Overview of Corporate Tax and Planning in Colombia

The corporate tax season in Colombia usually takes place between February and June of each year. During this time, companies of all sizes and sectors doing business in the country are encouraged to review their corporate tax expenditure and look for optimization alternatives through corporate tax planning for the next year.

Understand why corporate tax planning will maintain your business in good standing while complying with Colombian fiscal policy.

What is corporate tax in Colombia and who is subject to it?

As stated in Article 5 of the Colombian Tax Code “corporate tax is based on income, occasional earnings and international transfer of income, as well as on commercial profits in the case of branches of companies and foreign entities”.

Likewise, Article 12 of the Tax Code states that entities who are fiscal residents in Colombia are taxed for their global source income, and non-resident corporations are taxed only for their local source income. This means that in both cases, residents and non-residents who receive income in Colombia must comply with corporate tax requirements.

However, non-residents usually comply with their corporate tax obligations through the withholdings that fiscal residents are bound to do when making payments to non-residents.

In Colombia, the general tax rate for 2020 is 32% of taxable income and will decrease to 31% in 2021. Hotels and hospitals, publishing houses and partially state-owned companies have a tax rate of 9% and the users of free zones have a rate of 20%. This is applied to taxable income after subtracting the costs and expenses required to produce that income.

Note that one particular thing about Colombia is that the country still has in effect a presumptive income tax of around 0.5% of the total assets declared by the company in the last income tax declaration. It is expected that this provision will cease to be in force in the year 2021. While it is in force, companies must debug income tax through taxable income and presumptive tax and pay the higher amount.

Options for corporate tax planning in Colombia

Legal entities in Colombia are allowed to plan and reduce their income tax expenditures while fully complying with local regulations if done correctly. The Colombian government has established tax benefits on recent tax reforms to allow corporations to deduct from their effective corporate tax.  Those benefits aim to reduce the overall tax rate and increase the country’s attractiveness for foreign investors.

The first thing a corporate tax planning should consider is making use of all available deductions to reduce the tax base. This is done with the help of local accounting team. You planning must comply with current regulations to prevent such expenses from being rejected by the Tax Authorities.

Another alternative for corporate tax planning is to carry out a review of the withholdings made throughout the year, as these must be credited to be deducted from the tax payable. It is common for companies operating in Colombia to leave amounts withheld at the end of the year. This happens either due to ignorance of the law, or because they don’t know that crediting the withholdings to the maximum can attract the attention of Tax Authorities.

Finally, any successful corporate tax planning project must take advantage of the tax benefits offered by the Colombian Government, available for some specific sectors. For 2020, there are permanent tax benefits aimed at innovative investments in the environment and substitution of traditional energy sources.

Perform corporate tax planning with the help of a local expert

Understanding the Colombian tax system might be a challenging task for foreign executives. At Biz Latin Hub, our team of multilingual legal and accounting experts have broad experience to help you undertake a corporate tax planning project in Latin America.

We’re your single point of contact for your market entry and back-office needs. Our team of local and expatriate professionals in Colombia offer customized business solutions in company formation, corporate compliance, hiring and PEO services, visa processing and due diligence.

Reach out to us today for personalized advice.

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