Colombia has announced a new tax reform. With these measures, the administration aims to reduce Colombia’s overall fiscal deficit. On 15 April 2021 the reform bill was presented for discussion in Congress – Bill of Law 594 proposing the 2021 tax reform (Proyecto de Ley # 594 de Solidaridad Sostenible).
The Bill includes updates that have gained media attention (including mention of a possible basic income, previously unknown in Colombia), as well as outlining important changes to income tax and value added tax.
Expecting tough discussion in Congress, it may take a while before the Bill is approved into Law, but we would like to summarize main changes that should be considered for any entity performing, or planning to perform, activities n in Colombia.
Income Tax
Income Tax rate: Starting in 2022, the Bill proposes to maintain the current income tax rate of 30%, and reduce the rate to 24% for companies with a taxable net income of less than 13,770 UVT (approx. €110,000).
However, it establishes a 3% surcharge for 2022 and 2023 applicable to both rates – thus, the rate for those years will be 33% and 27%, respectively. This surcharge would be treated as an “advance” (in 2021 and 2022), in two installments to be set by the National Government.
Elimination of exemptions: Most of the current tax benefits would be repealed, according to this Bill. For example, the income exemption for the ‘development of the Colombian countryside for the sale of electrical energy generated based on wind energy, biomass or agricultural waste, solar, geothermal or ocean’, would be eliminated.
It would also repeal the special rate of 9% for hotel rents, for services provided in new hotels or hotels that are remodeled or expanded.
Elimination or reduction of discounts and deductions: If approved in its current terms, the special deductions of 130%, 125% and 120% of wages, benefits, and social services of SENA apprentices, workers with certified disabilities, and first job for workers under age 25, would be removed.
The ICA (Local taxes) discount actually paid from income tax would become permanently 50%, since it would repeal the rule that raised the discount to 100% of the ICA paid.
Extension to apply to Benefits: It extends from the date of incorporation for companies formed from December 31, 2021 to December 31, 2022, to access the exempt income of “creative industries” also known as ‘orange economy’ (Income Tax exemption for seven (7) years).
Income Tax withholdings: Income derived from advertising and / or marketing services, performed either inside or outside Colombia’s borders but aimed at the national market or with a benefit realized in the country, would become considered of national source income and subject to withholding tax of 20%.
Finally, if approved, the Bill would grant the President power to review the rates of income tax withholding at source for six (6) months.
Value Added Tax
Products Subject to VAT: Solar panel related products, machinery and equipment registered in the National Registry for the Reduction of Gas Emissions Greenhouse Effect, bicycles and electric bicycles, electric motorcycles, skateboards would be subject to a five percent (5%) VAT.
VAT on Fixed assets: VAT paid for the acquisition or importation of real productive fixed assets. This becomes discountable in VAT returns, with the right to a refund of the balance in favor arising from this VAT. The VAT paid until 31 December 2021 is still deductible from income tax, also with the right to refund.
Implications of these changes
If the Bill is approved in its current form, the Colombian government would aim to collect 2% of the current GDP in tax. This source of revenue would allow it to maintain the country’s current level of social protection, among other things.
We ask you to bear in mind that it may take a long time before this Bill is approved, and changes in its form are to be expected. In any case, this Bill will have consequences in sectors such as renewable energies, creative industries, and the primary sector.
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