Entities Liable for Corporate Income Taxes

All types of companies (such as joint stock corporations, limited liability companies, de facto companies, foundations, cooperatives, nonprofit companies, industrial and commercial state companies, and mixed economy companies) are subject to corporate income tax.

The Tax Code exempts from corporate income tax some entities, such as some charitable hospitals and institutions, the districts, the municipalities, the metropolitan areas, and the superintendencies. In addition, public entities or mixed economy companies that provide public utility services in the areas of water and sewage treatment and domestic electric energy are exempt from corporate income tax for seven years starting in 1995. Public entities or mixed economy companies that generate electricity, provide domestic natural gas services, or provide local telephone or mobile rural telephone services are exempt from corporate income tax for eight years starting in 1995

Residence and Nonresidence

Whether the taxpayer is a business entity established in Colombia or a branch belonging to a foreign entity, its Colombian-source income and capital gains are subject to corporate income tax. Revenues received from abroad by resident companies are also subject to Colombian income tax. Such revenues are not subject to tax in the case of nonresidents.

Resident companies are those incorporated under the laws of Colombia. Nonresident companies are entities incorporated under the laws of a foreign country with their principal place of administration outside Colombia.

Colombian-source income, under Colombian tax law, is income derived from the exploitation of tangible and intangible property within Colombia, from permanent or temporary services performed in the country, or from the sale of title to tangible or intangible property located in Colombia at the time of sale.

Taxable Income

Taxable income is ordinary and extraordinary income, obtained during the year or taxable period and not expressly exempted by the law, that, at the moment of realization, produces a net increase in a company's net wealth. The starting point for determining a company's taxable income is its gross receipts. Gross receipts are reduced by devolutions, rebates, and discounts to arrive at net receipts. From net receipts, costs related to such receipts must be subtracted to arrive at gross income. To obtain the taxable income, deductions and exemptions expressly allowed by the Tax Code must be subtracted from gross income. If, however, a company's declared net income is less than the higher of 1.5% of its gross wealth or 5% of its net wealth, its taxable income is deemed to be equal to this percentage of its net wealth.

For tax purposes, income is obtained when the right to receive the payment arises.

Exempt Income

The following activities are not considered income-generating activities in Colombia:

Credits obtained abroad that are not possessed in Colombia, as follows:

  • Short-term credits stemming from the importation of merchandise and bank overdrafts
  • Credits to be used in the financing or prefinancing of exports
  • Credits obtained abroad by financial institutions and banks established under Colombian law
  • Credits for international commercial operations realized through financial institutions and banks established under Colombian law
  • Credits obtained abroad by Colombian, foreign, or mixed companies incorporated under Colombian law whose activities are considered to be in Colombia's economic and social development interests

Income derived from technical repair and maintenance services of equipment performed abroad.

Income derived from leasing contracts (agreed upon directly or through leasing companies) with foreign entities not domiciled in Colombia to finance investments in equipment and machinery related to export activities or activities promoting Colombia's economic and social development.

The bonus generated from a stock offering if computed as a capital surplus not susceptible to distribution as a dividend.

The portion of profits obtained through the sale of shares or quotas that corresponds to the partner's or shareholder's interest, in terms of the company's retained profits triggered as of the date of the stock's acquisition or disposition.

Dividends or participations distributed by resident companies to resident companies or individuals.

Payments made in the acquisition of technical services or assistance performed by non-Colombian residents or by domiciliaries from abroad. (In addition, these payments are not subject to Colombian remittance tax.)

Activities performed by legal entities within free trade industrial zones.

Other income as determined by the law.

Inventory Valuation

Inventories are valued according to generally accepted accounting methods (see "Inventory Valuation" at 7.03). The tax authorities may authorize the use of the periodic inventory method, depending on the company's specific circumstances. With the introduction of inflation accounting in 1992, the value of year-end inventory must reflect increases in the Consumer Price Index (see 9.06). A taxpayer required to file a tax return signed by a statutory auditor or a certified public accountant is obligated to appraise the cost of inventories by using the perpetual inventory method.

