COLOMBIA. Brigard & Urrutia Calle 70 No 4-60 Bogota, Colombia TEL: (57-1) (57-1) FAX: (57-1) (57-1)

COLOMBIA Brigard & Urrutia Calle 70 No 4-60 Bogota, Colombia TEL: (57-1)540-5433 (57-1)346-2011 FAX: (57-1)310-0586 (57-1)310-0609 Prepared as of, 199_ The information on the taxing regime of the above country is intended to be accurate and current. Before relying on the information, however, please contact the above firm, which prepared and is responsible for revising the information to verify its accuracy. http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (1 of 32)8/18/2003 4:48:07 AM

INTRODUCTION This overview on Colombian taxes summarizes the most significant aspects of the current tax system, emphasizing on income taxes as applied to business entities and individuals. 1. Types of taxes imposed and their classification The Colombian National Constitution uses indifferently concepts such as taxes, contributions and appraisals to refer to the generic contributions currently applicable. The tax provisions in force do not provide for any legal classification of taxes. Doctrine has determined a classification of the generic contributions on the following basic categories: A) Depending on the range of application and destination of the funds collected: Taxes, Appraisals and Special Contributions. B) Depending on the incidence of the tax: Direct or Indirect taxes. C) Depending on the importance of the subjective or objective aspects of taxes: Personal or Real taxes. D) Depending of the contributive capacity of the taxpayer: Progressive or Regressive taxes. 2. Sources of tax law The original source of tax law in Colombia is the law. According to Article 338 of the National Constitution, during peaceful periods only the Congress, and the Departmental and Municipal Councils may impose taxes; however, the power of the Departmental and Municipal Councils is not autonomous, their power to impose taxes is conditioned to the scope determined by law. Article 338 mentioned before, also provides that the most important elements of the tax regulations, [1] must be established directly by the law and/or the Municipal and Departmental Agreements. As an exception to the aforementioned rule, the Government is empowered to declare the State of Economic Emergency which enables it to adopt measures that would otherwise require approval of a Bill by Congress. However, the Constitutional Court has recently ruled that in exercising those powers, which are exceptional, the Government may not enact http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (2 of 32)8/18/2003 4:48:07 AM

Tax Bills or otherwise replace the natural power of Congress as the tax law maker. 3. Tax Administration Structure As from year 1.992, there is one national entity that directly depends from The Finance Ministry, in charge of the administration of all custom and tax matters. The National Taxes are the following: Income Tax, Remittance and Capital Gains Taxes, Value Added Tax and Stamp Tax. As a general rule, the duties assigned to the National Tax and Customs Administration are exercised directly by the Local Tax and Customs Administrations which jurisdiction is established in the law and which usually comprises the territory of each of the Colombian territorial provinces. There are some special Delegated Tax and Custom Administrations for certain areas, while the most important local Administrations are divided into: Mayor Taxpayers Administrations, Individual Taxpayers Administration and Legal Entities/Taxpayers Administration. INCOME TAXES AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS The most common forms of organizations to carry out business in Colombia are the ones indicated below: Corporations: A Corporation ("Sociedad Anónima), is a company in which the capital is divided into shares of stock that are freely transferable by endorsement, unless limitations or preemptive rights are included in the By-Laws of the company. The Corporation requires at least 5 shareholders, none of whom may own more than 94-99% of the outstanding shares. The liability of the shareholders is limited to their equity contributions. This type of business entity needs to appoint a statutory auditor and depending on the amount of its assets, it is under the surveillance of the Superintendency of Corporations. Limited Liability Companies: A Limited Liability Company (Sociedad de Responsabilidad Limitada), is a type of partnership where the liability of the partners is limited to their respective equity contributions. The transfer of ownership rights can not be effected freely but through a formal assignment (amendment to the By-Laws and Public Deed). The Sociedad Limitada requires at least 2 partners and its members cannot at any time exceed 25. A partner may own 99.99% of the quotas of the company. This business entity may be required to have a statutory auditor and can also be under the surveillance of the Superintendency of Corporations depending on the amount of its gross assets. Wholly owned companies (Unipersonai Entities) Wholly owned companies were introduced in Colombian through an amendment to the Commercial Code, in force since June 1996. This type of business entity follows mostly http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (3 of 32)8/18/2003 4:48:07 AM

