On December 29, 2016, Congress approved Law 1819 of 2016, by which a structural tax reform is adopted, the mechanisms to combat tax evasion and tax avoidance are strengthened and, in general, provisions are issued which modify the tax system for individuals and legal entities, businesses and contracts, and foreign investors.
Below is a summary of the major modifications introduced by the mentioned Law:
Elimination of the Alternative Minimum Tax- IMAN and the Simple Alternative Minimum Tax- IMAS and creation of a schedular income tax system.
The schedular income tax system is designed to determine the tax independently for each type of revenue, in order to ensure that items of revenue not constituting income, costs and deductions apply only with respect to those revenues with which they have a causal relationship.
- Tax benefits may only be deducted in schedules with revenues.
- The same exempt income or deduction may not be assigned to more than one schedule.
The net income shall be determined independently for the following types of revenues:
- Dividends and Participating Interests. The revenues in this schedule are those received by way of dividends and participating interests in distributions obtained from domestic and foreign companies.
- Capital Gains. Those corresponding to interest, financial yields, rent, royalties and working of intellectual property. In order to establish the net schedular income, all revenues not constituting income, costs and expenses attributable to this schedule will first be subtracted; then, exempt income and deductions will be subtracted, provided they do not exceed 10% of the previous balance or of a sum equivalent to 1000 Tax Value Units (hereinafter "UVTs") (Today: COP $31,859,000).
- Earned Income. In order to establish the net schedular income in earned income, revenues not constituting income attributable to earned revenues will be subtracted. Any exempt earned income and deductions, not exceeding 40% of the revenues received or 5040 UVTs (today COP $160,569,360), may be subtracted from the balance.
- Pensions. The exemption for retirement, disability, old age, survivors and occupational risk pensions, not exceeding 1000 UVTs (today COP $31,859,000) per month, is maintained. Pension Substitution Indemnifications or refunds of pension savings balances will be subject to the same treatment.
- Unearned Income.
Revenues from unearned income are considered to include all those
that cannot be classified under any of the preceding schedules,
except for fees received by individuals providing services and who
contract or hire two or more workers associated with the activity.
In this case, the fees are not part of the earned income.
In order to establish the net schedular income, any revenues not constituting income, costs and expenses attributable to this schedule will first be subtracted; then, exempt income and deductions will be subtracted, provided they do not exceed 10% of the previous balance or of the sum equivalent to 1000 UVTs (today COP $31,859,000).
This article of the Tax Reform is pending clarification as to whether only deductions that do not correspond to expenses attributable to the income-producing activity are subject to the 10% limitation.
Income tax rate.
A. The Tax rate for resident individuals or successions of decedents residing in the country shall apply in accordance with the corresponding schedule, as follows:
- For net earned and pension income,
the rates that applied to individuals are maintained.
UVT Ranges1 Marginal Rate From To 0 1090 0% 1090 1700 19% 1700 4100 28% 4100 And above 33%
- For net unearned income and capital
gains, new intermediate rates are created: 10%, 20% and 30%; in
addition, the maximum tax rate is increased to 35%.
UVT Ranges Marginal Rate From To 0 600 0% 600 1000 10% 1000 2000 20% 2000 3000 30% 3000 4000 33% 4000 And above 35%
B. For individuals and successions of decedents without a fiscal residence in the country, the income tax rate shall be 35%.
Tax Treatment of Payroll Taxes.
- As of the year 2017, mandatory health and pension contributions made by employees will be considered Revenues Not Constituting Income.
- Voluntary contributions to pensions and AFC accounts will retain the exempt income treatment. Funds in AFC accounts may also be used towards housing lease agreements.
Below, are the rates that will apply for dividends:
|Taxpayer||Dividends distributed charging profits taxed on the domestic company||Dividends distributed charging profits NOT taxed on domestic companies||Dividends
obtained from foreign companies.
(Will be subject to deduction for taxes paid abroad, as applicable)
|Resident Individuals||Dividend Rate Range||Effective rate from 35% to 41.5%||Effective rate from 35% to 41.5%|
|0-19 million 0%
19-31 million 5%
>19-31 million 10%
|NON-Resident Individuals / Foreign entities and companies||5%||Effective Rate 38.25%||Not applicable|
|Legal Entities domiciled in Colombia||Revenues NOT constituting income or capital gains.||General rate 33%2||General rate 33%3|
|Permanent establishments of foreign companies||5%||Effective Rate 38.25%||Not applicable|
The above rates will be applicable only to dividends reported charging profits generated as of the tax year 2017.
1 Tax Value Unit (Unidad de Valor Tributario) – UVT for 2016 is COP $31,859 approximately USD 10.00.
2 See section on rates for legal entities.
3 See section on rates for legal entities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.