December 4, 2023
Colombia issues regulations on Significant Economic Presence
The National Government, in issuing Decree 2039 of 2023, has regulated the Significant Economic Presence (SEP), which applies beginning on 1 January 2024.
Law 2277 of 2022 introduced the SEP, under which nonresidents who sell goods and/or provide certain services to customers and/or users located in Colombia, may trigger an SEP and, therefore, be obliged to pay taxes in Colombia either via: (i) a 10% withholding tax or (ii) by filing an income tax return and apply a 3% rate on the gross income obtained in the country.
SEP will exist when the nonresident (or its related parties):
Potentially, SEP rules could not apply under double-taxation treaties and future international treaties on digital economy taxation.
Regulatory Decree 2039
II. Criteria to determine when customers/users are located in the national territory
Criteria to consider in determining when customers/users are located in the national territory include:
With regard to the sale of goods, the location of customers/users located in the national territory is established when at least two of the above criteria are met.
III. Choice to declare and pay 3% tax, and nonapplication of withholding tax at source
The nonresident with SEP must choose between declaring and paying income tax (at a 3% rate on gross income from SEP) or having the tax collected via a 10% withholding tax.
If a taxpayer choses to file and pay tax returns, it must register to obtain a tax identification number ("RUT" per its acronym in Spanish). If the nonresident is already liable for VAT from providing services from abroad, the nonresident must update its RUT to include the SEP obligation and provide certain documentation established in the regulation.
If the nonresident with SEP has registered, the nonresident may delete the obligation reference from the RUT, as long as certain assumptions contemplated in the regulation are met.
Nonresidents with SEP who choose to be a filer must make advance payments every two months. These advance payments will be 2% on "bi-monthly gross income per SEP." The payments may be credited against the value of the income tax payable according to the annual return filed.
IV. Priority of withholding agents
If a transaction with the nonresident with SEP is subject to withholding tax, and several withholding agents concur, the following order of priority is established.
It is noted that under category 1, the withholding agent will not withhold 10% when the foreigner states under oath that he or she does not meet the criteria for generating a SEP, or when he or she has chosen to file a return.
V. Some considerations regarding Colombian acquirers
If nonresidents with SEP choose not to issue electronic invoices or equivalent document, the purchasers of the goods or services must bear their costs (i.e., expenses), deductions and deductible taxes. The current regulations require purchasers to issue electronic support documents for acquisitions made from sellers that are not obliged to issue a sales invoice or equivalent document.
Taxpayers who acquire goods/services from nonresidents with SEP could claim the costs, deductions and creditable taxes derived from such transactions without being obligated to prove that they withheld income tax at the source, to the extent that the goods/services supplier has chosen to file the income tax return, which will be attributed to the applicable taxpayer using the RUT.
VI. Other topics
The Decree states that when a nonresident SEP filer invoices the service in a currency other than the COP, the filer must consider the rules on foreign currency exchange (articles 288 of the CTC and 1.1.3. Decree 1625 of 2016) to determine the applicable exchange rate for the income tax return.
Additionally, for nonresident filers with SEP, remitting the declaration and the bimonthly payment is accomplished by making a transfer to the appropriate international account of the National Treasury. Payment can also be made in COP at authorized banks in Colombia. Payment via the international account must be made in US dollars, based on the representative market exchange rate on the payment day, certified by the Financial Superintendence of Colombia.
The Decree also modifies certain rules of the RUT to align them with the registration and identification for nonresident persons providing services from abroad responsible for VAT and/or with SEP in Colombia. Likewise, the Decree proposes to regulate matters related to documents and formalization of registration, updating and requesting cancellation of the RUT.
For additional information with respect to this Alert, please contact the following:
Ernst & Young S.A.S. Bogota
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor