Tax Rules for Americans Living in Colombia
A lot of American citizens and green card holders decide to work or do business in Colombia and become residents for any period of time. In such scenarios, it is good for taxpayers to keep up to date with any emerging tax laws and reforms to avoid unpleasant surprises and unexpected costs and fines.
In December 2014 Colombia introduced a tax reform, which will apply for 4 years until 2018 and affects the personal wealth of fiscal and non-fiscal residents in the country. But before we go into any further details, let us clarify some specifics of the Colombian tax system.
What is a fiscal resident?
Fiscal residents can be Colombian nationals or foreigners who have lived and worked in the country for any 6 months during a calendar year. They are taxed on both their worldwide and Colombia-sourced income and need to report equity owned locally and abroad.
Non-fiscal residents can be Colombian nationals who don’t spend the bigger part of a calendar year in the country or foreigners who are living and work in Colombian territory for less than 6 months. They pay taxes only on the income they’ve received from work or business activities in the country and are not required to report foreign-owned equity.
What type of income is taxed in Colombia and how?
While not all types of income are taxed in Colombia, there are strict rules on those, upon which, the tax is imposed.
Employment and pension income
All the money that an individual earns from work, performed in Colombia is considered employment income, regardless of the money is received outside of the country. Colombia has tax units system, which determines the rates at which you pay taxes, based on your income. For annual income up to 1,090 UVT ($31,859 = UVT 1,090) you owe 0% in taxes. If your income fall in the bracket UVT 1,091 – 1,700, the tax rate is 19%; UVT 1,701 – 4,100 – 28%; and above UVT 4,100 – 33%.
The tax brackets in UVTs are divided as follows:
- Up to UVT 1,090 – 0%
- UVT 1,091 – 1,700 – 19%
- UVT1,701 – 4,100 – 28%
- UVT over 4,100 – 33%
Pension income can be made up by money received from retirement, disability, pension substitute compensation, pension plan refunds or labor risks. This type of income is also taxed, but only if exceeds the amount of $111,176 or UVT 3,800.
To be considered a resident for tax purposes in Colombia, an individual has to be present in the country for 6 months of a calendar year and they don’t have to be consecutive. Residents pay taxes on their worldwide income, while nonresidents are only taxed on their income sourced in Colombia. As a resident employee in the country, you may not be required to file a return because your employer will deduct the due taxes. However, if you are self-employed or receive income from any other sources, including capital gains, you are obliged to complete your annual tax return. On the upside, pension contributions are not taxed and every 25% of the income of any labor is exempt. Foreign pensions received if not over 1,090 UVTs, they are not taxable.
Colombia also provides deductions and allowances on education and healthcare costs, as well as the purchase of a residence, inclusive of a related interest. An important detail is that health allowances are only available to employees earning less than roughly $32,000 and the deductible mortgage interest is limited to a little over $8,000.
There are other taxes that apply to individuals in Colombia, such as capital acquisitions tax, which is capital gains from inheritance or gifts and is treated as ordinary income. Additionally, any real estate that you own will be a subject to municipal tax, which has different rates, depending on the value of the property. Net wealth is also taxed, usually at 3% of the individual’s net worth in the previous year, but some assets can be excluded, such as residential property under a certain value and shares in a Colombian company. Please note that if your assets round up to more than 3 billion COP ($1.6 million), you will have to pay assets tax at 1.2% as well. Employees will have to be prepared to remove 3.875% of their salary for pension contributions and 4% for healthcare as part of the social security tax. However, there are no Capital Duty and Stamp Duty taxes in Colombia.
You certainly do not want to be late with your tax returns and payment of your due taxes. Penalties for late filing are up to 5% per month of delay and withholding of 100% of the taxes you owe. If you have been summoned by the tax authorities for late filing, the penalty increases to 10% and 200% withholding of the due taxes.
Non-employment and capital income
Capital income includes all earnings from interests, royalties, financial, rental or intellectual property income. Any other income that does not fall in any of the above categories is considered non-employment income. Both types are taxable at different rates, based on their amount and in accordance with the UVT system, as follows:
- Up to UVT 600 – 0%
- UVT 601 – 1,000 – 10%
- UVT 1,001 – 2,000 – 20%
- UVT 2,001 – 3,000 – 30%
- UVT 3,001 – 4,000 – 33%
- Over UVT 4,000 – 35%
Usually, dividends are taxed at a corporate level and in such a case, an individual will have to pay additional taxes on one of the below rates:
- Up to UVT 600 – 0%
- UVT 601 – 1,000 – 5%
- Over UVT 1,000 – 10%
However, if dividends have not been a subject to corporate-level taxation, an individual is taxed at 35% flat rate, which may result in further taxes on the gross income.
What is the tax reform all about?
The tax reform passed by the Colombian Congress in 2014 introduces a brand new wealth tax for the years from 2015 to 2018 (inclusive), which applies for fiscal and non-fiscal residents, whose net worth exceeds COP 1 billion (approx. $420,000) at the beginning of each calendar year (January 1st).
This is important because although both tax and non-tax residents will be subject to the tax if their personal wealth is above the given figure, non-fiscal residents will only be taxed on their assets in Colombia. Foreign individuals who have lived in the country for a period shorter than 5 years do not need to include their assets owned abroad.