the same rules applicable to Limited Liability Companies. The creation of any of these business entities requires the execution of a public deed before a local notary public. Said deed contains the founding charter and ByLaws of the company and must be executed by the partners or shareholders either personally or by appointing an attorney in fact to represent them in the incorporation of the company. Once the company has been formed, the public deed issued by the Notary Public must be registered before the Chamber of Commerce in the principal place of domicile of the company. Branches of foreign companies Foreign companies that carry out permanent activities in Colombia have to set up a branch in the country. In order to do this, it is necessary to grant a public deed before a Notary Public, including a resolution issued by the competent corporate body of the foreign company, resolving as to the establishment of a branch in Colombia. The branch must have a statutory auditor and is under the surveillance of the Superintendency of Corporations. Except for the tax liability of the shareholders and partners, the tax treatment given to the Corporations and Limited Liability Companies is exactly the same. According to the current rules, shareholders of Corporations (S.A.'s) are not held jointly and severally liable for taxes due to the company. Also, from a tax point of view, there are no significant advantages of having a branch or a subsidiary incorporated in Colombia, as Colombian current tax regulations treats both structures in substantially the same terms. Due to this fact, the following summarizes tax returns that have to be filed by Limited Liability Companies, Corporations and Branches of Foreign Corporations. I. Corporations/Partnerships/Branches of Foreign Corporations As a general rule, non domiciled or non resident foreign companies in Colombia are not obliged to file income tax returns when all of their Colombian source income specified in articles 407 to 411 of the Colombian Tax Code, has been subject to income (35%) and remittance tax withholdings on payments abroad (7% net of income tax). 1.What tax returns must be filed The tax returns to be filed are the annual income tax return and the monthly income tax withholding return. A company is an income tax withholder whenever it enters into transactions in which it has to practice, by legal disposition, the corresponding withholdings on payments or accruals. These tax returns must be filed in the official forms issued by the Tax Administration (DIAN). A. Filing Dates http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (4 of 32)8/18/2003 4:48:07 AM

The filing dates of the tax returns are determined by a governmental decree issued for the corresponding taxable year. Annual income tax returns, are due in the first semester of the subsequent year. Income tax withholding returns are filed in the month following the month in which the withholdings are applied. (1) Annual income tax return: (a) For companies classified as "Major Taxpayers" by DIAN, the decree establishes filing dates without taking into account the Tax Identification Number of the company; dates for filing expire in the month of April. (b) For companies that do not classify as "Major Taxpayers" the filing dates depend on the Tax Identification Number of the company. Usually, dates expire in the months of May and June. (2) Monthly income tax withholding returns: Expiration dates for this returns usually correspond to the second half of each month. B. Where and with whom filed All tax returns have to be filed before the banks or other authorized entities of the jurisdiction determined by DIAN. C. When must taxes be paid (1) Income tax: Usually, the Governmental Decree determines that taxpayers must pay their income tax on the date for filing the tax return and on definite and not estimated net income. Major Taxpayers are entitled to pay the tax due on five installments; the first installment being estimated (1/5 of the provision for tax income included in the books of the company). Other companies that do not classify as Major Taxpayers are allowed to pay the income tax of the corresponding taxable year in two installments. (2) Income tax withholdings: Withholdings must be totally paid on filing. 2. Calculation of income/profit taxes A. How is the taxable base determined The net taxable income of a company is ordinarily determined as follows: (+) All ordinary and extraordinary revenues obtained in the taxable year, not expressly excluded by law http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (5 of 32)8/18/2003 4:48:07 AM

(-) Rebates, credits and devolutions ---------------------------------------------------------- (=) NET INCOME (-) Costs and expenses ---------------------------------------------------------- (=) NET TAXABLE INCOME The tax rates established in the law are applied directly to net taxable income assessed as explained above. (1) What revenues are included As a general rule, companies have to include in their tax returns all ordinary and extraordinary revenues. Ordinary revenues are those profits obtained in the performance of the company's corporate purpose. Extraordinary income corresponds to income that is obtained from activities which are not included in the corporate purpose of the company. (i.e. sale of fixed assets). However, it is important to point out that the inflationary adjustment system applying to legal entities and individuals who are obliged to keep accounting registries, does not discriminate the source of income. Revenues which are excluded from income tax Below is a list of the most important revenues which, according to the Colombian regulations, do not constitute taxable income. (a) Premium for the placement of shares, if it is accounted as capital surplus. (b) Dividends/Shares received by resident shareholders/ partners in Colombia, corresponding to profits which have been fully taxed at the company's level. (c) Payments for technical services or technical assistance services rendered from abroad by non residents individuals or non domiciled companies. A Tax Bill recently approved by Congress provides that technical assistance services or technical services rendered from abroad by these entities would be subject to a special income and remittance withholding tax of 10%. (d) Gains obtained by the sale of stock of companies listed in the Stock Exchange. http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (6 of 32)8/18/2003 4:48:07 AM