Dividend Income

Double taxation of profits that are later distributed as dividends to shareholders (or quotaholders) does not exist in Colombia. Dividends received by one Colombian company from another must be included in the recipient company's taxable income if they were paid out of untaxed profits. If the dividends are paid out of profits that have borne corporate income tax, they are not subject to corporate income tax or withholding tax in the shareholder's hands. This rule also applies to stock dividends, except that stock dividends representing the capitalization of inflationary profits are not subject to tax.

Foreign-Source Income

Foreign-source income is included in a Colombian company's taxable income before any foreign withholding tax is deducted, but a credit is allowed for foreign income tax paid. The credit is limited to the amount of corporate income tax chargeable on that income in Colombia. This is an overall limit as opposed to a country-by-country or per source limit. No credit is available for foreign corporate income tax borne on the profits out of which dividends are paid (underlying tax).

In addition to these provisions, tax law permits companies that receive dividends and that are domiciled in countries that are a party to integration treaties with Colombia to use a tax credit.

This tax credit is equivalent to the result of multiplying the amount of the dividends by the income tax rate at which the earnings of the issuing company are taxed. If the dividends were taxed in the country of origin, the tax credit is increased by the amount of the tax. The tax credit may not exceed the amount of the income tax generated in Colombia by such dividends.

Income derived from the other countries belonging to the Andean Pact (Bolivia, Ecuador, Peru, and Venezuela) is exempt from Colombian tax.

Capital Gains

For entities that are subject to inflation accounting (basically all entities), profits or losses on the sale of capital assets are computed and taxed or relieved, respectively, in the same way as ordinary income and losses. Taxpayers not subject to inflation accounting may not set off capital losses against operating profits, nor may they set off operating losses against capital profits, although capital profits are taxed at the same rate as ordinary income. Cost may be adjusted for inflation in computing losses.

Exchange Differences

Exchange differences arise when a Colombian company has foreign currency-denominated transactions. Such transactions are recorded at the average market rate prevailing on the date of the transaction. At the year-end, assets and liabilities collectible and payable, respectively, in foreign currency are translated at the market exchange rate published by the government for the year-end. Exchange gains and losses arising from the application of these rules are generally taxable and deductible, respectively, whether realized or unrealized, including losses on loans for the acquisition of fixed assets.

Foreign exchange adjustments affect the financial statements: foreign exchange adjustments at the end of the year, made according to the market rate, may result in an increase or a decrease in the taxpayer's liabilities or assets.

Allowable Deductions

As a rule, costs and expenses incurred are deductible from corporate income tax if they are necessary for generating taxable income and comply with tax law requirements. Provisions and estimates not specifically identified with actual disbursements and losses, however, may be disallowed. Also, when payments are made abroad so as to produce taxable income in Colombia, deductions for these payments are limited, as described below under "Expenses Paid Abroad."

Depreciation

Depreciation of tangible fixed assets, using the straight-line method, the declining-balance method, or any other method of recognized technical value previously approved by the Tax and Customs Administration, is deductible for tax purposes. Depreciation is calculated on the cost of the asset as adjusted for inflation.

The minimum useful life of an asset is defined by the tax law in fixed terms: buildings and oil pipes have useful lives of twenty years; trains, aircraft, ships, machinery, and equipment have useful lives of ten years; and automobiles and computers have useful lives of five years.

If machinery and equipment are used for more than an eight-hour shift, the basic depreciation rate may be increased by 25% for each additional eight-hour shift worked. A company may also apply for a ruling to depreciate assets over shorter useful lives than those normally accepted as the minimum.

Amortization of Expenses

Amortization of expenses necessary for development and organization is deductible. As a rule, the expenses may be amortized over a term of not fewer than five years; however, a shorter term is allowed if it is proven that, due to the nature of the business, amortization should be made in less time.

Expenses necessary for ordinary business purposes may also be amortized for not fewer than five years, unless the duration or nature of the business is such that the amortization must be made in less time. During the tax year or applicable period in which the business activity may be completed, pertinent adjustments may be made to complete amortization.

For mining or oil and gas acquisition or development costs, amortization should be made on the basis of the technical units of operation. When exploration results are not positive, the total cost incurred by the operations may be amortized during the year in which this determination is made.

