December 9, 2022
Colombia's Tax Reform includes key provisions on individual taxation
- Colombia's Congress approved the tax reform bill on 17 November 2022.
- The reform, to be signed by the President and published in the Official Gazette for entry into force, contains several provisions with respect to individual taxation.
- The key provisions, summarized in this Alert, cover individual taxation, equity tax, and capital gains.
On 17 November 2022, the Colombian Congress approved the tax reform bill submitted by the Colombian Government. The bill is expected to be signed by the Colombian President and then published in the Official Gazette to enter into force.
This Alert highlights the most relevant topics applicable to individual taxation (See EY Global Tax Alert, Colombian Congress approves tax reform bill, dated 22 November 2022 for details on the complete tax reform).
- Labor, capital, non-labor income, pensions and dividends would be combined and subject to the ordinary income progressive rates ranging from 0% to 39%. However, a 19% tax credit on the value of the dividends would be granted (thus the dividends themselves would be subject to a tax rate of up to 20% for residents).
Dividend withholding tax will be up to 15% (currently 10%) in the case of dividend distributions higher than 1,090 tax units (US$9,300).
Dividends paid to nonresident individuals out of profits subject to taxation at the corporate level will be subject to a 20% withholding tax rate (currently 10%).
- The tax reform reduces the annual cap for claiming 25% of labor income as tax exempt from 2,880 tax units (approx. US$24,500) to 790 tax units (approx. US$6,700).
- The 40% limit for tax-exempt income and deductions related to income in the general basket will be reduced from 5,040 tax units (approx. US$43,000) to 1,340 tax units (approx. US$11,400).
- The bill includes the possibility of claiming a deduction for up to four dependents, (72 tax units — approx. US$610 - for each).
- Under several conditions, up to 1% of all kinds of payments made by individuals for the acquisition of goods or services may be taken as a deduction in the general basket (capped to 240 tax units — approx. US$2,000) to the extent they are supported in electronic invoices.
- The annual tax-exempt income limit for pensioners will be kept at 12,000 tax units (approx. US$102,000). The same benefits would apply for foreign pensions received by Colombian tax residents.
- The bill establishes a permanent equity tax which will be levied on 1 January of each year.
- Colombian resident individuals will be subject to equity tax over their worldwide net worth. Nonresident individuals would be taxed only on their Colombian assets. The tax is also applicable to intestate successions (resident and nonresident).
- For this tax to apply, the net equity of the taxpayer must be at least of 72,000 tax units (approximately US$611,000) as of 1 January of each year. The equity tax rates would range from 0.5% to 1.5%. The 1.5% will apply until 2026. As from 2027, the highest tax rate will be 1%.
- To determine the taxable base of the equity tax, the exclusion of the first 12,000 tax units (approximately US$102,000) of the taxpayer's home is allowed.
- For purposes of calculating taxable equity, shares of Colombian companies that are not listed on the Colombian Stock Exchange or on a recognized international stock market, will be reported for the lower value between the intrinsic value and the taxable basis determined considering the consumer price index (IPC per its acronym in Spanish) from the acquisition date of the shares.
- Shares listed on the Colombian Stock Exchange or on a recognized international stock market will be reported at the average market value of the year immediately prior to the tax accrual date.
- The tax rate of capital gains for individuals (tax residents and nonresidents) will increase to 15% (currently 10%). Capital gains from lotteries, bets, raffles and similar, will remain at 20%.
- Compensation for life insurance will be taxed on the amount that exceeds 3,250 tax units (approx. US$27,500). Currently, the capital gains tax applies to the excess of 12,500 tax units (US$106,000).
- The thresholds for the following exempt capital gains applicable to inheritances, are modified as follows:
- Value of the urban housing property owned by the deceased: increased from 7,700 tax units (approx. US$65,000) to 13,000 tax units (approx. US$110,000).
- Value of the rural housing property owned by the deceased: reduced from 7,700 tax units (approx. US$65,000) to 6,500 tax units (approx. US$55,000).
- Value of other inheritance assets received by each of the heirs: reduced from 3,490 tax units (approx. US$29,600) to 3,250 tax units (approx. US$27,500).
- Assets and rights received by individuals other than the heirs by way of inheritance, and assets and rights received as gifts (donations): reduced from a maximum of 2,290 tax units (approx. US$19,400) to a maximum of 1,625 tax units (approx. US$13,800).
- The exempt capital gain arising from the sale of a house is reduced from 7,500 tax units (approx. US$63,600) to 5,000 tax units (approx. US$42,400). The requirement to reinvest the resources from the sale into the purchase of another house remains.
Annual report of assets owned abroad
Every resident with assets owned abroad shall file this report (previously a cap of assets held abroad applied).
For additional information with respect to this Alert, please contact the following:
Ernst & Young S.A.S., Bogota