(2) Deductions allowed (a) General Rule: The requirements for deduction of costs and expenses are the following: (1) that disbursements have a direct relationship with the income generating activity; (2) these must be necessary in the performance of the particular kind of activity; (3) have to be proportional, in accordance with the characteristics of the activity, and, (4) have to be incurred in the taxable year for which the deduction is requested. The need, proportion, and direct relationship of the expenses must be determined in accordance with a commercial criteria and taking into account the usual expenses required for performing a particular activity. (b) Costs and expenses incurred abroad Costs and expenses incurred abroad for the acquisition of national source income may not exceed 15% of the net income of the taxpayer, as computed before deducting said costs and expenses, with the following exceptions: i) Payments that are subject to withholding tax (Colombian source income); ii) Payments of interests on credits that are deemed not to be held in Colombia; iii) Sales commissions paid abroad for the purchase of goods or raw materials, when they do not exceed 5% of the transaction, and 10% in the case of exports of manufactured goods, if these payments are duly registered before the Central Bank; iv) Costs and expenses that are subject to capitalization according to the General Accounting Principles; v) Payments made abroad in compliance with any legal obligation; goods; and vi) Acquisition of tangible vii) Short-term interests originated in the import or export of goods. http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (7 of 32)8/18/2003 4:48:07 AM

(3) Major expenses that are not deductible the following: Non deductible expenses are, among others, (a) Interests and other financial costs and expenses, including exchange losses, originated in foreign loans to agencies, branches or subsidiaries by their home offices abroad, or by any agency, branch or affiliate thereof, except for interests and costs on short term loans for the purchase of raw materials and goods, in which these same companies act as direct suppliers (b) Losses from the transfer of assets between companies and individuals or unliquidated Estates that are economically related, or between Limited Liability Companies and their partners who are individuals or unliquidated Estates or with any close relatives specified by law of the partners. (c) Losses from the transfer of shares (d) percentage mentioned in 2b. Costs and expenses that exceed the (e) Payments to the head office on account of administrative and management costs and royalties for exploitation of any type of intangible assets are deductible, provided that income and remittance tax withholdings are applied. (4) There are no special deductibility rules regarding investments effected by Colombians abroad. B. Applicable rates (1) Federal The income tax rate for Corporations, Limited Liability Companies and Branches of Foreign Corporations is 35%. Remittance tax is complementary to income tax and applies at 7%. (2) State and/or other local Income tax is a federal tax. (3) Capital gains rates and base, if different Capital gains are taxable at 20% on lotteries and premiums - and at 35% - on other gains -. In case of individuals, progressive capital gain http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (8 of 32)8/18/2003 4:48:07 AM

tax rates apply on the value of the capital gain. C. How are losses handled (1) Operating losses The company's tax losses of a given taxable year can be carried forward for five years. Taxpayers applying inflation adjustments, can deduct such losses adjusted by inflation. (2) Capital losses Capital losses are only deductible if they occur due to force majeure, and on company's assets destined for the business. D. Any special Transfer Pricing Rules Currently there are no special transfer pricing rules in force, except for Article 90 of the Colombian Tax Code, which establishes that the price agreed by the parties is deemed to be the market price, unless it differs substantially from other prices established in the market for goods of the same kind on the date of transfer. According to this provision, a substantial difference exists whenever the price assigned by the parties differs in more than 25% from market prices. IF the Tax Authorities are able to evidence that the price fixed by the parties differs in more than 25% from the market value of the assets that were transferred, they can disallow the transaction for tax purposes and fix a new price. E. Consolidated returns for affiliated corporations Income tax returns may not be consolidated by companies and affiliates since in Colombia, legal entities, even if they belong to the same corporate economic group, have to file independent returns. Consolidated withholding tax returns (for income, value added and stamp tax) for agencies or branches owned by one legal entity are accepted. The consolidated withholding returns can be filed before banks or other authorized entities of the jurisdiction determined by DIAN that corresponds to the address of the head office, the agency or the branch. 3. Territorial Rules A. What is the corporations residence The corporations residence is the main place of business as registered before the local Chamber of Commerce. http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (9 of 32)8/18/2003 4:48:07 AM

B. Is worldwide income taxed Colombian Corporations and Limited Liability Companies are subject to taxation in Colombia on their worldwide income. C. How is branch income handled Branches and Foreign Companies are taxed on Colombian source income, unless specifically excluded in any international double taxation treaty. D. How are controlled foreign corporations handled For tax purposes, controlled foreign corporations in Colombia are considered to be independent from the foreign entity that controls them. Wholly owned subsidiaries are taxed on their worldwide income and branches of foreign companies are taxed on their Colombian source income. E. Tax Credits The Colombian tax legislation provides for several tax credits. The most important are described below: (1) Taxes paid abroad: National Colombian tax payers that receive foreign income subject to taxes in the foreign country, can discount from the income tax to be paid in Colombia, the amount paid for taxes abroad for such revenues. The discount can not exceed the tax that must be paid in Colombia. (2) Acquisition of capital goods: Companies may credit against income tax the Value Added Tax (VAT) paid in the acquisition and nationalization of capital goods. 4. Withholding Taxes On payments to non-resident companies A. Rates on dividends 7% income tax withholding plus a 35% income tax withholding on profits that have not been taxed at the company level, if any. The 7% remittance tax withholding will be deferred if the dividends are reinvested in the country. If the investment is kept for a period of 5 years or more, the dividends are exempt from taxation, provided that, if the dividends were subject to the 35% income tax withholding, this withholding has been http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (10 of 32)8/18/2003 4:48:07 AM