Interest

Interest in Colombia is the difference resulting from subtracting the initial capital from the final cost. The rules for interest deductions differ depending on whether the interest is paid on a foreign loan or on a local loan and whether the local loan was granted by a financial institution.

Interest on foreign loans is considered to be foreign-source income and is fully deductible. Furthermore, it is not subject to withholding in Colombia. A foreign loan may be granted only by an institution that is recognized as a financial service institution under the lending institution's country's law.

The same treatment applies to local loans granted by financial institutions. However, if the local loan is not granted by a financial institution, it is subject to a 7% withholding tax (see 12.02). The deduction for interest paid to a local lender that is not a financial institution is deductible only up to the maximum rate determined by the market. All interest paid that exceeds the 7% rate is not deductible.

Taxes

The payment during the year or tax period of the industry and commerce tax, registration tax, and stamp tax is deductible.

Expenses Paid Abroad

A taxpayer is allowed to deduct expenses paid abroad if certain requirements are met. The expenses must have a direct relation with the activity developed to acquire taxable income. In addition, withholding tax must be applied if the amounts paid abroad constitute Colombian-source income, except for payments in favor of foreign intermediaries for the acquisition of goods, merchandise, and any kind of property. Payments in favor of foreign intermediaries must not exceed the total fixed amount established by the Ministry of Finance for this type of operation.

Interest paid on foreign short-term loans and overdrafts granted on imports and exports of merchandise are exempt from withholding tax. These payments are deductible if they do not exceed the percentage established by the central bank for each loan or overdraft.

Deductions on expenses paid abroad may not exceed 15% of taxable income, determined before subtracting costs and deductions incurred abroad. This rule does not apply to payments, such as those for the acquisition of any type of material goods or for legal obligations, that are subject to withholding.

Branches, subsidiaries, or agencies of foreign companies duly established in Colombia may deduct payments made directly or indirectly to their home offices for management services or for the exploitation or acquisition of any type of intangible property. These payments are subject to withholding and remittance taxes (see Chapter 12).

Difficult and Doubtful Accounts

Reasonable sums considered by the company as difficult or doubtful debts may be deducted if they are linked to income-related activities and if they are considered past due accounts. Debts owed by companies of the same group or by partners or shareholders of the company are not considered difficult or doubtful debts.

The same treatment has been established for debts that cannot be collected because of a debtor's bankruptcy.

Directors' Fees and Management Remuneration

Directors' fees and management remuneration are deductible, provided that income tax has been withheld as required by law.

Special Deductions

Investments in scientific and technological investigations or in environmental protection are fully deductible in the taxable period in which they were made. These deductions cannot exceed 20% of the taxable income determined by the taxpayer before subtracting the invested amount.

Treatment of Tax Losses

A company may carry forward a tax loss for setoff against its taxable income arising in the five years following that in which the loss was sustained. No carryback of losses is permitted. In a merger, the continuing company may carry forward the unrelieved losses of the merging companies for the unexpired portion (if any) of the original carryforward period.

Corporate Income Tax Rates

Corporate income tax is levied at a 35% rate on taxable income of both resident and nonresident companies. In addition, a 7% withholding tax applies to profits remitted abroad, as described in Chapter 12.

Monetary Correction

In tax year 1992, a system of inflation accounting was introduced that affects taxable income of nearly all entities. Under the system, the value of nonmonetary assets (that is, fixed assets, deferred assets, inventories, and so on) is multiplied by the percentage of adjustment for the fiscal year (porcentaje de ajuste del aØo gravable-PAAG). This value is calculated according to the increase registered by the Consumer Price Index (Indice de Precios al Consumidor), published monthly by the National Department of Statistics. The adjusted value of the nonmonetary assets is recorded as a credit in the monetary correction account and as a debit in the nonmonetary asset account.

Nonmonetary liabilities (that is, payable accounts represented by commodities or tangibles or liabilities in foreign currency, in units of constant acquisition power-UPACs-or subject to adjustment clauses) are adjusted by the PAAG, the devaluation index, or the UPAC index. The adjusted value of the nonmonetary liabilities obtained is registered as a debit in the monetary correction account and as a credit to the nonmonetary liabilities.

