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IMPACT OF THE FINANCING LAW ON THE BUSINESS SECTOR

Law 1943 of 2018 known as the “financing law”, is nothing more than a tax reform aimed at achieving greater tax collection to address the fiscal deficit, however, the Government has stated that it also seeks to encourage private investment and boost the country’s economic development through job creation .
In order to enlighten our readers, we have decided to mention some of the tax changes that the business sector must face, and those that we consider occupy a larger percentage of business activities.
 

  1. Wealth tax:

    It is created for the years 2019, 2020 and 2021. Wealth tax is generated by having liquid assets as of January 1, 2019, whose value is equal to or greater than $5,000 million pesos, the rate will be 1% for each year. The tax is payable on January 1, 2019, 2020 and 2021.

This tax will apply to:

  • Individuals, illiquid successions and income taxpayers. Although the law does not expressly mention legal entities, it should be interpreted as meaning that they are taxpayers of income tax and therefore, they are also taxpayers of the wealth tax.
  • Individuals, nationals or foreigners, non-residents, with respect to assets owned directly in Colombia or owned indirectly through permanent establishments, except for the exceptions of treaties and law. In the latter case, the formal duty to declare corresponds to the branch or permanent establishment.[1]
  • Foreign entities that do not file income tax returns, and that own assets in Colombia other than shares, accounts receivable, and/or portfolio investments, as indicated in the law, such as real estate, yachts, boats, motorboats, works of art, aircraft or mining or oil rights. In other words, foreign entities that do not file income tax returns and own assets in Colombia such as shares, accounts receivable and/or portfolio investments are not subject to this tax, but if they own other taxable assets that exceed 5,000 million pesos, they will be subject to this tax.
  • Illiquid inheritances of non-resident decedents at the time of their death with respect to their assets held in Colombia.
  1. National excise tax on housing units:

    This tax is caused by the sale of real estate, new or used, whose value exceeds 26,800 UVT[2], including those made through the assignment of trust rights or funds that are not listed on the stock exchange. The fee shall be two percent (2%) of the total sales price.

  2. It is established that for those individuals, who receive dividends from domestic companies must pay a 15% tax, when these exceed 300 UVT, for the year 2019, corresponding to ten million two hundred eighty one thousand pesos ($10’281,000). This is in addition to the 33% rent payable by the company.

Article 27 of Law 1943 of 2018, indicates a formula that when it is higher than 300 UVT onwards, a 15% rate is applied on the excess. The formula is (dividends in UVT minus 300 UVT) x 15%.
Example: if the dividends correspond to 34’270,000, we must apply the formula
34’270.000 (value of dividends) / 34270 (value of UVT) = 1.000UVT – 300UVT = 700UVT
700 UVT x 34270 (value of UVT) = 23’989.000, to this value we apply the 15% rate, in this case, 3’598.350 tax should be paid.
Or, if you want to get 15% of 700 UVT, which corresponds to 105UVT x 34270 (UVT value) = 3’598.350.

4. When a foreigner renders a service in Colombia or from abroad, a withholding tax of 20% must be withheld at source.

Although the main purpose of the law is to collect more taxes, we cannot deny that it created a series of benefits that, when analyzed and applied, are very useful for the business sector.

  1. Tax discount of 50% of the value paid for ICA (100% as of taxable year 2022) and 100% of VAT paid on the importation, formation, construction or acquisition of real productive fixed assets[3]. This discount is applicable to legal entities and individuals, and is one of the great benefits incorporated by this Law.
  2. Presumptive Income will go from 3.5% in 2018 to 1.5% for 2019 and 2020, and to 0% for 2021.
  3. Decrease in the corporate income tax rate (starting in 2019 at 33%, decreasing 1% each year until reaching 30% by 2022).
  4. In the income tax return, it is possible to deduct 100% of the taxes, fees and contributions effectively paid during the year, which are causally related to the commercial income activity. This deduction is also applicable to 50% of the Tax on Financial Movements (4×1000). Before the financing law, the only deductible tax was the ICA, if for example, a company paid a special contribution for surveillance or the vehicle tax of company vehicles, these were not deductible, now, with this new law they will be deductible as long as they have a causal relationship with the activity generating the income tax.
  5. Legal entities that carry out economic activities related to the orange economy are exempt from income tax for 7 years. Among the requirements to be a beneficiary, we find the following:
  • These companies must have their main domicile in the Colombian territory, and their exclusive corporate purpose must be the development of value added industries.
  • It must be constituted before December 31, 2021 and be within the category of activities benefiting from the incentive.
  • Must comply with minimum employment amounts defined by the Government.
  • An investment project must be submitted to the Orange Economy Committee of the Ministry of Culture, justifying the feasibility, economic convenience and qualification as an orange economy activity. The Ministry must issue an act of conformity with the project and confirm the development of technological value-added industries and creative activities.
  • Comply with the minimum investment amounts in the terms defined by the National Government, which in no case may be less than four thousand four hundred (4,400) UVT and within a maximum term of three (3) taxable years.
  1. Special tax regime for Mega Investments. Companies that from 2019 and until January 1, 2024 generate at least 250 direct jobs and make investments in the national territory in a maximum period of five years, equal or greater than (30,000,000) UVT in any industrial, service, commercial or other activity, will have an income tax rate of 27% for a period of 20 years, exclusion of wealth tax and exclusion of tax on dividends obtained, among others.

 
Once the general outlook for companies in Colombia has been elucidated, it is clear that although it is true that Colombia has a high tax rate, it is also true that the legal system has created mechanisms through benefits, exemptions and exclusions that allow companies to alleviate the tax burden.
That is why, as specialists in Tax Law, we always recommend that companies and individuals, regardless of the stage in which they are, perform a Tax Planning exercise, through which a diagnosis is made to determine the tax situation of the company and applying the knowledge of tax obligations depending on the sector in which it is located, to advance a short and medium term plan taking advantage of the benefits granted by law in order to reduce the tax impact for the company. The purpose of this is to provide companies with a comprehensive analysis that allows them to make the best decisions with the greatest benefits in accordance with the law.
 
Author: Carolina Bertel
Editing: Santiago Pinzon Sosa
 
[1] Article 20 – 1. Tax Statute. Permanent establishment is understood as a fixed place of business located in the country, through which a foreign company, whether a corporation or any other foreign entity, or a natural person without residence in Colombia, as the case may be, carries out all or part of its activity.
[2] It stands for “Unidad de Valor Tributario” (Tax Value Unit) and is a unit of measurement that allows the homogenization of the different tax values. For 2019, the value of the UVT was set by the DIAN at thirty-four thousand two hundred and seventy pesos ($34,270).
[3] Decree 1766 of 2014 defines real productive fixed assets as tangible assets that are acquired to form part of equity, participate directly and permanently in the taxpayer’s income-producing activity and are depreciated or amortized for tax purposes.

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