September 20, 2021
Colombia enacts 2021 tax reform
The law increases the corporate income tax rate, as well as establishes a new normalization tax, anti-avoidance and procedural rules, and payroll and labor benefits.
On September 14, 2021, Colombia enacted Law 2155 (the Social Investment Act), which includes the 2021 tax reform, as well as rules to increase social expenditures, reduce public expenditures and adjust the 2021 budget. The law is effective September 14, 2021.
Corporate income tax
The law increases the corporate income tax to 35% as from January 1, 2022 (currently, the corporate income tax rate is 31% for 2021 and would have decreased to 30% for 2022). This rate generally applies to Colombian entities, permanent establishments in Colombia and foreign taxpayers with Colombian-source income that must file income tax returns in Colombia.
For financial institutions with taxable income of more than 120,000 tax units (approximately USD 1.1 million), the law imposes a 3% surtax on income from 2022 to 2025 (for a total income tax rate of 38%).1 The law establishes an advance collection mechanism for the surtax.
The law continues to limit the amount of turnover tax2 that taxpayers may claim as a corporate income tax credit to 50% by repealing a previously enacted law change that would have allowed taxpayers to claim 100% of the turnover tax effectively paid as an income tax credit beginning in 2022.
The law allows income taxpayers to make in-kind tax payments (i.e., performing projects for the community in lieu of paying income tax) in territories that (i) have high poverty rates, according to the criteria set by the Colombian Government; (ii) do not have public utilities infrastructure; (iii) have areas that are not connected to main roads; and (iv) have areas that promote creative and cultural activities as determined by the Government. Currently, income taxpayers may only make in-kind payments in territories highly affected by internal conflict ("ZOMAC," per its acronym in Spanish) and areas determined by the Government as strategic for the economic and social development of ZOMAC areas.
The law also allows in-kind tax payments for strategic projects related to the economic and social re-activation of the country, even if the projects are not located in any of the territories mentioned previously.
Additionally, the law requires companies that intend to apply the income tax exemption for creative activities and high-value technological activities to be incorporated before June 30, 2022 (before the tax reform law, companies had to be incorporated before December 31, 2021). Further, the law reduces the timeframe for the income tax exemption from seven to five years.
If the profits subject to taxation at the corporate level are higher than the profits recorded in the company's accounting records in the same year, the law allows taxpayers to carry forward the excess to reduce the amount of taxable profits (which will be subject to a higher withholding tax at the time of distribution).3 The law increases the carry forward period of such excess amounts from 5 to 10 years for taxpayers engaged in concession and public-private agreements.
The law establishes a new normalization tax (i.e., tax amnesty) applicable to income taxpayers that did not declare certain assets or claimed non-existent liabilities for tax purposes, as of January 1, 2022. The normalization tax rate is 17% (the previous normalization tax rate was 15%). For assets that are repatriated to Colombia before December 31, 2022, and kept in the country for two years, the effective tax rate will be reduced to 8.5%. According to the law, 50% of the normalization tax must be paid in advance in FY 2021.
In general, the rules are similar to the ones determined for the normalization taxes established in the past. To benefit from the normalization tax, taxpayers must file a normalization tax return and pay the tax on or before February 28, 2022.
The law establishes three days per year in which a value-added tax (VAT) exemption applies to some products (e.g., garments and accessories, home appliances, toys, and sports goods), provided the value does not exceed certain amounts. Purchases paid with cash also will qualify for the VAT exemption.
The law eliminates the VAT exclusion for imports of goods with a value of US $200 or less that enter Colombia through postal services. The exclusion, however, continues for imports from countries with which Colombia has signed a free trade agreement, by virtue of which the non-collection of VAT has been expressly agreed. For imports from countries with a free trade agreement with Colombia, the exclusion will not apply if the imports are for commercial purposes.
Additionally, the law establishes a VAT exemption for hoteling and tourism activities that will apply until December 31, 2022.
Tax procedures and formal obligations
Invoicing of the income tax due
The law establishes an income tax invoicing mechanism. Colombian tax authorities may issue an income tax invoice based on information reported by third parties. The invoice will be deemed as an official assessment of the taxpayer's income tax liability. Additionally, the law authorizes Colombian tax authorities to enforce the payment of income tax invoices.
Taxpayers that disagree with the assessment included in the income tax invoice may file an income tax return within two months of the publication of the invoice on the Colombian tax authorities' web page.
Changes to the definition of ultimate beneficial owner
The law changes the definition of ultimate beneficial owner and the criteria for determining which individual should be deemed as the ultimate beneficial owner of legal entities, as well as structures without legal personality (e.g., trusts).
In addition, the law creates a beneficial owner registry (RUB per its acronym in Spanish) and a system to identify structures without legal personality.
The law includes several rules to strengthen and broaden the application of the electronic invoicing system. Under the law, receipts issued by the POS system will not be accepted as supporting documents for tax purposes (and electronic invoices will be needed) for transactions exceeding 5 tax units (approximately US $48). The law requires the tax authorities to establish a calendar for implementing the new rules for the electronic invoicing system.
Temporary reduction of the status of limitation for certain income tax returns
For 2022 and 2023, the law reduces the general time the tax authorities may audit income tax returns from five years to 6 or 12 months, depending on whether the net income tax increased by 35% or 25% from the prior year, respectively.
Automatic VAT refund
The law allows the Colombian tax authorities to automatically refund balances in favor in income tax returns, as well as VAT returns, for taxpayers engaged in the manufacture of VAT-exempted (zero-rated) goods, provided that 100% of the input VAT credited (resulting from the balance in favor) and the income derived from those activities are supported by electronic invoices.
Benefits for the payment of outstanding taxes, penalties and late payment interest
The law reduces penalties and interest on any outstanding filing requirements or tax liabilities generated up to June 30, 2021, if the non-payment results from the COVID-19 pandemic.
The law also establishes payment provisions for (i) mutual agreement terminations in administrative procedures; (ii) conciliations at the judicial stage; and (iii) provisions requiring tax authorities to apply the most favorable application of the law at the collections stage.
Temporary extension of the payroll subsidy
The law extends the application of the payroll subsidy, which was previously established as one of the measures to counteract the impact of COVID-19, from July to December 2021. Depending on the economic indicators, the subsidy may be extended until June 30, 2022. The subsidy will apply to companies that comply with the requirements to receive the subsidy. In addition to other requirements, the law requires companies to have 50 employees or less as of March 2021.
Incentives for the creation of new jobs
The law establishes a new subsidy as an incentive for the creation of new jobs as follows:
This incentive will apply until August 2023. The employer will receive the payments for 12 months.
Benefits to counteract the impact of the COVID-19 pandemic
The law extends until December 31, 2022 (currently December 31, 2021), the temporary exemption to the special electricity contribution (generally, a 20% surcharge on the electricity bill) for tourism service providers registered before the National Tourism Service.
1 Before the 2021 tax reform, financial institutions were subject to an overall income tax rate (including surtax) of 34% for FY 2021, 33% for FY2022, and 30% for FY 2023.
2 Turnover tax is a municipal tax levied on the development of industrial, commercial or services activities within the territory of a specific municipality.
3 According to Colombian tax law, dividends distributed out of profits taxed at the corporate level will be subject to dividend tax at a 10% rate. Dividends distributed out of profits not taxed at the corporate level will be subject to a recapture tax equivalent to the corporate income tax rate (31% for FY 2021 or 35% for FY 2022). In this case, the 10% dividends tax applies to the distribution after it is reduced by the recapture tax.