Introduction

Besides a robust growth of GDP for 2022, as per estimates from the OECD and the World Bank, Colombia offers different comparative advantages to other investment alternatives in terms of geographic location, natural resources, trained personnel and a relative legal stability in Latin America for the development of business operations.

Nevertheless, corporate taxation in Colombia is high when compared to other countries such as Mexico, Chile, or Peru. Income-generating activities in Colombia are currently taxed at a general corporate tax rate of 35%. For financial entities with a taxable income greater than 120,000 UVT (2022: COP4,560,480,000 – approximately USD1,140 million) there is a surcharge of 3% between 2022 and 2025.

As part of its commitment to provide more secure investment conditions, Colombia has increased the number of double tax treaties in force, widening its tax network and is currently negotiating others. As of now, there are 13 tax treaties in force that cover different items of income (Andean Community, Spain, Chile, Switzerland, Canada, Mexico, South Korea, Czech Republic, Portugal, India, France, United Kingdom and Italy) and five that are already agreed and are going through its implementation processes (Japan, United Arab Emirates, Uruguay, The Netherlands and Luxembourg). The Colombian government has been vocal in its intent to grow its tax treaty network and is particularly keen on agreeing a treaty with the USA, which is Colombia’s biggest trading partner.

In addition, several incentives have been adopted in order to create more competitive conditions for international investors, which equalise or improve Colombia's position among its peers in the region and internationally.

In this article we analyse the following instruments that companies can apply for optimising their tax burden and achieve efficiency in their operations in Colombia:

• advantages of free trade zones;
• tax-exempt treatments for specific revenues;
• incentives for high-value investments (mega-investments);
• incentives on capital assets;
• incentives for renewable energy projects;
• incentives for research and development;
• income tax reductions; and
• special rules for international companies to establish their holdings in Colombia.

Advantages of free trade zones

Colombia offers investors different options to establish their operations within free trade zones (FTZ). Among the operative advantages that it offers, it provides the following tax benefits:

• Single corporate income tax rate of 20% for entities qualified as industrial users of goods and services. This qualification applies for those that undergo an industrial process within the area of the FTZ. However, commercial users are subject to the 35% general corporate income tax.
• Neither VAT nor import duties are accrued on the introduction of merchandise coming from outside of Colombia.
• VAT exemption on the sale of raw materials and goods sold in Colombia from the entities and people located within customs territory for the benefit of the operation of the industrial users of an FTZ.
• It is possible under regulations for industrial users to sell 100% of their output of goods and services within the Colombian customs territory. In this case, both VAT and customs duties should be considered.

For the application of the benefits, there are certain conditions regarding job creation and investments. For more information, please refer to the Chambers Practice Guide for International Trade 2022.

Tax-exempt treatments for specific revenues

Among others, the following revenues would be exempt from income tax:

Income generated by Colombian companies that belong to the technological industry and those that perform any creative activity (known to be part of the “orange economy”) are exempt from income tax for a five-year term. As a general rule, activities whose main purpose is the production or reproduction, promotion, dissemination and/or the marketing of goods, services and activities that have cultural, artistic or patrimonial content, and meet certain requirements, are eligible for this treatment. To be covered by this special treatment, it is necessary to submit a formal request before the Ministry of Culture explaining the project scope, its features and an analysis on its technical and financial feasibility. It is worth noting that this treatment applies as long as the income generated out of the specific project deployed by the Colombian entity does not exceed 80,000 UVT (2022: COP3,040,320,000 – approximately USD760,000).

Upon the completion of certain requirements, income associated to investments made in the Colombian countryside intended to increase the productivity of the agricultural sector is exempt from income tax for a ten-year period. This benefit is intended for companies whose gross income does not exceed 290,000 UVT (2022: COP11,021,160,000 – approximately USD2,750,000). In order to obtain and keep this special treatment, the investor shall create jobs. The number of jobs that shall be created will depend on the gross income produced in the respective year. It is also required that a minimum investment in fixed assets (property, plant and equipment) shall be made during the course of the six-year period. To apply for this special treatment, it is necessary to submit a formal request before the Ministry of Agriculture explaining its purpose, characteristics and an assessment on its technical and financial feasibility.

