Training on the 2010 Economic Growth Law

On December 27, the Tax Reform or “Growth Law” Law 2010 of 2019 was sanctioned.

Through this, the Executive seeks to ratify and fulfill the objectives and commitments that were promoted in Law 1943 of 2018 or “Financing Law” adding, together with the legislature, new fiscal measures in light of the current situation of the country.

Below, we present the main changes introduced by the Growth Law compared to its predecessor, the “Financing Law”:

1. Income tax

1. Legal entities

• General rate: The law maintains the value promise regarding the progressive reduction of the general rate, taking it to 32% for the tax year 2020, 31% for the tax year 2021 and 30% from the tax year 2022 onwards.

Despite the precedent of unconstitutionality, the income tax rates for "Financial Institutions" will be 36% for 2020, 34% for 2021, and 33% for 2022. This includes the obligation to generate an advance income tax payment on the additional points compared to the ordinary regime. It should be noted that the 2020 rate aims to recover the revenue lost due to the unconstitutionality of the Financing Law; however, it must be mentioned that this sector-specific surcharge is still subject to in-depth evaluations regarding its constitutionality.

• Presumptive income: It is reduced to 0.5% in the 2020 tax year; and to zero for 0.% from the 2021 tax year onwards. Remember that, according to the Financing Law, the rate for 2020 would be 1.5%, thus alleviating this charge resulting from Law 2010.

Taxpayers registered under the unified tax under the simplified tax regime - SIMPLE will continue not to be subject to presumptive income.

• Exempt income

The Growth Law incorporates activities related to sports, recreation, and leisure into the tax-exempt income for Orange Economy companies. Income from these activities will be eligible for this benefit for seven (7) years, provided that companies are established and begin their economic activity before December 31, 2021, and comply with the other requirements established by Law 1943.

Similarly, the activities indicated in the International Standard Industrial Classification – ISIC, section A, division 01, division 02, division 03; Section C, division 10 and division 11, adopted in Colombia by Resolution of the National Directorate of Taxes and Customs – DIAN, are incorporated into the exempt income from investments that increase the productivity of the agricultural or rural sector.

These companies must be incorporated after January 1, 2019, and begin their economic activity before December 31, 2022. The regulation mentions that the requirement of accreditation of direct hiring through employment contracts of a minimum number of employees with a vocation for permanence will be regulated by the National Government.

Regarding the investment amount that companies must meet, it may not be less than one thousand five hundred (1,500) UVT (Tax Value Units) and must be completed within a maximum period of six (6) tax years. Subsequently, companies must submit their investment project to the Ministry of Agriculture and Rural Development before December 31, 2022. Finally, the requirement for these companies to carry out their corporate purpose and maintain their effective management in the municipality where the project is located is eliminated.

• Indirect transfers: it is added, as requested, that when a subsequent indirect transfer is made, the tax cost will be the value proportionally paid for the shares, participations or rights of the foreign entity that owns the underlying assets located in Colombia.

Additionally, it is indicated that, in the event of an indirect alienation in mergers and spin-offs between foreign entities, the provisions of article 319-8 of the Tax Code will apply, that is, the alienation of assets will be treated for tax purposes except when the value of the assets does not represent 20% of the total assets of the group.

• Mega-investments: the generation of 400 new direct jobs associated with the development of the mega-investment is added as a requirement to access this regime; and it is specified that: (i) the 5 years to carry out the Mega-Investment are counted from the approval of the project, which must be approved before January 1, 2024; (ii) those who carry out Mega-Investment projects in free zones are subject to the Mega-Investment regime; this is particular, since in Free Zones the income tax rate without the mega-investment regime is much more competitive (20% vs. 27%).

• Public Works for Taxes: Starting in 2020, taxpayers using the public works for taxes program will have the option of choosing between: (i) the public works for taxes regime established in Law 1819; or (ii) the regime established in the Financing Law. Given the penalty system for each version of the program, the framework established by Law 1943 appears less vulnerable.

