Companies are taxed at the national and local level. National taxes include income and related taxes (remittance tax and tax on windfall profits), net worth tax, value added tax (VAT), tax on financial transactions, stamp taxes and registration fees. Local taxes include property tax applied to real state and those on industry and commerce.
Income and related tax
This tax is considered a single tax and is made up of three components: income tax, tax on occasional gains (windfall profits) and tax on remittances. The income tax rate is 35 per cent. For tax year 2006 a surcharge of 10 per cent was applied, thus for a rate of 38.5 per cent.
The tax is determined by applying the rate to the net taxable income. In general, said income is obtained by adding up all of the ordinary and extraordinary earnings likely to produce a net increase in holdings and that are not expressly exempted by law. Then, the costs and expenses imputable to such earnings are subtracted from the sum to obtain the gross income. Deductions are subtracted from the gross income to obtain the net income. The income items that are expressly declared exempt are subtracted and tax discounts are subtracted from the tax payable.
When net income, calculated as described above, is less than six per cent of net worth (assets minus liabilities) the greater of these two amounts shall be regarded as net income for tax purposes.
As for the tax on windfall profits, the rate is 35 per cent, except on earnings from raffles, gambling, lottery and other similar games, for which it is 20 per cent. Income that qualifies as windfall profits relates to:
- Profits from the sale of fixed assets held for more than two years.
- Profits from liquidation of a company.
- Gains from inheritances, legacies and donations
- Gains from lotteries, raffles, gambling and other similar games
Remittance tax is due on the transfer abroad of occasional income and gains earned in Colombia. In the case of foreign branch offices, the tax is payable due to mere obtainment of profits, which are presumed as being transferred to a foreign country.
Some exceptions to the remittance tax are dividends and shares (the drafting of dividends and shares to foreign countries involves an additional income tax rate of seven per cent), the credit interest obtained abroad by certain companies, and reinvestment of profits.
Remittance tax rates vary, depending on the origin of the funds remitted abroad. The most common rate is seven per cent. The tax base in the case of profits earned in Colombia, is comprised of commercial profits obtained during the tax year.
As for commissions, fees, royalties, rental fees, payment for personal services, use of industrial property or know-how, and benefits or royalties from literary, artistic or scientific property, the tax base is calculated by deducting the income tax from the payment or partial payment.
Net Worth Tax (Patrimony Tax)
For taxable years 2004, 2005 and 2006, a patrimony tax must be paid by all taxpayers holding net worth in excess of COP3 billion (approximately US$1,080,000 using 2,778 as reference rate). The tax is computed on total assets less total liabilities as of January 1 of each year, at the rate of 0.3 per cent. The value of investments in companies (shares and quotas) are excluded.
Value Added Tax (VAT)
The VAT is an indirect tax applicable to the provision of services and the sale and import of goods, in general being 16 per cent. The VAT is structured as a value added tax, in such a way that at the moment the tax is determined, the application of discounts is allowed.
Financial Transaction Tax
It is the tax on financial movements, which is equivalent to 0.4 per cent of the value of a financial transaction, whereby resources are made available through deposit into checking deposit or savings accounts and from drafting cashier’s checks.
The stamp tax is a national levy paid in Colombia to register public and private documents with contract value above an amount set each year by the national government. The standard rate is 1.5 per cent of the total value of the contract. However, there are special rates and certain exemptions.
These fees are charged to register acts, contracts or documentary legal transactions in which individuals are parties or beneficiaries and where registration with public records offices or chambers of commerce is mandatory under the law. Registration fees are set by regional legislatures, within the following ranges:
- Acts, contracts or legal transactions of an established amount and subject to registration with public records offices: between 0.5 per cent and 1 per cent.
- Acts, contracts or legal transactions of an established amount and subject to registration with chambers of commerce: between 0.3 per cent and 0.7 per cent.
- Acts, contracts or legal transactions of no established amount and subject to registration with public records offices or chambers of commerce, such as appointments of legal representatives or fiscal auditors, statutory amendments implying no assignment of rights or increase in capital, and explanatory deeds: between two and four times the minimum daily wage.
For legal documents, contracts or legal transactions that are subject to registration fees and have private and public entities as parties, the tax base is equal to 50 per cent of the value established in the document containing the act or the proportion of subscribed capital or corporate capital stock corresponding to the private parties. If a document is subject to registration fees, the national stamp tax is not charged.
Industry and Commerce Tax
It is a local tax on industrial, commercial or service activities performed within the municipality’s territory. Exports do not pay this tax. The taxable basis for the tax is the value of the revenues.
For the case of industrial activities, the revenues under the item of production distribution are understood as earned in the municipality where the plant is located. The taxable base can only be reduced in some cases expressly provided for such as the value of returns, exports and revenues from the sale of fixed assets, among others.
In the case of commercial or service-related activities, the taxable basis is the monthly average of the revenues for the last year, excluding the items mentioned in the previous paragraph.
- The rate is set by each municipality within the following limits established by law: Industrial activities: 0.2 to 0.7 per cent a month.
- Commercial and service-related activities: 0.2 to 0.10 per cent a month.
Charged on real estate. Tax rates may range from 0.1 to 0.16 per cent of the assessed property value.
The Colombian fiscal system has numerous benefits, as tax deductions, exempt earnings and tax discounts. In addition, the following benefits were designed to promote foreign and local investment:
- Importing machinery: Companies with a large volume of exports are exempt from paying the VAT for imported machinery that is not manufactured in the country and which is used for transformation of raw material. Such benefit applies also when the importation of the machinery is made through a local leasing company.
- Public utilities: Exempted Income for the use of water, electricity, telecommunications, natural gas and community services.
- Purchase of assets: Taxpayers who demonstrate the purchase of productive property plant and equipment are allowed to a special income tax deduction equivalent to 30 per cent of the purchase value of each year’s acquisitions. This tax benefit applies to taxable years 2004 through 2007.
- Building and remodelling of hotels: The building and remodelling of hotels enjoys a 30-year income tax exemption.
- Eco-tourism: Companies providing eco-tourism services certified by the Ministry of the Environment, Housing, and Development may qualify for income tax benefits.
- New medical products and software: Companies registering new medical products and software that involved significant national scientific research are granted income tax exemptions.
- Urban renovation plans: There is an income tax exemption for urban renovation projects.
- Oil exploration: Seismic services for oil exploration have a five-year income tax exemption.
- Construction of aqueducts and sewage services: Public utilities companies constructing aqueducts and sewage regional services or in nearby municipalities are entitled to an income tax discount.
- Housing: Income tax exemption for housing lease contracts that have a purchase option.
- Power generation using alternate fuels: companies selling electric power generated with wind, biomass or agricultural waste, qualify for an income tax exemption.
- River transport with shallow drafts: River transport of supplies using shallow-draft vessels and barges qualify for an income tax exemption.
- Wood development for commercial purposes: New forest plantations, including ‘guadua’ (a type of bamboo), benefit from an income tax exemption, as well as investments in commercial sawmills and properly registered commercial tree plantations.
- Fuel alcohol: In Colombia’s main cities, fuel alcohol that is mixed with gasoline will be exempt from the gasoline tax and surcharge.
- Gas for vehicles: VAT is not charged on the vehicle conversion kits of gasoline to gas.
- Tariffs elimination: Tariffs are not paid on industrial machinery not produced in the country.