NAVIGATING TAX AND ACCOUNTING OBLIGATIONS: A VITAL ASPECT OF DOING BUSINESS IN COLOMBIA

Running a business entails more than just delivering products or services; it requires meticulous attention to tax and accounting obligations.

Understanding and fulfilling these responsibilities are fundamental for compliance and avoiding potential penalties when you consider establishing your own business in Colombia.

So, let’s explore some key obligations that businesses in Colombia need to be mindful of to ensure smooth operations and financial transparency:

1. Income Tax (Impuesto de Renta y Complementario, Régimen Ordinario)

Income tax applies to all income, profits, or benefits earned by individuals, corporations, and undivided estates within a specific fiscal period. Businesses must accurately calculate and report their income to comply with tax regulations, ensuring transparency in financial dealings.

The income tax rate for 2024 is 35%. However, for free trade zone industrial users of goods and services, the corporate income tax rate is 20%, which also applies to the special tax regime and to non-profit entities.

2. Withholding Tax (Retención en la Fuente a Título de Renta)

Withholding tax serves as an advance payment of income tax, sales tax,It is discounted from payments made to suppliers or service providers and remitted to the tax authority on their behalf, streamlining tax collection processes.

The withholding tax rate varies depending on the purchase or service acquired.

3. Exogenous Information Reporter (Informante de Exógena)

Businesses are mandated to report transactions with clients, users, or other entities involved in their activities annually to the National Directorate of Taxes and Customs (DIAN). This requirement fosters transparency and accountability in financial transactions, promoting a fair business environment.

4. Value Added Tax (Impuesto al Valor Agregado, IVA)

As a general rule, all companies established in Colombia are required to collect Value Added Tax (VAT), which is an additional 19% tax on the cost of the product or service provided.

It is important to note that there are some exceptions regarding the collection of VAT, which are related to specific activities and services outlined in Colombian regulations. It is also important to highlight that there are different VAT rates:

0% Rate: (https://estatuto.co/477). https://taxsummaries.pwc.com/colombia/corporate/other-taxes
5% Rate: (Coffee, rice, sugar, oil, vegetable materials and waste, blades, and others established in article 468-1). (https://estatuto.co/468-1).
19% Rate: (https://estatuto.co/468).

5. Industry and Commerce Tax (Impuesto de Industria y Comercio, ICA)

ICA applies to businesses conducting industrial, commercial, or service activities, with the tax rate varying based on the municipality where the activity is performed. Understanding local tax regulations is crucial for complying with ICA requirements and avoiding penalties.

Tax regime for businesses in Colombia

Here are some of the most important considerations that you must keep into account regarding the Colombian tax regime for businesses:

1. The Colombian tax system is based on the principles of financial reporting, with special rules for the recognition of income, costs, and expenses.
2. Tax regulations offer various benefits, including exemptions, credits, and deductions, to encourage priority sectors and improve infrastructure.
3. Taxpayers can determine their taxable base through the ordinary system, presumptive income system, or equity comparison system.

Additionally:

Deductible interest expenses are limited to the highest rate charged by banks.
Costs and expenses incurred abroad may be deducted if they meet general requirements and relevant withholdings have been applied.
Tax losses can be carried forward and offset against future income.
Depreciation of business assets is allowed for income tax purposes.
Special rates of 9% apply to specific activities such as new hotels, theme parks, and energy from non-conventional sources.
Certain activities, such as value-added technology industries and investments in the agricultural sector, are exempt from income tax.
Tax discounts are available for taxes paid abroad, VAT paid for productive real fixed assets, ICA tax, donations, and investments in research, technological development, and innovation.
Mega-investments can qualify for special tax benefits, including a reduced income tax rate and depreciation allowances.
Transfer pricing rules apply to taxpayers involved in transactions with foreign related parties or in certain jurisdictions.
Real estate tax is imposed on the property, possession, or exploitation of lands and buildings.

Additional Considerations:

Electronic Invoices and Payroll: Businesses, including SAS, must issue electronic invoices and payroll to comply with accounting and tax regulations, facilitating record-keeping and ensuring accuracy in financial reporting.

Legal Liability of SAS: It’s noteworthy that SAS entities have legal personality, shielding shareholders from personal liability for the company’s debts or defaults. This legal framework emphasizes the distinct identity of the corporation, providing a layer of protection for shareholders.

Staying informed about tax and accounting obligations is indispensable for businesses operating in Colombia.

By understanding and fulfilling these obligations, your business can navigate the regulatory landscape effectively, maintain financial transparency, and contribute to a robust business environment conducive to growth and sustainability.

Empowering Your Business Through Tailored Tax and Accounting Solutions

Once you’ve made up your mind and you make the decision to start your business in Colombia, it is challenging to know exactly where to start or what your first step should be.

First things first, you may want to check out our complete video about doing business in Colombia, where we offer the wider picture of what it entails.

We will be more than happy to help you with our tailored advisory services prioritize accounting and tax solutions, offering a diverse array of strategies to enhance commercial reach and operational efficiency.

From annual tax declarations to payroll management and IFRS accounting, we provide holistic support aimed at streamlining financial operations and maximizing profitability.

Make sure to get in contact and let’s start building your path together!

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Medellín, Colombia