Aug. 20, 2019
The common types of vehicles for conducting business in Colombia are branches of a foreign company and simplified stock companies (S.A.S. by its acronym in Spanish). The governing tax regime is the same for all the legal vehicles in Colombia. From a tax perspective there is no advantage or disadvantage between them.
Branch of a foreign company
A branch of a foreign company is a commercial establishment organized by a foreign company in Colombia. A branch is an extension of its head office. It is not an independent entity, so the head office is liable for all the actions and operations carried out by the branch. The branch would not be a suitable structure if its purpose is to protect the foreign company from possible contingencies that may arise against the corporation established in Colombia. The capital assigned to the branch must be paid at its establishment in Colombia. The head office may determine the amount of said capital but not the form of payment conditions. Branches are obliged to have an authorized officer and an external auditor domiciled in Colombia. The authorized officer may have broad powers, which would allow for smooth operations, although there would be no strict control over such activities by the head office. Additional contributions to the assigned capital made by the head office can be treated as a supplementary investment and can be used to cover operational costs and expenses. To create a branch, the bylaws of the head office must be notarized as a public deed and registered with the competent chamber of commerce.
S.A.S. is a commercial company formed by capital contributions made by its shareholders and can be incorporated by one or more shareholders (natural or legal persons, Colombian or foreign). S.A.S. is preferred by local and foreign investors due to its flexibility and dynamism. The corporate capital of the S.A.S. comprises authorized, subscribed, and paid-in capital. Conditions, amounts, proportions, and terms of payment of the capital can be freely determined in the company's bylaws. A legal reserve is not mandatory. The term to pay the shares cannot exceed two years. Shareholder liability is limited to the amount of their capital contributions. However, there is an express legal provision that allows for the corporate veil to be pierced if a court decides that the company is used to subvert the law.
The S.A.S. must have:
• a general shareholder's assembly or sole shareholder, and
• an authorized officer.
A board of directors is optional. S.A.S. is a flexible vehicle that allows shareholders to decide between managing the company solely through an authorized officer or through both the latter and a board of directors. A S.A.S. must have a fiscal auditor when its assets and/or gross income exceed the maximum amounts set forth by law. The incorporation, as well as amendments to its bylaws, can be done by a private document (registered with the competent chamber of commerce) instead of a public deed, which simplifies the process in time and cost. A public deed is required only when the assets involved in the incorporation require transfer by means of a public document, for example, the transfer of real property. The incorporation process may take up to one week.
The Colombian tax system includes national, departmental, and municipal taxes.
The main national taxes are income, capital gains, sales, dividends, and financial transactions.
National companies, entities, and individual residents in Colombia are taxed on their revenues, equity, and capital gains obtained in Colombia or abroad. Non-resident individuals, foreign companies, and entities are income taxpayers on revenues and equity held in Colombia. The corporate income tax has the following rate scheduled:
No foreign individuals or legal entities, without residence or domicile in the country, are required to submit an income tax return when all their income has been subject to withholding tax.
Tax on dividends
Dividends received by resident individuals or non-resident investors, as a general rule, are subject to income tax. Because it is a taxable income, withholding at the source must be practiced. The rate of income tax for the member will depend on whether the company that distributes the dividends has already paid income tax for its own profit. Companies must pay the income tax at the rate of 33% (year 2019) on their own income. During the year, the company may have some tax benefit that reduces its tax base, on which the 33% rate on its income must be paid as income tax. The said benefit cannot be transferred to the shareholders in case of distribution of dividends. Therefore, in the event of distribution of dividends, the difference in taxes not paid by the company should be assumed by the partner. Thus, for dividends on profits for which the company already paid the 33% tax, the partners must pay a tax at the rate of 0%, 7.5%, or 15% as explained below. For dividends on profits for which the company has not paid the 33% tax, shareholders must pay (i) a tax of 33% on the portion of profit that did not pay tax in the company and (ii) tax of 0%, 7.5%, or 15% on the dividends after subtracting the tax indicated in numeral (i).
Dividends distributed among companies belonging to a business group registered in the Chamber of Commerce are not subject to a 7.5% withholding tax. When deliberating the distribution of dividends, the company must withhold at the source the tax on dividends according to the following rates (see chart on right):
Dividends received by companies belonging to the CHC regime or distributed to their foreign partners are not subject to withholding tax of 7.5%.
Capital gains tax
Capital gains tax (with a 10% rate) is levied on revenues arising from the disposal of fixed assets owned for more than two years as well as revenues from inheritances, estates, donations, and similar acts as well as those received from a spouse's participation in marital community property.
Sales tax (VAT)
VAT is a national tax charged to consumers based on the purchase price of certain goods and services. There are three different rates: 0%, 5%, and 19%. Exportation of goods and services is exempt from the VAT. Certain goods and services are excluded, especially transportation services under certain conditions, educational services, public utilities, and interests, among others.
Tax on financial transactions (GMF)
GMF is applicable to financial transactions through which resources deposited in checking or savings accounts and in the central bank and cashier checks withdrawn are available. This tax is of permanent nature and takes when the financial transaction resources are produced, at the rate of 4x1,000.
Municipal and departmental taxes
The main departmental and municipal taxes are the industry and commerce tax (ranging from 0.2% to 1.0% on the gross income), real estate tax (dates and rates are variable), and registry tax (usually 0.7%).
Double taxation agreements
Colombia has currently executed agreements to avoid double taxation (DTA). The purpose of a DTA is to abolish or reduce double taxation and promote cooperation and trade between the countries involved. The DTAs cover the income tax and equity tax. Taxes such as the VAT or Industry and Commerce Tax are not covered by these DTAs. Except for the treaty with the Andean Community of Nations, Colombia has either followed the model of DTA of the Organization for Economic Cooperation and Development (OECD) or the United Nations (UN) models. The DTA with the CAN (Peru, Ecuador, Colombia) states that the country that applies the tax is mainly the one in which the activity is performed. The model of DTAs of the OECD or UN establishes which country will apply the tax, based on residence criteria. Colombia has signed DTAs, totally in force, with Czech Republic, Canada, India, Portugal, Korea, Mexico, Switzerland, Chile, Spain, and CAN.
The DTAs listed below are the current treaties not in force signed by Colombia:
In the maritime navigation or air transportation, Colombia has signed DTAs, all in force, regarding income tax and equity tax with Panama, United States of America, Italy, Venezuela, Argentina, Brazil, Chile and Germany. Colombia has also signed DTAs in order to exchange information with the tax authorities of the UAE and Barbados (these are not in force because the exchange of notes is pending) and has in-force DTAs with the US and OECD.
Colombia has also signed free trade agreements (FTAs), among others with the EU and the US, which establish the application of preferential tariffs in import and export operations between member countries.