Find out everything you need to know about corporate dividend tax for businesses in Colombia.
Understanding corporate dividend tax might be a challenging experience for companies recently operating or looking to operate in Colombia.
We outline the key concepts every foreign executive should consider when complying with local regulations and interacting with Colombian tax authorities.
What are dividends for tax purposes in Colombia?
As we explored in our article ‘Understanding dividend withholding tax in Colombia for US residents in 2020‘, the definition of dividends for tax purposes can be found in section 30 of the Colombian Tax Code, which states the following:
“Any distribution of benefits, in money or kind, charged to the equity that is made to partners, shareholders, community members, associates, subscribers or similar. The transfer of profits that correspond to income and occasional gains of national source obtained through permanent establishments or branches in Colombia, by non-resident natural persons or foreign companies and entities, in favour of related companies abroad.”
Furthermore, according to the 48 and 49 section of the National Tax Code, dividends are taxed considering income tax. Likewise, dividends can be received by a third party without being taxed.
Understand the difference between taxed and non-taxed dividends
As previously explained, dividends in Colombia may be taxed by the company in charge of distributing them or by the individual or entity receiving said dividends.
This means that companies can tax dividends before delivering them to shareholders, these dividends are considered ‘already taxed dividends’. On the other hand, companies can also deliver them without previously calculating the tax, these are known as ‘non-taxed benefits’.
When distributing already taxed benefits the company will have to make an additional withholding of 7.5% to residents and 10% to non-residents. The beneficiary can credit that additional withholding for income tax purposes.
When distributing non-taxed dividends, the company will have to make the same 7.5% or 10% withholding previously explained, and an additional withholding of 10% when distributing values above COP$10.682.000 (US$2.800). The final beneficiary must pay a 32% income tax over the dividend received and will be able to credit the additional 10% withheld.
Distribution process for already taxed dividends
To be able to distribute taxed dividends, distributing companies must follow these 6 key steps:
- Add the total taxable income with the occasional earnings of the period for a result (A).
- Add the value of the income tax with the occasional earnings tax for a result (B).
- Operate A – B – applicable discounts for taxes paid abroad for a result (C).
- Add (C) to the value of other “taxed dividends” received by the company from other local companies for a result (D).
- Take (D) and add any other tax benefit or discount that may apply for a result (E).
- (E) will be the maximum amount that the distributing company will be able to distribute as ‘taxed dividends’.
If the value to be distributed as dividends for that particular year is less than (E), the company will have up to 5 tax periods to distribute taxed dividends up to that value.
Note that companies, as opposed to individuals, can credit most of its expenses related to income generation to lower the effectively paid tax. Thus, it is essential to review for each case which scenario could be more advantageous for the distributing entity or beneficiaries.
Understand corporate dividend tax in Colombia with professional support
The taxable dividend distribution process can be a complex undertaking for foreign executives doing business in Colombia. At Biz Latin Hub, our multilingual team of tax advisors are equipped to deliver excellence and help you make the best decisions in regards to corporate tax dividend in Colombia.
The Biz Latin Hub Group is a market leader in helping both local and foreign companies to successfully do business in Latin America, by providing a full suite of market entry and back-office services. Find out more on taxation of dividends in Mexico and other Latin American countries.
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