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Colombia provides regulatory framework for significant economic presence rule
December 2023
In brief
The Colombian Government on November 28 issued Executive Decree 2039, which provides a regulatory framework for applying the significant economic presence (SEP) rule. The SEP rule was introduced by Law 2277 of 2022 (‘the Tax Reform’) and will enter into force on January 1, 2024.
Action item: Taxpayers should evaluate their transactions with Colombian individuals and entities in light of the SEP regulatory framework. They should consider its potential impact in their SEP analyses, including the potential obligation to register.
In detail
Under the SEP rule, income arising from the sale of goods or provision of digital services to Colombian customers and/or users becomes taxable for Colombian Corporate Income Tax (CIT) purposes when certain conditions are met. Such income is subject to either a 10% withholding tax or, at the provider’s election, a 3% tax on gross revenues. If the provider selects the latter methodology, it must register before the Colombian Tax Authority and file an annual income tax return.
Under the Tax Reform, a non resident entity is deemed to have a SEP in Colombia when it meets the following conditions:
- The non resident maintains deliberate and systematic interaction(s) in the Colombian market (i.e., with client(s) and/or user(s) located in the national territory).
- The condition above is presumed to be fulfilled when either (or both) of the following conditions are met:
- The non resident entity maintains an interaction or marketing activity with 300,000 or more clients and/or users located in Colombia during the previous tax year or the current tax year; or
- The non resident entity allows its customers to view its prices or/and accepts payments in Colombian pesos (COP).
- The condition above is presumed to be fulfilled when either (or both) of the following conditions are met:
and
- During the previous or current tax year, the non resident has obtained or obtains gross income equal to at least 31,300 Tax Value Units (COP 1,327,495,600 for 2023 or approx. USD 335,000 at the FX rate of December 12, 2023) from transactions involving the sale of goods or provision of digital services to customer(s) and/or user(s) resident in Colombia. Executive Decree 2039 includes the following definitions:
- Customers - people who pay or hire/purchase a service or good
- Users - people who have access to a website, portal, or app with a username and password
- Digital service - “services provided through the internet or an electronic network, automated, requiring minimal human intervention by the service provider and impossible to be provided in the absence of information technology."
- Note that the Tax Reform had included the following digital services within its scope:
- Online marketing services
- Digital content services, whether online or downloadable, including mobile applications, e-books, music, and movies
- Free broadcasting services, including television programs, movies, streaming, music, multimedia transmissions - ‘podcasts,’ and any form of digital content
- Any form of monetization of information and/or data of users located in the national territory and that have been generated by the activity of such users in digital marketplaces
- Online services of intermediation platforms
- Digital subscriptions to audiovisual media, including news, magazines, newspapers, music, video, and games of any kind
- The management, administration, or handling of electronic data including web storage, online data storage, file sharing, or cloud storage services
- Services or licensing of online, standardized or automated search engines, including customized ‘software’
The provision of the right to use or exploit intangibles - Other electronic or digital services for users located in Colombia
- Any other service provided through a digital marketplace to users located in Colombia.
- Note that the Tax Reform had included the following digital services within its scope:
Further, among other provisions, the Executive Decree:
- Excludes from the scope of SEP certain services such as ‘technical services,’ ‘technical assistance,’ and ‘consulting,’ which already are regulated by other laws, as well as educational services.
- Provides a registration procedure for non residents applicable to the voluntary self-assessment and payment system (3% on gross revenue).
- Requires taxpayers who choose to file a tax return and pay the corresponding tax to make advance payments on a bimonthly basis at 2% of their gross income. These advance payments are creditable against the annual tax.
- Allows the deductibility of costs/expenses derived from payments to non residents with SEP in Colombia who have decided to file an income tax return and therefore are not subject to withholding tax.
- Provides ordering rules for withholding agents in cases where several possible withholding agents are involved in the payment process (i.e., acquirer, card issuers, payment processor, etc.) to avoid multiple withholdings over the same transaction.
- Includes specific rules to make payments in USD.
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