Furthermore, in international organizations, where employees are often assigned to work on projects abroad, in this case, Colombia, the managers will have the right to decide whether they will reimburse the assignee through company’s tax policies and schemes if they become a subject to the personal wealth tax. In some cases, the organization may not be willing to refund those taxes to the employee so they will have to cover the tax they are liable for themselves.
The taxable base for any taxpayer in Colombia is made up by their net worth, excluding the value of their home (a cap of $135,000 applies) and the effective equity value of stocks owned in Colombian entities. As mentioned above, foreign taxpayers who have lived in the country for less than 5 years can exclude their foreign-owned wealth from the taxable base.
The personal wealth tax rates are progressive from 0.125% to 1.5%.
- Taxable base up to COP 2 billion – 0.125%
- COP 2 billion to COP 3 billion – 0.35%
- COP 3 billion to COP 5 billion – 0.75%
- Over COP 5 billion – 1.5%
Taxpayers are required to pay the first installment of the due tax between May and June of the fiscal year. The exact deadline depends on the last two digits of the taxpayer’s identity number (TIN). The second installment needs to be paid in September the same year.
If you are one of the Americans affected by this tax reform in Colombia, it may find it useful to contact a professional tax adviser or CPA. They will be able to discuss the process of filing the wealth tax return in more detail and let you know if there are any further options for minimizing the tax you owe. Such a smart investment can save you a lot of trouble for wrong or late filing, including penalty charges.
Colombia Tax Rate for Corporations
The corporate tax rules are similar to those for individuals. For example, the tax rate is, again, 33% and resident companies are taxed on their worldwide income, while foreign corporations and their branches, only on the income sourced in the country. An organization may be considered resident if it has been formed under the Colombian law or has made the country its main domicile.
Of course, there are many specific tax rules and details that only apply to corporations. The taxable income of a business entity is made up of the gross income, deducting, returns, rebates, discounts, ordinary costs and allowed deductions. Costs that are “necessary and proportionate to the activities performed” can also be deducted. Any dividends, earned a profit that has not been taxed on a corporate level are subject to 33% dividends tax. Capital gains tax is applied on gains from a sale of a property that has been held for 2 or more years. In any other scenario, capital gains are treated as ordinary income. If you have made losses, you can carry them forward without limitation.
The Alternative minimum tax for corporations is similar to the net wealth tax for an individual. It is also taxed at 3% of the taxpayer’s net worth for the previous year and some assets are not included in the calculation.
The Foreign tax credit is available to resident corporate taxpayers who paid foreign tax on a foreign-sourced income if the amount of foreign tax is not higher than what they would have paid in Colombia.
Withholding taxes apply in several situations:
- Interests – Any interests paid to nonresidents are subject to final withholding tax of 33%. There are a few exemptions, which include, but are not limited to credits to finance or pre-finance exports; credit for trade transactions obtained through financial corporations or authorized banks; short-term import credits and overdrafts.
- Royalties – Payments made to non-resident companies are taxed with 33% withholding tax. In the case where royalties are derived from exploiting a software, they are still subject to 33% withholding tax but only on 80% of the amount.
- Dividends – Dividends that have not been taxed on a corporate level are a subject to 33% withholding tax.
Other taxes also apply to corporations in Colombia. For instance, an employer has to contribute a total of 9% of their payroll in the payroll tax, which is broken down as follows:
- 4% of family subsidy
- 3% of the Institute of Family Welfare
- 2% of the National Apprenticeship Service.
These contributions can be reduced for corporations that provide their own training.
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Social security tax is also divided into 3 types of contributions:
- 8.5% of salary to health insurance
- 11.625% to general pension scheme
- A variable percentage of work-related accident insurance
Real estate owned by a corporation is taxed on a variable tax rate in municipal tax, determined by a band between 1 to 16 per thousand, based on the value of the property. An Industry and Trade Tax from 0.2% to 1% is added for carrying out commercial, industrial and service activities within the territory of the municipality.
There’s also a registration tax, which can vary from:
- 0.3% to 0.7% for registering documents with the Chambers of Commerce, or
- 0.5% to 1% for registering with the Registry of Public Deeds.
Last, but not least, a 0.4% financial transaction tax applies to withdrawals from checking and savings accounts, including those with the Central Bank.
The corporate tax returns are done via self-assessment system and must be completed within the deadline (usually April-May). The penalties for late filing are the same as for individual tax returns, but there’s also a penalty for amendments, which is 10% of the additional tax per month.
Colombia VAT Rates
The standard VAT rate in Colombia is 16%. It applies to goods and services supplied by a taxpayer within the country, as well as, on imported goods, brought to Colombia by anyone. There is no VAT on export.
Some businesses benefit from lower VAT rates, such as commercial air transport (10%) and specific food items (7%).
Other product providers are taxed at higher VAT rates of 20% to 25%, for example, wine and alcoholic drinks, pleasure boats and some vehicles.
Financial leases, utilities, healthcare, house lease and insurance are not subject to VAT in Colombia.
For an American expat in Colombia, it is important to know the peculiarities of the local tax system. Although with enough research you may be able to complete your annual tax return successfully, we recommend turning to a professional to help you with the job and maximize the savings you could generate on your due taxes.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.