November 3, 2021
Colombia issues regulations to identify preferential tax regimes
The decree regulates the criteria for identifying preferential tax regimes. Taxpayers may want to consider reviewing their structures to determine whether they are subject to the preferential tax regime rules.
On October 28, 2021, the Colombian government issued Decree 1357 of 2021, regulating the criteria established by Article 260-7 of the Colombian Tax Code (CTC) for identifying preferential tax regimes (PTR).
Article 260-7 of the CTC establishes five criteria for identifying a PTR. If two of the five criteria are met, the regime will be considered a PTR.
Decree 1357 establishes the following series of assumptions to assess whether each of the criteria is met:
Non-existence of tax rates or existence of low nominal rates on income
- Non-existence of tax rates: There is no applicable rate or absolute value or, if a rate exists, the effective income tax is non-existent.
- Low nominal rates on income: The income tax rate is less than 60% of the net income tax that would have been applied in Colombia on the same item of income (with a 35% income tax rate, less than 60% would be rates below 21% ).
Lack of an effective exchange of information or the existence of legal regulations or administrative practices that limit such exchange of information
- The jurisdiction does not exchange information with the Colombian tax authorities about structures or final beneficiaries that apply the PTR.
- The jurisdiction does not comply with international commitments to spontaneously exchange information with Colombia about administrative decisions related to taxpayers or final beneficiaries that apply the PTR.
Lack of transparency at the legal, regulatory or administrative level
- The characteristics of the PTRs are not defined in detail, and there is no information available to understand the characteristics.
- An entity is not in charge of the surveillance and control of the design and administration of the PTR.
- Financial disclosure standards do not apply to the PTR.
Non-existence of a substantial local presence or the development of a business activity with economic substance
- No substantial local presence is required.
- The development of business activities with economic substance is not required.
- There are no substance requirements.
Regimes available only for nonresidents (ring fencing)
- PTRs cannot be applied by residents of that jurisdiction.
- The beneficiary entities of the PTR cannot develop any business activities in the jurisdiction.
In accordance with Decree 1357, these criteria must be applied to the list of PTRs established by the OECD, to determine whether they are PTRs under the Colombian regulations.
If it is determined that a person, company or entity is resident, located or carrying out activities in a PTR as established in Article 260-7, the tax implications will be as follows:
- Payments made to the PTR, which are deemed as Colombian-source income, will be subject to withholding tax at the same rate as the corporate income tax rate (31% for 2021 and 35% for 2022). The rate may be reduced if a tax treaty applies.
- Transactions with persons, companies, entities or residents located or carrying out activities in a PTR will be subject to the transfer pricing regime, including the filing obligations, even if the person located in the PTR is not a related party. If the transaction is concluded with a related party, a functional analysis should be submitted for the related party.
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