Currently, Colombia has DTTs in force with Canada, Chile, Czech Republic, France, India, Italy, Mexico, Portugal, South Korea, Spain, Switzerland, the United Kingdom Northern Ireland, and the Andean Community (Bolivia, Perú and Ecuador). DTTs with the following territories are signed but are not yet enforceable: Brazil, Luxembourg, Japan, the Netherlands, the United Arab Emirates, and Uruguay.
Colombia has also entered into an intergovernmental agreement (IGA) for the implementation of the Foreign Account Tax Compliance Act (FATCA) with the United States. Agreements for the interchange of tax information have also been entered into with other nations.
Base Erosion and Profit Shifting (BEPS)
Import of services rules expanded to be in scope, including all services (save for exception established by law), provided that the purchaser or beneficiary of the service is a Colombian tax resident, or has a domicile, PE, or place of economic activity in Colombia.
From 1 July 2018, purchasers of digital services should be registered before the Colombian Tax Office, enact invoices, and pay VAT. Otherwise, VAT WHT should be made by the financial institutions over the payments made with debit or credit card or another prepayment method. See Value-added tax (VAT) in the Other taxes section.
A CFC regime was introduced in 2016. This regime pretends to have a tax control on the income generated by foreign entities, which are managed by one or more tax residents in Colombia, that also meet the requirements to be considered as a controlled company: (i) Is a subordinated or controlled company according to the commercial regulations and (ii) is considered a foreign related party.
The CFC applies if the Colombian tax resident owns at least a 10% participation, directly or indirectly, in the company abroad.
If a Colombian tax resident owns a CFC, it will be taxed currently on their proportionate share of the CFC’s income (including passive income), costs, expenses, and deductions.
Colombia has signed both the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC) and the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA). It is intended that automatic exchange of tax information in Colombia began in September 2017.
Also, according to Section 631-4 of the Colombian Tax Code, the Tax Office must issue a Resolution to identify the entities subject to reporting to fulfil the international commitments towards the Automatic Exchange of Information (AEOI) agreements currently in force. Resolution 119 of 2015 set the requirements to be met by the local financial institutions for AEOI purposes.
Actions 8 to 10
Colombian transfer pricing rules are based on OECD Transfer Pricing Guidelines. In the Colombian Tax Code, the following were introduced: (i) rules regarding transactions re-characterisation (Section 260-4), and (ii) best method rule (comparable uncontrolled price or CUP) for commodities and raw materials (Section 260-3 (1)). No further changes are foreseeable in the future.
Transfer pricing informative return: If caps are exceeded, all transactions (no materiality applicable) are subject to disclosure.
Master File: Mandatory if caps are exceeded, it follows the suggested contents issue by the OECD and is generally prepared by the ultimate parent company. At the date of this summary, it is estimated that it may be filed in English; however, if required by the tax authority, an official translation should be provided within the following 20 working days of said request.
Local File: There is an obligation to prepare and file the Local File for transactions per type of transaction (not on a stand-alone basis) exceeding approximately 494,000 United States dollars (USD) per type of transaction.
Country-by-Country (CbC) Report: Not applicable for subsidiaries; however, it will be require to present a form disclosing if parent is obligated to CbC reporting in its domicile country (see Country-by-country [CbC] reporting in the Group taxation section).
Multilateral Instrument (MLI)
In July 2017, Colombia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) aimed to amend its DTTs aligned to the BEPS recommendations. The MLI will be enforceable when the internal procedures have been completed by the Colombian Congress, Constitutional Court, and the government (expected in FY 2022).
Colombia included as Covered Tax Agreements whole of the DTTs in force and the DTTs signed with France.
Common Reporting Standard (CRS)
The CRS is the standard for AEOI developed by the OECD.
CRS is a very broad reporting regime that relies extensively on the intergovernmental exchange used for the implementation of FATCA.
Similar to FATCA, the CRS requires financial institutions resident in participating jurisdictions to implement due diligence processes to document and identify accounts that must be reported according to the CRS, as well as establish a wide-ranging reporting process.
Colombia has signed both the MAC and the MCAA. Automatic exchange of tax information in Colombia started in September 2017.
Choice of business entity
The most common type of company used in Colombia is the simplified stock company or simplified corporation, known as an SAS (sociedad por acciones simplificada). Besides SAS, foreign investors also use branch offices of an offshore entity as their investment vehicles in Colombia.
As a general rule, from a high-level perspective, there are no major differences between a branch office and a subsidiary (such as an SAS) as far as Colombian taxation is concerned.
All the taxes discussed in this summary would apply equally to a branch operation or a subsidiary operation. However, from a commercial perspective, and specifically from the perspective of corporate liability, operating through a branch office means that the head office is exposed to direct liability for all the obligations of the branch, tax obligations included. Operating through a subsidiary means that only the subsidiary is liable for its obligations as a general rule, that is to say that the shareholders are not liable for company obligations. Of corporations, the advisable choice would be an SAS, which is very flexible in nature, easy to incorporate, and can be held by one single shareholder (regular corporations require a minimum of five shareholders).
Mergers and de-mergers are tax free, subject to limitations as follows:
- The surviving or the beneficiary entity must be a resident.
- De-mergers must be over units of business/going concern (substance requirement).
- If merger/de-merger participants are unrelated, shareholders owning at least 75% (85% where participants are related) must receive, as a result, shares proportional in value to what they had prior to the merger or de-merger.
- Shareholders must receive at least 90% of value in shares (99% if participants are related).
Mergers/de-mergers failing to meet these standards will be treated as taxable dispositions. Where participants are not residents, the tax-free status is available if assets held in Colombia represent 20% or less of the worldwide aggregate of assets of the group.
Significant economic presence (SEP)
An SEP rule is unilaterally introduced whereby the sale of goods or provision of digital services into Colombia will attract WHT at 10% or, at the election of the provider, a 3% tax (over gross revenues) will apply, subject to registration and an annual income tax filing.
Exceeding a revenue cap of USD 275,000 per year, as well as a 300,000 customer/user threshold or showing the prices in COP or allowing payment in COP, opens the door to eligibility for SEP. These rules will apply beginning in 2024.