The net wealth of the company (capital, compulsory reserves, and retained earnings) at the beginning of each month must be adjusted using the PAAG. The value of the adjustment is registered as a debit to the monetary correction account and as a credit to the net wealth revaluation account.

If the monetary correction account registers a credit balance (occurring when the value of nonmonetary assets is greater than the value of nonmonetary liabilities and net wealth), this credit balance is considered a profit for accounting purposes. This profit is also recognized for tax purposes and will increase the taxpayer's ultimate tax liability. But if the monetary correction account registers a debit balance (occurring when the value of nonmonetary liabilities and net worth is greater than the value of nonmonetary assets), the debit balance is a deductible expense.

This outcome decreases the final income tax due, the net profit, and the dividends paid to shareholders.

Groups of Companies

In Colombia, special business forms, such as consortia and temporary unions, exist for groups of companies to perform common projects and ventures. Colombian administrative law contemplates these forms, and they are most appropriate for contracting with the state. These forms can also be used for private purposes (see also 6.07). As of the last tax reform, consortia and temporary unions are not taxpayers in Colombia. Members of consortia and temporary unions are taxed according to their participation. They are also taxed on income from tasks for which they are responsible.

For Colombian tax purposes, member companies in groups are taxed individually, according to their independent results. Members must individually declare and pay their income tax. Member losses may not be shared or transferred to other members.

Profits arising from the transfer of assets between companies in a group are taxable. Intercompany transfers are exempt, however, in the cases of mergers, consolidations, and disintegrations (see 9.09).

If transaction prices among members differ from prices commonly established by unrelated parties, the tax authorities may challenge those prices.

Taxation of Branches and Subsidiaries Compared

A branch in Colombia of a foreign company is taxed in basically the same way as a subsidiary company organized under Colombian law, and the same tax rate applies. Branch profit remittances are subject to a remittance tax whose rate is the same as the withholding tax rate levied on dividends distributed by a subsidiary to its foreign parent. The business profits of a branch, however, are presumed to have been remitted for the purposes of remittance tax unless they are capitalized or reinvested; there is no equivalent presumption that the profits of a subsidiary have been distributed as dividends. Moreover, a branch is taxed only on Colombian-source income, while a Colombian company is taxed on its worldwide income.

If branch profits are capitalized or reinvested in Colombia for five years, they can then be remitted without the remittance tax applying. Dividends payable to a foreign parent company (or other nonresident shareholder) are exempt from dividend withholding tax if they are capitalized; that is, they are stock dividends, and the shareholder retains the stock (or reinvests the sales proceeds in Colombia) for at least five years.

Foreign contractors that bid to carry out a project in Colombia should consider carrying it out through a branch. If they use a branch, they may be able to claim a deduction for expenses incurred instead of being subject to withholding tax on gross payments received without an expense deduction.

A branch of a foreign company cannot be converted into a subsidiary under Colombian law; therefore, unrelieved losses of a branch cannot be transferred to a subsidiary and carried forward by the subsidiary for setoff against its own profits. If a branch is liquidated and its assets are transferred to a subsidiary, corporate income tax is payable on any capital gains arising, and sales tax is chargeable according to the normal rules.

Tax Aspects of Corporate Reorganizations

The Tax Code provides special legal treatment for merger and split-off processes performed by Colombian companies.

In the case of a merger, no asset acquisition is considered to take place between companies. Furthermore, the merger itself is not subject to taxation. Once the merger has been completed, the new company must pay any income and withholding taxes, interest, and other obligations incurred by the acquired company before the merger.

The split-off, according to the Commercial Code, may be performed two ways. The company may divide itself for the purpose of creating one or more new companies, or the company may divide itself for the purpose of transferring a part of its net wealth to another company, known as the beneficiary. In both cases, tax liability does not arise during the split-off, as an acquisition does not occur.

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.

For further information contact Mario Andrade, Deloitte & Touche, Santafe de Bogota, Colombia on Tel: +57 1 256 1548, Fax: +57 1 256 1557