duty practiced. B. Rates on royalties 35% income tax withholding plus 7% remittance tax withholding net of income tax (Effective rate 39.55%). Currently, the remittance tax rate applies only on payments or accruals for royalties that exceed 3% of the total amount of the sales or production of the company that originates them, but a Tax Bill just approved by Congress avoids the exclusion. C. Rates on interest 35% on the total amount of the payment or accrual, plus a 7% remittance tax withholding on payments net of income tax. (Effective rate 39.55%). In connection with this issue, please bear in mind that according to the Colombian Tax Code, the following payments are not deemed Colombian source income for the beneficiary: Interests paid on short term credits for imports and bank overdrafts. Interests paid on credits used to finance/pre finance exports. Interests paid on credits obtained abroad by financial entities organized under Colombian rules. Interests paid on credits used for foreign market transactions channeled through financial entities organized under Colombian law. Credits obtained abroad by national, foreign and mixed companies established in Colombia whose activities are considered of interest for the social and economic development of the country as defined by CONPES. International leasing. Income originated from leasing contracts granted by foreign non resident companies for financing of investments in machinery and equipment used in: (i) export processes; (ii) activities considered to be of interest to social and economic development as defined by CONPES. Primary sector and manufacturing activities, as well as services like transportation, engineering, hotels, tourism, health, trade and housing constructions, have been qualified by CONPES as activities of interest to social and economic development. D. Rates on withholding tax on profits realized by a foreign http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (11 of 32)8/18/2003 4:48:07 AM

corporation Please refer to I.4.A. E. Others (1) Commissions, fees, exploitation of intangibles, know-how: 35% on the total amount of the payment or accrual, plus a 7% remittance tax withholding. (2) Exploitation of software: 35% on 80% of the payment or accrual, plus a remittance tax withholding of 7% applied on 80% of the amount that results from deducting the income tax withholding. (Effective rate 31.64%). (3) Other concepts not specified by law: 14% income tax withholding on the total amount of the payment or accrual, plus a 1% remittance tax withholding on gross income received. For domiciled entities A. Rates on dividends 0% on dividends corresponding to profits fully taxed at the company level. 35% on profits excluded from tax. B. Rates on Royalties There is no specific withholding rate for payments of royalties received by domiciled entities; a 3% withholding general rate would apply on the total payment or accrual. C. Rates on interests Rates on interests range from 1.39% to 10% depending on the transaction originating the financial yield (term deposit certificates, savings accounts, other securities). The effective rate is approximately 7%. D. Rates on withholding tax on profits realized by a foreign corporations Profits of foreign branches are subject to a 7% remittance tax withholding. Profits of branches are deemed to have been distributed unless reinvested in Colombia. If the profits are reinvested, the 7% remittance tax withholding is deferred. If the amounts are reinvested for a http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (12 of 32)8/18/2003 4:48:07 AM

minimum five year period, the branch would have the right of being exempt from this tax. E. Others 10% on payment or accrual 10% on payment or accrual activities: 4% on payment or accrual i)intellectual fees: ii)commissions: iii)service iv)leasing of real estate 3%; leasing of tangible goods 2% 5. Any other matter which might have some impact upon the corporate tax situation A. International leasing contracts (1) Income tax exclusion As mentioned before, as per article 25 of the Tax Code, income originated from lease agreements with foreign non resident companies for financing of investment in machinery and equipment used in export processes or activities considered to be of interest for the social and economic development of the country, as defined by CONPES, are deemed to be foreign source income for the lessor and consequently, are not subject to income or remittance tax withholding which would otherwise apply at an effective rate of 39.55%. (2) Deductibility of lease rentals For income tax purposes, payments effected under a lease agreement may have two treatments depending on the kind of contract executed between the lessee and the lessor, as explained below: Operational lease agreements: Lease agreements on: (i) real property with a duration of five years or more, (ii) equipment and goods for a minimum three year term, and (iii) leases on productive vehicles and computer equipment for a two year term, are deemed to be operational leases. http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (13 of 32)8/18/2003 4:48:07 AM

