How Does a Foreign Company Pay Taxes in Colombia?

October 09, 2023

The State relies on tax revenue from its inhabitants to cover necessary expenses to ensure the fulfillment of its purposes and the provision of required services. Thus, both Colombian citizens and companies as well as foreign citizens and companies that reside or invest in Colombia must adhere to tax obligations.

Colombia offers appealing opportunities for foreign companies to expand operations, highlighting promising routes for commercial development. For foreign entities, the tax landscape in Colombia is vital when evaluating investment opportunities. Therefore, prior to investing, it's vital for these companies to be informed about their tax responsibilities, the pre-established tax calendar, and the relevant deadlines.

Not meeting tax obligations, whether stemming from ignorance, tardiness, or miscalculations, can result in financial consequences generated for the corresponding tax authority.

Should you require tax legal consultation, we invite you to reach out via our WhatsApp line at +57 310 5706331, where you can speak with an expert attorney specializing in foreign investments in Colombia.

To learn more about establishing a foreign company in Colombia, please refer to the following article: How to Incorporate a Company in Colombia?

What are taxes?

Taxes are compulsory financial contributions made by individuals to the public sector in order to fund public expenditures. They are due under specific legal circumstances, such as when one buys goods or earns asset-enhancing income.

In Colombia, there are both national and territorial taxes. National ones are collected by the National Tax and Customs Directorate (DIAN), while territorial taxes are collected by the respective departments and municipalities.

Which taxes must foreign companies pay in Colombia?

The taxes that foreign companies are subject to depend on their activities in the country. They could be liable for:

• Income Tax.
• Value Added Tax (VAT).
• Wealth Tax.
• Industry and Trade Tax.
• Consumption Tax.
• Property Tax.
• Financial Transaction Tax.

Further details on each are provided below.

What is Income Tax:

It's a national tax that levies the annual net income of taxpayers. In other words, income tax must be paid on the profits earned by companies during the taxable year.

As per Article 10 of the Tax Statute, all fiscal residents who meet DIAN's criteria are liable for this tax. According to Article 20 of the Tax Statute, foreign companies and entities, concerning only their domestically sourced income and occasional gains, are subject to this tax, irrespective of direct or indirect receipt through branches or permanent establishments within Colombia.Thus, the general rate for income tax applicable to foreign companies in Colombia will be 35%.

However, particular cases result in a variation of this rate. If you need tax advice for your company, please contact us at +57 310 5706331.

What is the Value Added Tax (VAT):

VAT is a national imposition predicated upon criteria delineated in Article 420 of the Tax Statute, encompassing:

• The sale of tangible and intangible assets, barring specific legal exceptions.
• Transfers of rights pertaining to intangible assets, specifically those related to industrial property.
• Domestic or foreign services, except for those legally exempted.
• Importation of tangible goods, unless explicitly exempted.
• Engagement, sales, or operation of luck-based games, save for certain online exclusions, where the game operator assumes the tax obligation.

Therefore, VAT liability concerns: commercial entities regardless of their operational phase; service providers; importers; and other entities as described in Article 437 of the Tax Statute. The standard VAT rate, applied to goods and services, is set at 19%, albeit with some items at 5% and others enjoying VAT exemption. VAT-subject businesses must submit periodic declarations depending on income streams and their specific tax regimes.

Wealth Tax:

The Wealth Tax is a national duty targeting companies' liquid assets, such as their properties or possessions, particularly when they exceed 72,000 Tax Value Units (UVT). Notably, it's imposed on companies that don't declare Income Tax and possess assets in Colombia aside from shares, receivables, or portfolio investments.

As set out in Article 295-3 of the Tax Statute, the tax base for the Wealth Tax is the company's gross asset value as of January 1 each year, minus any liabilities effective on the same date.

What is the Industry and Trade Tax (ICA)?

ICA is a regional levy, as established by Law 14 of 1983, which encompasses all industrial, commercial, or service operations executed by businesses within municipal territories. It's assessed based on the previous year's average monthly gross revenue. Accurate ICA payment requires informed guidance from tax attorneys.

What is the National Consumption Tax (INC)?

The INC is a national imposition on the final consumer's provision, sale, or import of the following goods and services:

• Mobile telephony, internet, mobile browsing, and data services.
• Businesses involved in the sale of foods and drinks.
• Services related to the sale of prepared foods and drinks.

Entities liable for this tax include:

• Companies providing mobile telephony and internet services.
• Businesses involved in the sale of foods and drinks.
• Companies importing products for which they act as the end consumer.
• Businesses selling goods that are subject to this tax.

The INC rate varies based on the service or good being taxed:

• Telephony and internet services bear a 4% rate on the total service cost. For data, internet, and mobile browsing, only the amount exceeding 1.5 UVT monthly is taxed.
• Restaurants charge an 8% rate on the total consumption cost.
• Bars, taverns, and nightclubs impose an 8% rate on total consumption, inclusive of entry fees and other additional charges.
• Vehicles like family cars, off-road vehicles, and pick-ups priced below USD 30,000, motorcycles with piston engines, and yachts and other recreational boats are taxed at 8%.
• Vehicles like family cars, off-road vehicles, and pick-ups priced at or above USD 30,000; balloons, gliders, non-motorized private aircraft, other types of spacecraft, and their launch vehicles; and private suborbital vehicles are taxed at 16%.

Exclusions from INC encompass certain vehicles such as taxis and other public service vehicles, vehicles meant for transporting 10 or more people, and canoes and boats used for artisanal fishing, among others.

What is the Property Tax?

The Unified Property Tax is a territorial duty, its base being the cadastral valuation of properties owned by the business. This tax rate varies depending on the municipality where the property is located and may qualify for special discounts.

What is the Financial Movement Charge (GMF)?

The Financial Movement Charge (GMF) is a federal tax incurred when conducting financial transactions that access funds in checking or savings accounts, as well as deposits in the Republic Bank, and bank drafts.

All companies that are clients of entities supervised by the Financial Superintendence are liable for GMF. The GMF rate is four pesos for every one thousand pesos transacted.

In conclusion, just like local companies, foreign companies are subject to taxes in Colombia based on their activities, mirroring the obligations of domestic companies. Additionally, they must fulfill other tax obligations, such as registering in the RUT and ensuring their information is up-to-date.

Do You Require an Expert Tax Attorney for Your Business in Colombia?

At AGT Attorneys, our team comprises expert corporate tax lawyers prepared to offer legal counsel and representation to all foreign enterprises in Colombia aiming to adhere to their tax obligations.

Write to us on our Contact Form, schedule your legal appointment with our lawyers through the following link or contact us at +57 310 5706331.

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