Learn more about Colombia’s tax incentives for businesses and how you can take advantage of them to optimize revenue and deliver better results by year’s end.
In recent years, Colombia has undergone a process to increase its competitiveness and attractiveness, becoming an investment hub in Latin America. As part of this process, the country is constantly increasing its offer of tax benefits to reduce the overall tax burden that is often considered as one of the most expensive in the region.
What are Colombia’s tax incentives for businesses?
Colombia’s tax incentives for businesses refer to any differential treatment that legal entities and individuals can apply to reduce their overall tax burden. All tax benefits must be established by the Colombian Congress if it is of national relevance or by the local councils if it is a municipal tax.
To understand Colombia’s tax incentives for businesses, you should be aware that the tax benefits are not subject to interpretation and must be applied exactly as required by law. Similarly, you cannot make interpretations to be able to acquire a tax benefit.
Which kind of tax benefits exist in Colombia?
In Colombia, there are 3 categories of tax benefits. They differ according to the way they impact the tax determination process. The 3 categories are:
1. Tax benefits to lower the taxable base.
2. Tax benefits that discount from the value to be paid.
3. Tax Benefits that return to the taxpayer the value already paid as taxes.
Some sector-specific tax benefits may be applicable to some specific commercial operations. However, all tax benefits affect either Income Tax or VAT, which are the main taxes collected by the Colombian government and those that have the greatest impact on entities and individuals.
Please refer to our previous article ‘How to file taxes as a corporation in Colombia‘ to learn more about the tax determination process and Colombia’s tax incentives for businesses.
Deductions and tax benefits to lower the taxable base
The benefits that lower the taxable base in Colombia are non-taxable income, deductions, and exempted income, as it’s shown below
Non-taxable income: The Colombian government has listed a number of income categories that do not generate income tax. These categories are included in the income tax return in a different bracket than the rest of the income. Some examples of this are:
- Revenue from the sale of stocks and bonds.
- Stocks and bonds given to employees as a form of compensation.
- Food payments received by employees.
- Compensation from insurance policies.
- Compensation received by victims of the armed conflict.
- Scholarships or other forms of academic support.
Deductions: Through a tax determination process in Colombia, taxpayers can deduct some amounts authorized by the Government from their tax base. In its simplest form, these deductions will be the amounts paid directly by the taxpayer for the generation of income.
While these general deductions described do not represent a benefit, they are a step in the tax determination process. However, the Government has approved special deductions that allow the taxpayer to deduct more than 100% of the actual value paid, which represents a tax benefit. Some examples of this are:
- Salaries and social security payments made to widows, orphans of the armed conflict, or victims of kidnapping can be deducted at a rate of 200%.
- Donations to specific NGOs like ‘Corporación Matamoros’ that render services to armed forces personnel wounded in combat can be deducted at a rate of 125%.
Exempted income: are categories of income that are taxed with income tax but at a 0% rate. Some examples of this are:
- Revenue from “orange economy” entities whose annual revenue does not exceed USD 720.000. Orange economy refers to the creative and technological added-value industries, including arts, music, app, and software development, among others.
- Revenue from agricultural entities with annual revenue below USD 720.000.
- Revenue from the sale of energy from renewable sources (eolic, maritime, geothermically).
- Benefits of the sale of priority or emergency housing.
- Income from exploitation of artificial forests and artificial plantations.
Taxes that are discounted from the amount to be paid
Colombia’s tax incentives for businesses reward taxpayers that invest in sectors of special interest to the government. These discounts provide the taxpayer with a document that can be credited for tax payment purposes or can be sold as collateral to be credited by a third party.
Currently there are income tax discounts for investments in the following sectors:
- Innovation and hi-tech industries.
- Sectors related to the conservation or improvement of the natural environment.
- Renewable sources of energy and energy conservation.
This discount is 100% of the invested value and can be credited up to 25% of the total value of income tax for 4 years. This means that a taxpayer has 4 effective periods to credit 100% of his investment for income tax purposes.
Tax benefits that return to the taxpayer the amount paid as taxes
This last category of tax benefits returns to the taxpayer the amount paid as taxes. This mainly has an effect for VAT, since the taxpayer can claim the values paid for goods or services in certain specific categories.
Thanks to this benefit, VAT can be claimed for investments in capital goods or services to expand or increase production. VAT can also be claimed when a service is paid for by a Colombian tax resident but is enjoyed abroad.
Acess Colombia’s tax incentives for businesses with expert guidance
Understanding tax benefits in Colombia can be a challenging experience for foreign executives looking to do business in the country. You must engage with a trusted local specialist who can advise you on the best way to request tax benefits in the country.
At Biz Latin Hub, our team of bilingual experts is equipped to help you navigate regulations for tax benefits in Colombia and other countries in Latin America. With our full suite of market entry and back-office services, we are your single point of contact to ensure you take advantage of Colombia’s tax incentives for businesses while remaining in compliance with local legislation.
Contact us today to receive personalized assitance and learn more about key considerations for foreign companies in Colombia.
Learn more about our team and expert authors.