Colombia’s Finance Ministry has submitted a tax reform bill to Congress to replace the financing law, which included income tax changes, overturned by the Constitutional Court last week.
On 16 October 2019, the Constitutional Court stated that the 2019 tax reform law, law No. 1943 which came into force on 28 December 2018, was invalid. In a 6-3 vote, the Court ruled that the law would only remain valid until the end of 2019.
The reason of the decision is because the legislation was not properly published in the legislative gazette, in breach of normal procedure, between votes in lower and upper houses. Unless legislators do not pass an alternative proposal by 31 December 2019, the court ruled, the aspects of the old law that have been repealed or changed will come back into effect.
Prior to the decision, Finance Minister Alberto Carrasquilla cautioned that overturning the law could harm investor confidence and bring lower growth to the $350 billion economy in Colombia.
The Tax Reform reduces the corporate income tax (CIT) rate from 33% in 2018 to 32% for 2020, 31% for 2021 and 30% for 2022 and onwards. On the other hand, the Tax Reform increases the dividend tax on distributions to foreign nonresident entities and individuals from 5% to 7.5%. In addition, the Tax Reform establishes a 7.5% dividend tax on distributions between Colombian companies. The tax will be charged only on the first distribution of dividends between Colombian entities, and may be credited against the dividend tax due once the ultimate Colombian company makes a distribution to its shareholders (nonresident shareholders (entities or individuals) or to Colombian individual residents).
The thin capitalization rule ratio is modified from 3:1 (which includes all debt that generates interest with local and foreign entities, related or unrelated) to a 2:1 ratio that only considers debt transactions involving related local and foreign parties (including back-to-back transactions involving foreign third parties). Further, Under the Tax Reform, permanent establishments (PEs) are subject to taxation on worldwide-source income (in the past, they were only subject to tax on Colombian-source income). In addition, the Tax Reform does not allow taxpayers to deduct interest expenses that are attributable to a PE and are not subject to withholding tax in Colombia. The Tax Reform does not, however, modify the rule that allows taxpayers to deduct interest expenses when the transfer pricing rules apply.
The new bill has the same provisions as the previous one, but excludes provisions that will no longer be relevant from 2020. The reform measures of the original law will remain in force for 2019, but the new bill must be approved for the measures to remain in force from 2020 by 31 December 2019.
While the government intends to have the same bill passed easily, it is noted that the current political climate in Congress is such that more debate and further adjustments may be required for approval.