Only companies that as of December 31st., 1.996 have a gross equity of less than Col$5.900.000.000.oo (approx. US$5.570.000.oo as of today), can apply for the total tax deduction on rental payments for operational leases. The rentals paid by the lessee in infrastructure projects deriving from contracts with a minimum twelve year term, qualify as operational leases. The benefits of qualifying a contract as an operational lease are mainly the following: The lease rentals are fully deductible. The lessor does not have to register in its books any assets that otherwise are subject to inflation adjustments. Financial lease contracts: Lease agreements where lessees own gross assets exceeding the amount mentioned above, lease agreements on the above assets but with shorter terms, lease agreements on land regardless of the term of the contract, lease-back agreements on all kinds of equipment whichever the duration, and infrastructure project leases with a term shorter than twelve years, do not give rise to a total deduction of the rentals; the lease rentals must be apportioned to reflect the partial payments of capital, and the part that constitutes financial cost or expense. The portion of the rentals capitalized by the lessee will be registered against a liability account and the portion that corresponds to the financial cost and expense may be deducted. In order to ensure the income tax deductibility of the lease rentals, it is important to take into account that if the lease rentals are paid to Parent Companies abroad or to agencies, branches or affiliates of said Parent Companies the deduction of the interest portion of the rental is disallowed by article 124-1 of the Tax Code, which establishes that financial costs and expenses including exchange losses arising therefrom, paid by local companies to said entities are not deductible for income tax purposes. (3) Value Added Tax ("VAT") Lease services are excluded from VAT. Temporary imports of heavy equipment that is not produced in Colombia, used for basic industries are excluded from VAT. If the VAT exclusion is not obtained, the corresponding payment may be deferred over 5 years. Custom duties applicable would also be deferred. B. Minimum presumptive income All taxpayers required to file tax returns in Colombia, must pay income tax on the higher of these two amounts, which must be assessed and compared http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (14 of 32)8/18/2003 4:48:07 AM

each year: (1) The ordinary net taxable income that results from the calculation explained before, and, (2) The minimum presumptive income, which is a special type of income tax assessment, that provides for the minimum taxable income that any tax payer is supposed to obtain, based on a legally established yield. The presumptive income is the highest value between 5% of the net worth of the company on December 31st. of the prior year and 1.5% of the gross assets on the same date. C. Inflation Adjustments As of 1.992, the determination of income tax takes into account inflationary adjustments applied to the Financial Statements of companies. In general terms, all non-monetary assets and liabilities, as well as the tax payers's equity, is adjusted according to inflation, in order to recognize in the Financial Statements the effects of economic deflation. For this purpose, those assets and liabilities that maintain their economic value and that may acquire greater nominal value because of inflation are considered to be non-monetary assets. The inflation adjustments are calculated on an inflation rate which is known as PAAG, certified by the National Administrative Department of Statistics each month. Profit and Loss accounts are also adjusted using the same rules and procedures for non-monetary assets and liabilities. Tax payers must create a "monetary correction" account in which the income and expense originated from the application of the inflationary adjustments to non monetary assets and liabilities must be registered monthly. II. Partnerships and Limited Liability Companies Please refer to the aspects included in point I above. III. Other entities such as Joint Ventures, Associations and Foundations Joint Ventures ("Consorcios/Uniones Temporales"): Article 18 of the Colombian Tax Code establishes that the Consorcios/Uniones Temporales do not qualify as income taxpayers and that the members thereof have to include all income and costs and expenses incurred by the Joint Venture, in individual tax returns, in proportion to http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (15 of 32)8/18/2003 4:48:07 AM

the shares included in the Joint Venture Agreements. Non profit associations and foundations: Article 19 of the Colombian Tax Code and Decree 124/97 determine which entities make part of the special tax regime. These are, among others: (1) non-profit corporations, foundations, and associations which main corporate purpose and resources are used for health, research, educational, cultural, sport, and ecological activities; (2) non-profit legal entities which execute investing and lending activities; (3) employee funds, sector associations and investment funds with respect to income derived from industrial and marketing activities. 1. What tax returns must be filed As for other legal entities, non-profit entities have the same obligation of filing annual income tax returns and the monthly income tax withholding return. A. Filing dates Entities subject to the special tax system can be qualified as Major Taxpayers. If so, tax returns must be filed on the same dates established for legal entities qualifying as such. If the special entity does not qualify as Major Taxpayer, the filing of tax returns will follow the same rules for legal entities that do not qualify as Major Taxpayers. B. Where and with whom filed Entities subject to the special tax system have to file their Tax Returns before the banks or other authorized entities of the jurisdiction determined by DIAN. C. If taxes are levied against the entity, when must they be paid Entities subject to the special tax system qualifying as Major Taxpayers must pay any taxes levied on the dates specified above. If not, taxes must be paid on the same dates established for those entities that do not qualify as Major Taxpayers. 2. Calculation of income for income tax purposes A. If the entity is taxable, identify the basis of the taxation The income tax basis for entities subject to the special tax system is made up of the total revenues gained by the entity, no matter where these derive from, less the applicable expenses. This taxable basis is denominated "net benefit or excess". The applicable expenses that may be deducted are those expenses that are necessary and proportional costs for the entity and that have a direct cause http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (16 of 32)8/18/2003 4:48:07 AM

