Understanding dividend withholding tax in Colombia for US residents

Learn about dividend withholding taxes in Colombia that US residents should expect to pay to Colombian Tax Authorities when receiving dividends from Colombian companies.

Colombia has an unmatched business environment. Its economy has seen growth rates of over 4% a year consistently during the last 5 years, according to data by the Ministry of Foreign Affairs. With a growing number of US residents investing in companies in Colombia, it’s important to clearly understand how the dividends from said investments will be taxed and which withholdings will be applied.

US residents in Colombia must understand the information below will be applicable to dividends accrued after 2019. Due to the latest tax reforms passed by the National Government there are currently 3 regimes in effect for dividends to be accrued:

• before 31 December 2016
• in 2017 and before 31 December 2018
• in 2019 and after.

The main difference between said regimes will be in the rates the taxpayers will end up effectively paying, but each has considerations that must be thoroughly understood.

Our tax advisory experts provide information applicable for dividends accrued by Colombian companies from 2019 to be paid to US residents.

What is dividend withholding tax in Colombia?

The definition of dividends for tax purposes is found in section 30 of the National Tax Code, which states the following:

“Any distribution of benefits, in money or in kind, charged to 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 favor of related companies abroad.”

According to the content of sections 48 and 49 of the National Tax Code, dividends are taxed with income tax, and can be taxed either to the head of the company which distributes them, or to the head of the receiving party.

Even when receiving dividends already taxed by the distributing company, the beneficiary should expect to pay a marginal rate, as we’ll explain below.

How Colombian taxes on dividends work for US residents

Section 245 of the National Tax Code states that foreign individuals or entities will be required to pay an additional 10% when receiving already taxed dividends, and a full rate according to section 240 of the National Tax Code (32% for 2020) when receiving non-taxed dividends.

1. When receiving dividends already taxed by the distributing company.

To be able to distribute taxed dividends, the distributing company must follow this process:

1. Add the total taxable income with the occasional earnings of the period for a result (A)
2. Add the value of the income tax with the occasional earnings tax for a result (B)
3. Operate (A) – (B) – applicable discounts for taxes paid abroad for a result (C)
4. Add (C) to the value of other “taxed dividends” received by the company from other local companies for a result (D)
5. Take (D) and add any other tax benefit or discount that may apply for a result (E)
6. (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.

Implications for US residents

When receiving taxed dividends, US residents (non-Colombian residents) will be charged an additional 10% of the gross value to be distributed. This amount must be withheld and paid to the National Tax Authority by the distributing company according to the content of section 245 of the National Tax Code.

It’s important to bear in mind that as ordered by section 592 of the National Tax Code, non-Colombian residents will not be required to file an income tax return if the total amount of their income was subject to withholdings at the proper rate according to each kind of income.

US residents receiving dividends from Colombian companies will not be required to fulfill the formal obligations regarding income tax in Colombia if the withholdings are done by the distributing company.

2. When receiving non-taxed dividends

Section 245 of the National Tax Code instruct taxpayers that when the company distributing the dividends has not done the previously explained process, or when distributing dividends above the maximum amount allowed as “taxed dividends”, the receiving US resident will be charged income tax over said dividends at the regular rate of 32% for 2020.

In addition to that rate, the US resident will have to pay a 10% over the remaining value after being diminished by the initial 32% tax.

Example of taxed and non-taxed dividends

The following is an example of dividend withholding taxes in Colombia for US residents

Taxed dividends (USD) — Non-taxed dividends (USD)

Taxable income — 100,000 — NA

Occasional earnings — 50,000 — NA

Paid income tax — 32,000 — NA

Occasional earnings tax — 5,000 — NA

Taxed dividend limit — 113,000

Dividend to distribute example — 30,000 — 30,000

Income tax rate — – — 9,600

Foreign investor withholding — 3,000 — 2,040

Total to be received by investor — 27,000 — 18,360

It’s important to note that some US residents (entities or individuals) may be able to claim tax credits over the amounts already taxed by the Colombian tax authorities.

Get expert support with your dividend withholding tax in Colombia as a US resident

Our team of experts at the Biz Latin Hub understand the challenges that US business owners and residents may face when doing business in Colombia, and are ready to help you and your organization comply with the local tax regulations to optimize your revenue.

Contact us today so we can start identifying savings and optimization opportunities regarding taxes and withholdings on dividends.

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