• Deductions: A deduction is created under form 120% for payments made by taxpayers required to file income and complementary tax returns for salaries paid to individuals under 28 years of age, provided it is the person's first job. The deduction per employee cannot exceed 115 UVT per month.

• Private equity funds: defines a beneficial owner as the natural person who owns, controls, or benefits from a legal entity. This regulation will be submitted for presidential approval and will be applicable starting in the 2020 tax year, by virtue of the principle of non-retroactivity of the law, provided that the following conditions are met: i) owns 51,000,000 or more of the capital or voting rights of the legal entity; ii) exercises control over the legal entity in accordance with the definitions in Articles 260 and 261 of the Commercial Code and the related-party criteria defined by the Tax Code; and iii) benefits by 51,000,000 or more from the returns, profits, or assets of the legal entity or structure without legal personality. It also creates the Single Registry of Beneficial Owners (RUB).

1. Natural persons

• Exempt income: reinstates as exempt income the representation expenses of Magistrates of Courts and their Prosecutors in a percentage equivalent to 50% of their salary and, for the Judges of the Republic in a percentage equivalent to 25%.

• Inflationary component of financial returns: they are again treated as non-taxable income or occasional gain, due to the express declaration of the revival of articles 38, 39, 40, 40-1, 41, 81, 81-1 and 118 of the Tax Code.

• Taxable net income: Costs and expenses related to employment income from fees or compensation for personal services rendered in the course of independent professional activity are deductible. Taxpayers may choose between deducting the corresponding costs and expenses or the exempt income corresponding to the total value of employment payments, limited monthly to 240 UVT (Tax Value Units).

• Withholding at Source: the first three ranges in UVT for the application of withholding at source to taxable payments made to natural or legal persons originating from the employment relationship are modified, without any modification in their rates, as follows: first range, from 0 UVT to 95 UVT (previously 87 UVT); second range, from 95 UVT to 150 UVT (previously 145 UVT) and; from 150 UVT to 360 UVT (previously 335 UVT).

• Other: The special bonus and the cost of living bonus of public servants in plants abroad who, although they provide their services outside of Colombia, are tax residents in the country, are added as exempt income.

1. Income tax on dividends and shares

Dividend rates: The income tax rates applicable to dividends and profit shares for resident individuals and non-resident individuals, as well as foreign companies and entities, are equalized as follows:

1. Resident natural persons and undivided estates of deceased persons: the rate is reduced from 15% to 10% and the threshold for the application of this tax is maintained, that is: from 0 UVT to 300 UVT a rate of 0% applies and; from 300 UVT onwards a rate of 10% applies.

1. Foreign companies and entities or non-resident natural persons: increase the rate from 7.5% to 10%.

This levels the asymmetry that existed between residents and non-residents; however, it increases the effective income tax rate -shareholder company- when the dividend is distributed to foreign entities, taking this ratio to as high as 38.8% for 2020.

1. Permanent establishments of foreign companies: increases the rate from 7.5% to 10%.

1. National companies: maintains the rate of 7.5% and, retains the rules that indicate that withholding is not appropriate for entities with a control situation duly registered with the Chamber of Commerce.

Finally, in accordance with the Plan Law, dividends distributed within domestic companies under control and duly registered with the Chamber of Commerce are not subject to withholding tax. This applies provided that the company is not an intermediary entity established for the purpose of deferring dividend taxes.

1. Asset normalization tax

The supplementary tax for regularization created for 2020 retains most of the characteristics of the one created for 2019. However, among the main modifications, we highlight the following:

1. It includes taxpayers under the simplified tax regime within the liable parties.

1. It broadens the definition of omitted assets, including within the legal obligation to declare them “those who have an economic benefit, potential or actual, from said assets”.

1. It specifies that the reinvestment period of resources with a permanent vocation must remain for a period of no less than 2 years in Colombia, for the reduction of the taxable base to 50% in the settlement of this tax, counted from December 31, 2020.

See full article here

More news from the Ubaté branch at the News Agency