Income produced out of the sale of electric energy generated from wind, biomass or agricultural waste, geothermal or from the seas, upon meeting certain requirements, is exempt from income tax. This benefit will remain in force until 2032. This benefit applies for energy-generating companies that apply, obtain and sell associated carbon credits and that at least 50% of the revenue generated out of the sale of such carbon credits is invested in social-benefit works where the company operates.

Income generated out of social housing projects (including the sale of the land where they will be built, the first sale of housing units, the sale of land intended for urban renovation projects) is also exempt from income tax.

Income related to the exploitation of new forestry plantations will remain exempt until 2036.

Income derived from the river transport service of light draft is eligible for a tax-exempt treatment until 2033. It is possible to align this benefit with the provisions of double tax treaties that provide certain reliefs on the taxation of dividends. For example, dividends distributed out of profits that are not subject to tax would be exempt if distributed to a Spanish tax resident if reinvested into the same activity for a period of three years. Other treaties provide for a lower tax.

Incentives for high-value investments (mega-investments)

There is a special tax regime available for 20 years for taxpayers that generate at least 400 direct jobs and make investments exceeding 30 million UVT (COP1,140,120,000,000 for the year 2022, which is approximately USD285 million). The project can be in any activity (industrial, commercial and/or of services). Hydrocarbons and mining investments are not eligible for this regime.

Benefits of this regime include:

• a reduced corporate income tax rate of 27% without prejudice to lower applicable rates (eg, hotels that currently hold a 9% corporate income tax);
• no tax on dividends;
• the possibility to depreciate all fixed assets in a two-year term regardless of their useful life;
• the express exclusion of any present or future tax on net worth.

Additionally, the investments made by virtue of this regime could be covered by a tax stability agreement that would allow them to keep the benefits in case of future unfavourable modifications to the regime. This stability would be granted in exchange of a premium equivalent to 0.75% of the investment value that will be made within a five-year term.

The above-mentioned projects, altogether with their benefits, can be developed and performed within the area of a FTZ. This would also allow the applicability of the benefits that are granted to them as explained above.

To enjoy this special treatment, it is necessary to submit a formal request before the Ministry of Commerce, Industry and Tourism, explaining the scope of the project, the social and economic impact, and technical and financial feasibility.

Incentives on capital assets

Colombia foresees a general 0% rate on customs duties for the import of capital goods. Furthermore, it allows the possibility to treat as a tax credit for income tax purposes, the VAT paid on the acquisition, construction, formation or importation of tangible fixed productive assets.

Additionally, it is possible to import equipment into the country under a long-term modality that defers the accrual of import taxes (customs duties and VAT) into semi-annual instalments.

Furthermore, whenever the asset qualifies as heavy machinery intended for the basic industry is exempted from VAT during the course of the long-term temporary import modality (up to five years). It is considered to be part of the basic industry the following: mining, heavy chemistry, steelworks, extractive metallurgy, generation and transmission of electric energy and obtention, purification and conduction of hydrogen oxide. Within the term  "heavy machinery" is included all the complementary and accessory elements of the main equipment.

Incentives for renewable energy projects

As part of the government’s effort to encourage a more environmentally friendly energy supply, the following tax benefits apply for those projects intended to generate energy from renewable sources and efficient energy management:

• Income tax deduction of 50% of the investment value for up to 50% of taxable income. This benefit could be applied for a 15-year term counted from the year after the entry in operation of the respective investment.
• VAT exemption on the acquisition of equipment for renewable energy and efficient energy management projects and the necessary services to put in operative conditions for the respective project (CAPEX).
• Import duty exemption for renewable energy and efficient energy management equipment that is not produced domestically.
• Accelerated depreciation of up to 33.33% per year for renewable energy investments and for the equipment needed for measuring and assessing potential resources and for actions or measure of efficient energy management, including smart measurement equipment that is either acquired and/or built for these purposes.