relationship with the revenues or with the corporate purpose of the entity, including investments that are made in compliance of the corporate purpose. Other deductible expenses are direct investments in health, research, educational, cultural, sport, and ecological activities. The income tax rate applicable to the net benefit or excess is 20%. The net benefit will be excluded from income tax if it is destined directly or indirectly, or permanently assigned to the development of the activities mentioned above, or, in the case of cooperatives, if it is destined to the development of the corporate purpose. B. Identify how the income is allocated to the partners, members, or beneficiaries Income to the members of the Joint Venture is allocated taking into account the proportions included in the Joint Venture Agreement. Income allocated to the owners of associations and foundations on dissolution of these entities, if taxed at the association/foundation level, would not be subject to double taxation on distribution to its members. IV. Individuals As a general rule, all individuals must file income tax returns in Colombia. However, there are certain rules that exclude certain individuals from this obligation depending on the amount of gross income or of gross assets held in the previous year. 1. What tax returns must be filed The income tax returns to be filed by individuals are the same for business entities: annual income tax return and monthly income tax withholding returns. An individual is classified as an income tax withholder if the following requirements are fulfilled: (i) that he/she is a merchant (trader) and (ii) that in the prior year his/her gross equity or gross income exceeds COL$453.300.000 (approx. US$417.400 for 1996). A. Filing Dates The filing dates of the tax returns for individuals are also determined by a Decree issued by Government. (1) Annual income tax return: The filing dates for those individuals that have to file income tax returns depend on the two last numbers of their assigned Tax Identification Number. The usual filing dates expire during the months of June an July. (2) Monthly income tax withholding returns: Dates for filing these http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (17 of 32)8/18/2003 4:48:07 AM

returns usually fall into the second half of each month. B. Where and with whom filed Individuals have to file their tax returns before the banks or other authorized entities of the jurisdiction determined by DIAN. C. When must taxes be paid Income tax and income tax withholdings must be totally paid by individuals on filing date. Individuals do not pay income taxes on estimated basis. 2. Calculation of income taxes A. How is the taxable base determined As for Corporations and Limited Liability Companies, net taxable income of a Colombian resident taxpayer subject to the obligation of filing tax returns is the result of reducing his/her ordinary and extraordinary income with the costs and expenses related to the production of such income. (1) What revenue is included Depending of the worldwide rules explained further below, individual's taxable income is made up of their national and foreign ordinary and extraordinary income. The following revenues among others, are not considered as taxable income: (a) Inflation on financial component yields obtained from companies subject to the surveillance of the Superintendency of Banks. (b) Payments for life insurance. (c) Indemnity payments for indirect or consequential damages. (d) Dividends received by shareholders and partners who are resident in Colombia, on profits fully taxed at a corporate level. (e) Mandatory and voluntary contributions to pension funds, inaslong as these do not exceed 20% of the total labor income gained. (2) What deductions allowed http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (18 of 32)8/18/2003 4:48:07 AM

(a) For employees: Interests paid for home loans, with an annual limit of Col$8.221.396, (approx. US$7.600), donations under certain conditions, and industry and commerce tax, stamp tax, vehicle and real estate tax paid, if, however, these have a direct relationship with the taxpayer's income. (b) For independent workers: The general rule on costs and expenses applies, if all the income obtained by the independent worker has been duly invoiced and subject to withholdings. If not, deductions for independent workers may not exceed 50% of the revenues they receive for their independent activity. (3) What exemptions are allowed Payments to employees are exempted from income tax as follows: (a) 30% of the total labor payments. (b) 100% on indemnification payments for labor accidents or sickness. (c) 100% on payments for pensions (until taxable year 1997). (d) certain percentages of severance payment and interests, depending on the employees salary. (4) What major expenses are not deductible Please refer to aspects on IV.2.2. (5) Are other benefits included or excluded in taxable income As a general rule, all indirect payments made by the employer to third parties that compensate any services or assets acquired in favor of the employee, his/her spouse or close relatives established in the law, are taxed for the employee. Payments for education, health and nourishing may be excluded from income tax given that: (a) the amount excluded does not exceed the average amount recognized to the majority of employees in the same company, and that, (b) the payments are part of a permanent plan offered to the employees of the company. B. What are the applicable rates (1) Federal http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (19 of 32)8/18/2003 4:48:07 AM

(a) Residents The national income tax rate for local individuals and foreign residents ranges from 0.00% to 22.11% depending on the income level of the individual. If the income level exceeds COL $40.200.000 (approx. US$37.000 for taxable year 1997), revenues are taxed at 22.11%, plus a 35% marginal rate over such amount. The monetary basis for the progressive rates is annually adjusted for inflation. (b) Non residents Foreign employees not resident in Colombia are taxed with a 35% income withholding tax, plus a 7% remittance tax withholding on any money sent abroad. For other revenue different from labor income, the withholding rates are the ones included for non domiciled companies in I.4. (2) State and/or other local Income tax is a federal tax for both companies and individuals. (3) Capital Gains rates and base, if different The Capital Gains rates are the same as the income tax rates for individuals. These rates are applied on a Cellular Basis. C. How are losses handled Deductible losses by individuals are capital losses, which are deductible if they occur due to force majeure, and in relation to assets used for carrying out of the business. 3. Territorial Rules A. Where is the individual subject to tax The fiscal domicile of the individual is his/her principal place of business. B. Is the individual subject to tax on his worldwide income For tax purposes, it is understood that an individual is resident in Colombia if he/she keeps continues or discontinuous physical presence within the country for six or more months during the taxable year, or which are http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (20 of 32)8/18/2003 4:48:07 AM

