Key Tax Considerations for Foreign Companies in Colombia

Colombia has become one of the most attractive Latin American destinations to invest in, with many businesses choosing to expand through the incorporation of a Colombian company. When it comes to the constitution of companies in Colombia, the most used type of corporation is the Simplified Share Company. known as the ‘SAS’. The process to incorporate a SAS is straightforward and a SAS can be incorporated in as little as 2 weeks and allows for (2) shareholders, who can be natural or legal persons (i.e the company can be owned by an individual or another company – local or foreign). 

Nevertheless, if you want to establish a branch of a foreign company, the requirements are slightly different. Even though the process to establish a branch office is different from that of a SAS, it is important to highlight that the taxation liabilities are not that dissimilar. 

Colombian Tax Considerations – National Tax and Customs Authority (DIAN)

DIAN is the national authority in charge of financial regulation and tax collection in Colombia. Its functions include the following: 

• Manage taxes and customs in Colombia – tax collection, tax inspection, tax settlement, tax refund etc. 
• Control and surveillance the exchange rate regime. 
• Support international trade operations.

Tax Requirements in Colombia

Income Tax

When a company has been formed under Colombia´s laws or when a foreign company receives revenues from activities in Colombia, the company must pay income tax. 

REMEMBER:  If you live in Colombia for more than 183 days per year, you will have to pay this tax as an individual.

According to the most recent Tax Reform Law, the income tax rate for 2019 is set at 33% of the income reported until December 31st, 2018. From 2020 to 2022 the rate will decrease 1% per year, which means that in 2022, the income tax rate for companies in Colombia or foreign company´s branch offices in Colombia, will be 30%. This is representative of the governments ‘pro-business‘ mentality. 

In order to calculate the amount of income tax you have to pay, it is highly important to bear in mind the tax deductions that you may apply for. Some of these include:  

• Deductions of other taxes paid.
• Deductions of taxes paid in other countries.
• Deduction for investments in science and technology research:
  • The value of the deduction will correspond to 25% of the investment.
• Deduction for investments in sustainability and for the conservation of the environment:
  • The value of the deduction will correspond to 25% of the investment.
• Deduction for donations to non-profit organizations:
  • The value of the deduction will correspond to 25% of the contribution

The mentioned exceptions are just examples and some other may apply according to the activity your branch or company is involved with. To lodge your tax declarations correctly and efficiently, it is best to consult with a local accountant. 

Industry and Trade Tax

This local tax should be paid by individuals and companies that receive profits from the execution of industrial, commercial or service activities. Therefore, if your company develops activities (such as the below mentioned), you must comply with this taxation liability:

1. Selling, buying or delivering cargos.
2. The provision of a service that is undertaken in Colombia.
3. Producing, preparing, fixing or manufacturing any material or good.

The person that executes these activities must be enrolled in the Taxation Information Resister (RIT), in order to pay the corresponding tax. 

Value-Added Tax (VAT)

A VAT is a consumption tax fixed on a product/service whenever value is added to the product/service at each stage of the supply chain. This tax levies the following activities:

• Sale of movable or real assets.
• Sale or assignment of rights upon intangible assets. 
• Provision of services in Colombia. 
• Importation of assets.

The Colombian VAT is based on a credit-debit system throughout the entire chain of operations. 

According to the Public Financing Law, companies that are involved in certain commercial activities are not obliged to pay VAT. Some examples of these include: 

• Public transportation services.
• Website supply, hosting and cloud computing services.
• Services provided in order to improve farming and agriculture production.
• Buying and selling of currencies.

In Colombia, beginning in 2019, the ruling system for tax collection is through electronic invoicing. Through this system, the Government will try to reduce tax avoidance and formalize the economy. 

Local Support in Colombia

Before undertaking commercial operations in Colombia, it is vital to have a sound understanding of your corporate tax obligations and requirements. While the opportunities to grow and expand your operations in Colombia are infinite, the risks for individuals and companies who do not comply with Colombian tax law are severe. 

For this reason and more, working with a trusted local legal and accounting firm can ensure that your company remains compliant when operating in Colombia. Biz Latin Hub was established in 2014 to assist foreign companies to expand their operations abroad. Get in contact today and see how we can support your commercial operations in Colombia.