significant changes to the current tax regime applicable to resident and nonresident companies, including the following: 

1.      Corporate Income Tax (CIT)

The Tax Reform Law:

• Keeps the general CIT rate at 35%.
• Introduces a 15% Minimum Effective Tax Rate (METR) that applies to Colombian-resident corporations (with a few industry-specific exceptions). This new requirement reflects the rate proposed by the OECD's Pillar Two initiative, but when viewed in conjunction with other Tax Reform Law changes appears to have different and, sometimes, broader goals. Subject to a formulaic system, in-scope taxpayers will be required to true-up the METR to 15%.
• Extends the temporary 5% surcharge (on top of the regular 35% CIT) applicable to certain financial industry taxpayers. Taxpayers subject to the surcharge now will include insurance and reinsurance companies, stocks and commodities brokers, and infrastructure suppliers of the stock and securities markets, with taxable income equal to or greater than approximately USD 1.1M (at current foreign exchange rates).  
• Sets the CIT rate applicable to new hotel services, ecotourism, and agrotourism themed parks at 15% (subject to certain conditions), up from 9%.
• Introduces a permanent CIT surcharge for crude oil and coal extraction and production industry taxpayers with taxable income equal to or greater than approximately US $470,000 (at current foreign exchange rates). The surcharge rate varies by industry and specific segment, and ranges between 5% and 15%. The surcharge will only apply to the extent the current-year average market prices exceed 65% of the average prices over the preceding 120 months.
• Introduces a 3% temporary surcharge for hydro-electric power companies with taxable income equal to or greater than approximately USD280,000 (at current foreign exchange rates), for fiscal years 2023 through 2026.
• Adopts a new requirement for qualified Free Trade Zone (FTZ) industrial users to benefit from the preferential 20% CIT rate. The new requirement includes the filing (and approval) of an export-oriented plan with the Colombian Government in 2023 or 2024. However, the current regime is grandfathered with respect to FTZ users that demonstrate revenue growth of 60% in 2022 vis-a-vis their 2019 revenue. In addition, qualified FTZ industrial users will become subject to the general 35% CIT rate with respect to income from activities other than the export of goods and services. 
• Keeps the following qualified FTZ users subject to the CIT preferential tax regime (20%): 

1. Offshore FTZ users (Exploration & Production)
2. Qualified companies operating in onshore FTZ (port services, permanent FTZ dedicated to refining of fuel derived from petroleum or of industrial biofuels). 
3. Qualified FTZ companies providing logistic services to FTZ management entities

• Caps certain items that previously were treated as nontaxable, special deductions, exempt income, and tax credits at 3% of the taxpayer's net income (before subtracting those items).
  
• Increases the capital gains tax rate applicable to, among others, transfers of assets/shares held for more than two years to 15% (up from 10%) for resident and nonresident taxpayers.
  
• Keeps the entire Industry and Trade Tax (‘ICA’) deductible for CIT purposes; however, it no longer will be allowed as a 50% tax credit against CIT.
  
• Repeals the Mega Investments regime. 
• Disallows payments of royalties in the oil, gas, and mining Industries as a deduction for CIT purposes.  
• Repeals the five-year straight-line amortization regime for exploration and production expenditures from 2017- 2027. 
• Reduces the single-owner ownership cap to 3% (down from 10%) for applying the CIT exemption on profits from the sale of stock listed on the Colombian stock exchange.

4.      International Taxation

The Tax Reform Law:

• Broadens the effective place of management (EPOM) criteria. Under the new rules, EPOM will consider less subjective standards and also will focus on where day-to-day activities are carried out, as well as the place where management usually exercises authority and responsibility over the entity’s affairs.  
• Adopts a significant economic presence (SEP) rule (applicable as of January 1, 2024) whereby the sale of goods or provision of digital services to Colombian consumers will be taxable income for Colombian CIT purposes, subject to either withholding tax at a 10% rate or, at the election of the provider, a 3% tax of gross revenues (subject to registration and an annual income tax filing). The SEP is expected to apply to taxpayers whose revenue exceeds approximately USD275,000 (under current foreign exchange rates) and whose sale of goods or services reach over 300,000 customers/users in either the current or the previous fiscal year.  

6.      Miscellaneous Provisions 

Under the Tax Reform Law:

• The tax authority will have the ability to assess the tax due by means of electronic invoicing records where the taxpayer has not filed its income tax return. 
• Default interest rates will be reduced by 50% for outstanding customs and tax obligations that are fully paid by June 30, 2023, or for which the tax authority and the taxpayer execute a payment agreement before that date.
  
• The maximum penalty for not providing information to the tax authorities will be reduced to approximately USD60,000 (at current foreign exchange rates), down from approximately USD120,000 (at current foreign exchange rates).
• Taxpayers who, as of December 31, 2022, have not filed Federal tax returns will be able to opt for a temporary reduction in interest and penalties upon compliance with certain requirements.
• The thresholds to determine the crimes for nondisclosure of assets, reporting of nonexisting liabilities, tax fraud, and tax evasion will be lowered. 
• Grandfathering rule: Taxpayers adversely impacted by any limitation of removal of tax holidays will continue to enjoy any such prerogatives to the extent having met the conditions for full entitlement.