completed in the subsequent taxable year. National individuals who keep their families and their main place of business in Colombia are deemed to be residents in the country, eventhough they remain abroad. Local individuals who are resident in the country and foreign individuals after the fifth year of residence in the country, are subject to income tax on their national and foreign ordinary and extraordinary income and on the assets they posses in the country and abroad. Foreign individuals who have not completed the five years of residence in the country are subject to income tax only on their Colombian source income and on the assets they posses in Colombia. C. Expatriates An expatriate in Colombia, regardless of the qualification as Colombian resident is liable for income tax on all income earned for work executed in Colombia. Remittance tax is applicable on the part of the salary that the company pays abroad. After 5 years of residence, expatriates would be subject to income tax on their worldwide income, as explained before. Withholdings applicable to expatriates vary depending on whether the expatriate is a resident or not. Please refer to I.4. above. D. Withholding Taxes Salaries are withheld at source. The applicable rates depend on whether the employee is classified as a Colombian resident or not. Please refer to I.4. above. ALL OTHER TAXES, CONTRIBUTIONS OR TRANSFER REGIMES OTHER THAN INHERITANCE AND GIFT TAXES AND LEVEES 1. Valued Added Tax ("VAT") The importation or sale of tangible goods and services in Colombia which are not expressly excluded or exempt from VAT, are subject to this tax, at a general rate of 16%. The taxable basis for VAT in the importation of goods is the CIF value of the imported goods plus applicable custom duties. In the sale of goods and/or services, the taxable basis is the value of the transaction. VAT returns must be filed in the fiscal domicile of the VAT collector. As in the case of income tax and income tax withholding returns, VAT returns must be filed before the banks or other authorized entities of the jurisdiction as determined by DIAN. http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (21 of 32)8/18/2003 4:48:07 AM

The taxable period for VAT is two months; tax returns are filed bimonthly. Withholding for VAT.- Local entities paying services rendered within Colombian territory by non-resident companies, are obliged to withhold 100% of the VAT accruing on the price of the local services. Certain private local entities in Colombia, as well as Official Entities, are obliged to apply a 50% VAT withholding on payments subject to VAT to other resident taxpayers. VAT withholdings must be included in the monthly withholding returns. 2. Fringe Benefit Taxes/Worker Compensation Levies A. "Cesantía" (similar to, but not exactly, severance payment): Equal to the value of one month's salary for every year of service and proportionally for fraction thereof, which must be deposited within the first two months of the year, in the "Cesantía" Fund selected by each worker. B. Interest on "Cesantía": Equivalent to 12% per annurn on the total severance payment as of December 31, payable in the following month of January. This interest must also be paid at termination of the contract on the final amount of the severance payment, or at the time of making any partial payments of the "Cesantía", on the amount of this advance. If the interest is not paid at such times, the employer shall pay, as a penalty, double of the interest (24%). C. Service Bonus: Equal to one month's salary payable 50% in June and 50% in December. The bonus does not represent salary and therefore it's value is not computed as such. D. Transportation Allowance: This right is provided for workers whose salary does not exceed twice the amount of the minimum legal salary. The Government establishes the relevant annual amount by Decree. Currently this allowance is fixed at Col$17.250, approx. US$17/month. E. Labor Shoes and Clothes: For employees whose salary does not exceed twice the amount of the minimum legal salary, a pair of shoes and work clothes must be provided every four months. The dates for this provision are: April 30; August 31; December 20. There is a legal prohibition to provide this aid in cash. http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (22 of 32)8/18/2003 4:48:07 AM

F. Holidays: All employees have the right to fifteen (15) consecutive business days as paid holidays for each year of service and proportionally for fraction thereof. Holiday payments do not qualify as salaries or fringe benefits. It is forbidden to pay the vacation term in money, except with the authorization from the Ministry of Labor (up to 50%). The foregoing does not apply in the event of termination of the contract without having enjoyed the corresponding vacations; their value must be included in the final liquidation. G. Family Subsidy: Three modalities exist: a) in cash, a monetary allowance for every dependent person; b) in kind, represented by scholarships, school books, food, etc. for those same individuals; and c) in services, that is, in jobs and programs. The employer does not pay this benefit directly but through a Compensation Bureau, within the first ten days of the month following the payment of the subsidy. The subsidy covered by the employer amounts to 9% of the total payroll. This sum is distributed as follows: 4% for the Bureau to pay the subsidy, 3% for the Colombian Family Welfare Institute (ICBF) and 2% for the National Training Service (SENA). The subsidy payments do not constitute salary nor are they computed as a salary factor. 3. Social Security and/or Welfare System Contributions A. Current Social Security Contributions on salaries (1) Health: 12% (8% employer/4% employee). (2) Pensions: 13.5%(10.125% employer/3.375 % employee). If the employee earns more that 4 monthly minimum salaries, Col $688.020 (approx. US$630), an extra 1%, charge to the employee, applies. (3) Labor Risks payable by the employer. The percentages oscillate between 0.358% and 8.7% on the monthly payroll. All of these contributions are deposited in authorized banks or other authorized entities. 4. Payroll Contributions: Employers are obliged to pay 9% of all the labor payments that are deemed to be part of the salary, to the following entities as explained above in 2.G.. 5. Stamp Tax Currently, all written agreements in Colombia are subject to Stamp Tax at an 0.5% rate on the total value of the document. http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (23 of 32)8/18/2003 4:48:07 AM