A prior registration of the projects before the Mining and Energy Unit of Planning (UPME for its acronym in Spanish) is necessary. Additionally, the VAT exemption on the acquisition of goods and services is subject to a prior certification by UPME considering the specific need for the good or service.

In case the certificate issued by UPME is obtained after the start of the project, it is possible to request a refund of the accrued VAT.

Incentives for research and development

Upon meeting certain requirements set by the National Council of Tax Benefits (CNBF according to its initialism in Spanish), investments made on research, technological development and innovation are eligible for the following benefits:

• Investments or donations done either directly or indirectly in qualified research projects of innovation and technological development are fully deductible for income tax purposes.
• Additionally, a 25% tax credit over the total value invested is allowed to the extent that it does not exceed 25% of the tax payable. Any excess tax credit can be used in the following four income tax returns.
• In the case of small or medium-sized enterprises, the applicable tax credit is of 50% of the investment made.

Also, labour payments to people with a PhD made by companies involved in the research, development and innovation projects, certified by the CNBT, are fully deductible and are eligible to an additional 25% tax credit. In the case of small or medium-sized enterprises, the tax credit is increased to 50%.

Income tax reductions

In general terms, Colombian corporate income tax allows the reduction of the taxable base with their costs and expenses. Expenses that may be deducted for income tax purposes in Colombia include:

• Salaries paid to employees, as long as the employer/taxpayer has paid their payroll contributions.
• Payments related to employees’ education.
• Taxes and stamp taxes paid during the fiscal year, as long as they are directly related to the taxpayer's economic activity.
• 50% of the financial transactions tax paid during the fiscal year, regardless of whether or not they are related to the taxpayer’s ordinary course of business.
• Cross-border expenses, as long as they are directly related to the productive activity of the taxpayer, and the corresponding withholding tax (if applicable) has been applied. In case no withholding was applied, the deductibility of the expense would be limited to 15% of the taxable income calculated prior to deducting expenses that were not subject to tax.
• Contributions to the employees’ pension system made by the employer.

Additionally, the following may reduce further the effective rate of taxation:

• 20% extra deduction may be allowed for salary expenses of those under 28 years of age. This also applies for the hiring of senior citizens.
• 100% extra deduction is allowed for salary expenses of people with physical limitations. Certain conditions apply regarding the level of certified limitation.
• For the purposes of the investor’s corporate income tax, a 50% tax credit of the local industry and turnover tax paid in the respective jurisdiction of operation is available. Additionally, the other 50% of this tax may also be deductible.
• New hotel projects may apply for a 9% reduced corporate income tax rate, whenever they are in municipalities of up to 200,000 inhabitants.

There are certain items that may enjoy a non-taxable condition. These are provisions intended to encourage certain sectors. For example, any gain associated with the sale of shares of listed companies in the Colombian stock exchange whenever the sale represents less than 10% of the outstanding listed shares of the company within a fiscal year per real beneficiary.

Among other relevant considerations, Colombian law allows a step-up in basis of the tax basis of real estate. As per current law, it is possible to increase the tax basis of a property by way of increasing its cadastral value. This applies for sales that occur in the year subsequent to the update in the cadastral value and intends to reduce the resulting tax from any disposition.

Special rules for international companies to establish their holdings in Colombia

This special regime is available for Colombian companies whose main corporate purpose is the holding of securities, investments in shares or participation of foreign entities.

No income tax would be accrued on the dividends distributed by foreign entities to the entity covered by this regime. Likewise, any dividend distribution made by the Colombian Holding Company to foreign shareholders, and any gain associated with the sale of the participations held outside of the country, would not be subject to tax in Colombia.

This would allow foreign entities to channel their investments through Colombia, enjoying a favourable tax treatment and the benefits of the treaty network to which Colombia belongs to.