Income Tax in Colombia
The responsibilities of the taxpayer in Colombia: understand the Colombian tax system and how it affects your income...
In Colombia income tax and tax on occasional earnings or capital gains tax are declared once a year. The taxable year is the same as the calendar year. There is a system of withholding tax, where a percentage of income is withheld by the employer and deducted from the annual tax that has to be paid.
Every resident of Colombia is required to pay taxes; residence status for tax purposes is achieved by living in the country for 183 consecutive or non-consecutive days in any 365-day period.
For corporations and businesses, the residence status starts when the company is set up under Colombian law, and has its main address in Colombia, or when the company’s headquarters are located in the country. Resident companies are taxed on worldwide income; foreign companies and local branches of foreign companies are taxed only on their income in Colombia.
Income tax is due on the earnings received by taxpayers that generate an increase in their assets and are derived from their ordinary activities. The rate at which income tax is charged is between 19 and 33 percent of total income, depending on the income bracket the taxpayer falls into.
In Colombia there is no double taxation; therefore, as long as a company has paid its income tax, the company’s shareholders need not pay income tax on dividends.
What is income?
Income for tax purposes is defined as gross income minus all costs incurred in order to obtain net income, and all allowable deductions.
There are two systems in place that determine the taxable base; these are the Ordinary System and the Presumptive Income System.
- Ordinary Income System: The basis of what constitutes taxable income in the ordinary system consists of the sum of all the ordinary and extraordinary incomes, which are likely to produce an increase in net assets and that have not been expressly exempted from taxation, minus deductions and discounts – this constitutes the net income. From the net income, the costs related to the income are subtracted to obtain the gross income. The gross income minus the relevant tax deductions generates the taxable income, to which the appropriate tax rates are applied.
- Presumptive Income System (Renta Presuntiva): Presumptive income occurs because the authorities assume that the assets of the taxpayers gain value at a minimum level. Presumptive income is three percent of the net assets of the taxpayer at the end of the previous year
To determine the taxes payable in each individual case, the calculations must be made according to both systems, and the greater of the total amounts from the Ordinary Income System and the Presumptive Income System will be used as the taxable base.