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Every country has their own tax system and code by which individuals and corporations must abide. The tax policy of individual countries is one of the main determining factors for whether it is considered viable for businesses and friendly to foreigners doing business in or relocating to that country. Let’s take a look at Colombia’s tax overview in three main categories: Personal Taxes, Corporate Taxes, and VAT Taxes.
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Colombia Personal Taxes
Here’s everything you need to know about personal taxes in Colombia:
Who is Taxed?
Colombia taxes both residents and non-residents for income that is earned in the country. To be considered a resident according to Colombia law, a person must be in the country for at least six months in any tax year.
A person is also considered a tax resident if their family resides in Colombia for at least six months in that tax year—even if the individual lives outside of the country. This part of the law, however, does not apply to foreigners.
What is the Tax Rate?
Colombia has a progressive personal tax rate that tops out at 39%. Non-residents must pay a flat 35% personal tax rate.
In 2021, individual tax rates in Latin America averaged 31.89%. This puts Colombia on the higher end of personal taxes, especially for non-residents who pay the 35% flat rate. Depending on a person’s income, however, they may fall on the lower sale of Colombia’s progressive tax rate.
National vs International Income
Those considered residents of Colombia have to pay taxes on their worldwide income. Non-residents, by contrast, only pay Colombian personal taxes on the income they earn in the country.
Capital Gains, Exemptions & Other Considerations
Colombia imposes capital gains taxes on real estate sales, gifts and inheritance, but the sale of stock shares is exempt. Also exempt from personal taxes are contributions to a pension fund, and 25% of all income derived from labor.
Finally, Colombia imposes a 4% personal tax for health contributions and a 3.875% tax for pension. Both of these social security taxes are on the percentage of an individual’s salary.
Colombia Corporate Taxes
Here’s everything you need to know about corporate taxes in Colombia:
Who is Taxed?
Under Colombian law, a corporation is considered a resident if it was organized under law of the country, or if its main home is Colombia. Resident companies are taxed on income they generate worldwide.
Just like personal taxes, foreign companies (and branches/entities of foreign companies) only pay corporate taxes on the income they generate within Colombia.
What is the Tax Rate?
In 2021, Colombia’s statutory corporate income tax (CIT) rate is 31%. This rate will decrease to 30% in 2022. While this may seem high, Colombia does offer tax incentives and deductions for certain businesses and business activities (see notes below).
This rate is on the higher end compared to the rest of the world, with Colombia just outside the top 20 countries with the highest CIT rate in the world. Compared to the rest of South America, Colombia is 3.5 percentage points higher than the average. The average corporate tax rate for all of South America in 2020 was 27.54%.
What is Taxable Income?
Colombia’s corporate tax law defines taxable income as gross income minus any discounts, rebates, returns, ordinary costs that are incurred to obtain the net income, as well as any allowable deduction.
Tax Incentives & Deductions
Colombia offers corporate tax incentives to businesses, including a 15% rate for businesses that operate in a special free trade zone regime. The country also gives a 40% tax deduction for investments businesses make in fixed assets. They also give corporate tax deductions for investments in science and the environment.
Colombia VAT Taxes
Value-added taxes, better known as VAT taxes, are a common form of consumption tax. The value-added portion is the difference between a business’ sales and its cost of purchasing services or goods from another business. Here’s what you need to know about VAT taxes in Colombia:
Who is Taxed?
In Colombia, a VAT tax is levied on services and goods by an individual considered taxable within Colombia. VAT taxes are also levied on goods being imported into Colombia by any individual. Exports are not subject to a VAT tax.
What is the Tax Rate?
Colombia charges a standard VAT tax rate of 19%. This is one of the highest rates in Latin America. That said, there are many goods and services that are subject to a huge discount on the VAT rate (reduced to only 5%) or exempt altogether.
Goods that are subject to a reduced 5% VAT tax include:
- Some new real estate sales
- Cleaning
- Hybrid and electric vehicles
- Timber
- Agricultural supplies
- Agricultural and medical insurance
- Cotton
- Coffee
- Some foodstuffs
In addition to exports, goods that are completely exempt from Colombian VAT tax include:
- Some tourism packages sold to foreign visitors
- Meat
- Livestock
- Some foodstuffs
- Some magazines and books
- Some police and military equipment
- Any sale in a free trade zone
Is Colombia Right for Your Business?
SERVIAP is a leading Professional Employer Organization (PEO) ready to help your business expand operations throughout the Western Hemisphere. PEO is a model of co-employment, where we assume total responsibility for your talent, allowing you to focus on the strategic activities of your organization. Contact us today to learn more about how you can expand your business in Colombia.
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