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12 November 2021

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Colombia Publishes Decree Explaining Criteria for Preferential Tax Regimes

Colombia has published Decree 1357 of 28 October 2021, regulating the criteria provided in Article 260-7 of the Colombian Tax Statute for preferential tax regimes. As provided in Article 260-7(2), preferential tax regimes are those that meet at least two of the following criteria, with further explanation provided by Decree 1357:

  • No tax rates or existence of low nominal rates of income tax, as compared to those that would be applied in Colombia in similar operations - further explanation:
    • no tax rates: The taxable base is not subject to a percentage rate or absolute value to calculate income tax or, despite the existence of a tax rate, effective income tax is non-existent;
    • existence of low nominal rates of income tax: The nominal rates of income tax, or of taxes of an identical or analogous nature to income tax, are less than 60% of the net income tax that would have been applied in Colombia for the year in which the operation is carried out;
  • Lack of effective exchange of information or existence of legal norms or administrative practices that limit the exchange of information - further explanation:
    • the jurisdiction does not effectively exchange information with the Colombian tax authority (DIAN) on the structures or final beneficiaries that make use of the preferential regime; or
    • the jurisdiction does not spontaneously send information to Colombia, in compliance with international obligations, on administrative decisions taken in relation to specific taxpayers and final beneficiaries that make use of the preferential regime;
  • Lack of transparency at the legal, regulatory, or administrative level - further explanation:
    • the characteristics and details of the preferential regime are not defined in detail or the information necessary to understand the operation of the regime is not provided;
    • the design and administration of the regime is not duly supervised by a regulatory or supervisory body; or
    • the regime is not subject to the financial disclosure obligations in force in the jurisdiction;
  • Absence of the requirement for a substantial local presence or the exercise of real activity with economic substance - further explanation:
    • the regime applicable in the respective jurisdiction does not require a substantial local presence for the development or exercise of the activity;
    • access to the regime does not require the development of real activities, that is, it does not require the development or exercise of an economic activity and does not require that the activities to be developed have economic substance; or
    • to access the regime, no substance requirements are required in relation to the activity that gives rise to income;
  • Regimes that are only available to persons or entities considered as non-residents of the jurisdiction in which the corresponding preferential tax regime operates (ring fencing) - further explanation:
    • the regime applicable in the respective jurisdiction implicitly or explicitly excludes taxpayers resident in the jurisdiction from accessing it; or
    • an entity that benefits from the regime in the respective jurisdiction is explicitly or implicitly prohibited from operating in the local market of that jurisdiction.

Note, similar criteria are provided in Article 260-7(1) for non-cooperative and low/no tax jurisdictions, although these are not the subject of Decree 1357.

In addition to providing further clarification on the criteria, Decree 1357 also provides that the following tax obligations arise from the performance of operations with persons, companies, or entities located in preferential regimes:

  • The obligation to withhold tax at source on payments to such persons, companies, or entities at the corporate income tax rate; and
  • The obligation to apply the transfer pricing regime for transactions with such persons, companies, or entities and comply with all formal obligations of the transfer pricing regime.

Decree 1357 is in force from 28 October 2021.

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