Preferential Tax Regimes
Through Decree 1357 of October 2021, the Colombian government regulates the criteria applicable for the purpose of identifying preferential tax regimes.
New subjects of the Transfer Pricing Regime
Through Decree 1357 of October 2021, the Colombian government regulates the criteria applicable for the purpose of identifying preferential tax regimes. The implications of determining that a person, company, or entity is a resident, is located or operates in a preferential tax regime are as follows:
- On payments of Colombian source made to the preferential tax regime, an income withholding shall be made at a rate equal to the corporate rate, except for any reduction applicable by virtue of the application of an agreement to avoid double taxation.
- Transactions carried out under preferential tax regimes are transactions subject to the transfer pricing regime, regardless of the fact that the counterparty in the transaction does not correspond to an economic related party. Therefore, such operations will be subject to compliance with the formal transfer pricing duties (informative declaration and local report). Likewise, in case the counterparty corresponds to an economic related party in a preferential tax regime, they must comply with additional documentation requirements such as providing the detail of the functions performed, assets employed, and risks assumed and the total costs and expenses incurred by the person or company located, resident or domiciled in the preferential tax regime, in the performance of the activities carried out for the execution of the operation.
Otherwise, such payments may not be considered deductible for income tax purposes. Likewise, the taxpayer will be subject to the applicable penalties for noncompliance associated with the formal transfer pricing duties established in article 260-11 of the Tax Statute.
Unlike the criteria applicable for the identification of jurisdictions of low or no taxation (tax havens) established in 2014 in which a list of 37 jurisdictions is identified. In the case of the identification of preferential tax regimes, the national government establishes a series of criteria to be evaluated both by the taxpayers of income tax and its complementary taxes, as well as by the Tax Administration, which are detailed below:
Criteria | Concept |
No tax rates or "low" nominal income tax rates compared to those that would apply in Colombia for similar transactions. | Non-existence of tax rates is to be understood as the fact that the taxable income tax base is not subject to a percentage rate or absolute value to calculate the income tax or when, in spite of the existence of a tax rate, the income tax is non-existent. Likewise, a "low nominal income tax rate" is defined when the nominal rate on this tax, or on an analogous one, is less than sixty percent (60%) of the net tax that would have been applied in Colombia to such income for the year in which the operation is carried out. |
Lack of effective information exchange or the existence of legal norms or administrative practices that limit it; | It is understood that this circumstance occurs when the jurisdiction does not keep at its disposal or does not effectively deliver to the DIAN the information on the structures or beneficial owners, or does not spontaneously send to Colombia the administrative decisions taken in relation to the specific taxpayers and beneficial owners that make use of the regime. |
Lack of transparency at the legal, regulatory or administrative level | Lack of transparency at the legal, regulatory or administrative operational level is understood as: i) the fact that the characteristics of the regime are not defined, are determined in an imprecise manner or the information necessary to understand its operation is not provided, ii) the design and administration of the regime is not properly supervised by a regulatory or supervisory body, and iii) the regime is not subject to the financial disclosure obligations in force in the corresponding jurisdiction. |
Absence of the requirement of a substantive local presence, of the exercise of a real activity with economic substance. | The non-existence of the requirement of a substantive local presence, of the exercise of a real activity with economic substance, is understood as when the corresponding regime: i) does not require a substantive local presence for the exercise or development of the activity, does not require that the activities to be developed have economic substance to access the legal regime applicable in the respective jurisdiction, or iii) to access the regime there are no requirements of substance that are related to the activity that gives rise to the income. |
Corresponding to a regime to which only the following may have access persons or entities considered as non-residents of the jurisdiction in which the corresponding preferential tax regime operates ("ring fencing"). | This occurs when the legal regime applicable in the respective jurisdiction, implicitly or explicitly, excludes taxpayers from the taxpayers resident in its jurisdiction from accessing this or an entity that benefits from the legal regime applicable in the respective jurisdiction is prohibited, explicitly or implicitly, from operating in local commerce in that jurisdiction. |
Both the Tax Administration and the taxpayers shall apply such criteria to the list of preferential tax regimes established by the forum of harmful tax practices of the Organization for Economic Cooperation and Development - OECD, so that if two or more of the above criteria are met, it shall be considered as a preferential tax regime for income tax and complementary tax purposes.
The fact that there is no list establishing the preferential tax regimes to be considered for the application of the provisions of article 260-7 of the Tax Statute (transfer pricing regime) and article 408 (foreign payment regime), On the contrary, if the taxpayer and the Tax Administration are responsible for analyzing the compliance with the criteria and determining a specific preferential tax regime, this will result in differences in the interpretation of the applicability of the criteria and additional efforts in the development of analyses that allow supporting and accrediting the characterization granted for each of the cases. This implies that the application of such regulations entails a significant risk of audits due to interpretative differences.
Should you require further information or need a specific analysis for your company or operation, please do not hesitate to contact us at the e-mail addresses below.
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