There is a provision in the Tax Bill recently approved by Congress, which will be in force once the Tax Bill is officially published, that increases this rate to 1%. If at the moment of execution of the contract, the value is undetermined, Col $440.000 (approx. US$405), have to be paid as an advance for stamp tax; monthly adjustments equivalent to 0.5%11% invoicing are due. Stamp Tax is currently payable with the monthly withholding tax returns. II. Registration duties for business entities 1. Upon the incorporation of a company, the following general registration duties must be complied with: A. The public deed of incorporation of the company must be registered before the Chamber of Commerce of the Company's domicile. At the moment of the registry, a registry tax of 0.7% must be paid on the paid/assigned capital of the company in case of Limited Liability Companies and Branches, and on the subscribed capital in the case of Corporations. B. Registration before the local and national Tax Authorities. The company must obtain a Tax Identification Number (NIT) in all cases. Certain companies must be registered among others as VAT collectors. The registry for the NIT must be performed through the filing of the forrn of Unique Tax Registry ("RUT"), and does not give rise to any charges. C. R.I.T. Registration for Industry and Commerce Tax purposes must be filed on execution of industrial, trade and service activities in a municipality. D. Registration for social security purposes before the Social Security Entities. E. Registration before the Superintendency of Corporations. Such registration is mandatory in the case of branches of foreign companies; in other cases, it depends on the gross assets of the company. Companies under the surveillance of the Superintendency of Corporations must pay a contribution that varies in proportion to the gross assets of the Company. F. If it is branch of a foreign company, or a Colombian company with foreign capital, the foreign investment must be registered before the Central Bank. This registration is applied for with a written request free of charges. G. Companies must register accounting and social books before the Chamber of Commerce of the social domicile (approx. US$10 per. book are collected). H. Other companies may be subject to the compliance of additional registration duties, deriving from the particular social purpose. http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (24 of 32)8/18/2003 4:48:07 AM

2. Upon an increase of the capital of the company, the following registration duties are due: A. The public deed whereby the By-Laws are amended in the case of Limited Liability Companies, "LLC's" or the certificate evidencing an increase of the subscribed capital in the case of corporations "SA s must be registered before the Chamber of Commerce of the company's domicile. The registry tax is 0.7% over the value of the increase. B. If the increase of capital implies an increase of the foreign investment, this increase must be registered before the Central Bank. No charges are due for registration before the Central Bank. 3. Upon the transfer of the company's shares, the following are the registration duties: A. If the holder of the shares/quotas is a foreign investor, a provisional tax assessment request must be filed before the DIAN by the transferor. No registration duties are due. B. If the buyer of the shares/quotas is a foreign investor, a substitution of foreign investor must be recorded by the Central Bank. If the buyer is Colombian, the foreign investment registry on behalf of the person transferring the shares, must be canceled. The cancellation of the records should be applied for in writing and no registration payments are due. 4. Upon the transfer of a corporate asset, the following are the registration duties: A. If it is an immovable asset, the transfer must be made through a public deed. The notarial fees amount to approx. 2.5 x 1.000 of the value of the asset transferred, plus VAT of 16% on the notarial fees. The transfer must also be registered before the Registry Office of Public Instruments of the asset's domicile. Depending on each municipality, registry tax is collected at rates that range from 0.5% to 1%. of the asset value. Other charges to the municipality also apply at rates that may go up to 10 per 1.000 of the asset value. B. In general terms, the transfer of movable assets is not subject to any registry. The transfer of vehicles must be registered before the National Transit and Transportation Institute and approx. US$40 are collected. 5. The appointment or removal of general managers, directors, fiscal auditors, liquidators or officers of companies must be registered before the Chamber of Commerce of the company's main domicile. For such appointment, the Chamber of Commerce collects a fee of approx. US$33. INHERITANCE AND GIFT TAXES ("CAPITAL GAINS") http://www.lexmundi.com/publications/tax_guides/tax-colombia.htm (25 of 32)8/18/2003 4:48:07 AM