A complex tax filing system, the number of taxes imposed on business entities in Colombia and the difficulties in navigating the tax authority’s – DIAN – regulation, are some of the reasons why Colombia has a very high number of informal businesses who prefer to work outside the system and face eventual fines than becoming law-abiding companies.
The new Simplified Tax Regime (STR)
Law 1943 of 2018, called the “Financing Law” is the latest tax reform introduced by the government to obtain funds to implement, among others, the peace process and to cover the important economic gap left by the previous government. Law 1943 of 2018 entered into force on January 1, 2019.
The vast majority of businesses that currently support the Colombian economy are small and medium companies. Many of them do business informally without complying with local tax regulation. For instance, transactions are carried out without an invoice, in cash, without the use of the financial system and without any reporting to State agencies.
As an effort to attract such companies towards legal compliance, the Financing Law introduced a new legal figure under the name of “simplified tax regime”. The STR is an optional alternative for companies, which mainly consists of substituting the income tax and consolidating the consumption tax, the value added tax (VAT) and the industry and commerce tax. The STR is currently regulated under articles 903 to 916 of the Colombian tax statute.
Even though this new scheme is optional, DIAN may include in it taxpayers who have not complied with their fiscal obligations either at district, municipal or national level.
The following are the main benefits deriving from the simplified tax regime:
- Integrating up to six (6) taxes in one sole annual tax filing (income, capital gain, industry and commerce, consumption, firefighters’ contribution, notices and boards tax);
- Self-registration with DIAN in order to obtain the tax identification number;
- Electronic calculation and online payment of taxes;
- Improving taxpayers’ cashflow as they will not be subject to any withholding nor required to withhold; This with the exception of labor-related withholding which shall continue to apply.
- Taxpayers under the STR must continue paying all social security contributions regarding pensions but are exempted from health contributions and fringe benefits’ payments regarding SENA and ICBF.
Requirements to opt for the Simplified Tax Regime in Colombia
Individuals developing their economic activities with entrepreneurial criteria and business entities may opt for registration under the simplified tax regime, provided they meet the following criteria:
- Having obtained during the previous fiscal year gross income, ordinary or extraordinary, lower than 80,000 tax value units (from its Spanish wording: UVT – unidad de valor tributario). For year 2019, 80,000 tax value units correspond to COP2,741,600,000 (approx. USD856,750). Note that tax value units are adjusted on an annual basis and therefore this amount will change in each new fiscal year starting January 1st.
- To qualify for the Simplified Tax Regime for year 2019, applications must be filed no later than July 31, 2019. As from year 2020, applications may only be filed between January 1 and January 31st of each fiscal year.
- For registration purposes, taxpayers under the STR must choose responsibility No. 47 before DIAN, both if they register for the first time and when they update their registration.
Other requirements and restrictions
If any of the shareholders of a company applying for the STR has one or more companies or participates in one or more companies already registered under the STR, the maximum income limits shall be reviewed in a consolidated manner and according to their participation.
If any of the shareholders of a company applying for the STR is manager or administrator of any other company, the maximum income limits shall be reviewed in a consolidated manner with all the companies managed by that person.
The STR applicant must be up-to-date with all its national, state and municipal fiscal obligations, as well as with all social security system contributions. To determine whether all obligations are up-to-date, one can go online to the DIAN’s web page where there is an option to download a statement of account with all pending obligations.
The simplified tax regime applicant must be also registered with DIAN thus having a tax id number – from the Spanish wording Registro Único Tributario – RUT – including all electronic mechanisms to comply with online filings and electronic invoicing obligations.
For this purpose, it is important to note that not only the entity itself must have a tax id number but also its administrators. When administrators are not Colombian citizens or are not domiciled in Colombia, their tax registration will be limited to the responsibility of making online tax filings on behalf of the corresponding company.
Who may not opt for the Simplified Tax Regime?
The following may not opt for the simplified tax regime:
- Foreign business entities or their permanent establishments;
- Individuals or permanent establishments without residence in Colombia.
- Companies the shareholders or administrators of which have a material labor relationship with the contractor, as they refer to personal services regularly rendered under subordination.
- Entities that are affiliates, subsidiaries, agencies or branches of non-domiciled national or foreign business entities.
- Companies that are shareholders, participants, trustees or beneficiaries of other companies or business entities in Colombia or abroad.
- Companies incorporated as financial entities.
- Companies resulting from a business spin-off occurring within 5 years prior to the simplified tax regime application date.
- Individuals or companies performing the following activities may not opt for the simplified tax regime:
- Asset administration;
- Financial advisory services;
- Electricity generation, transmission, distribution or trading;
- Automobile manufacturing, import or trading;
- Fuel import;
- Machine gun, ammunition, gunpowder, explosives or detonators’ production or trading.
Individuals and entities interested in opting for the Simplified Tax Regime must carefully examine whether the regime is convenient for their specific situation. This considering that taxpayers under the STR will have to pay taxes on the basis of their gross income, without considering any costs or deductions.
We hope you find this post interesting. If you have more questions about Taxes in Colombia, don’t hesitate to contact us.