FILING TAXES IN COLOMBIA IN 2023? BE PREPARED TO PAY

By: María Cristina Estrada, CPA (COL).

Until just recently, many foreigners did not have to worry about personal tax liability in Colombia. After all, and as explained in our ongoing Filing Personal Taxes in Colombia series:

most foreigners are not required to file taxes unless they are considered tax residents;
even if a foreigner does become a tax resident, many are not required to submit a personal tax return in Colombia; and
even if 1. a foreigner does become a tax resident AND 2. they are required to file, plenty of foreigners do not end up paying anything either because they don’t have any taxable income OR because they can discount any tax paid in other jurisdictions against any taxes owed locally.

While the above remains accurate, starting this year many more foreigners who are required to file tax returns will also be required to make tax payments to local tax authorities.

CHANGES ARE HERE

With the approval of Law #2277 in December, 2022, the government eliminated/amended a series of tax breaks and benefits that previously allowed tax payers the opportunity to minimize their overall tax obligations. The intention of the Colombian government (as in other jurisdictions) was to decrease the percentage of the population that is currently exempt from paying local taxes in order to increase overall tax collection. This was particularly important for a government that continues to face a severe fiscal crisis following the covid pandemic and that is intent on increasing funding for social programs.

Below is a non-exhaustive summary of some of these changes and how they may impact local tax payers starting this tax year:

Employment Income

Prior Rules: Foreigners could reduce their share of taxable employment income by 25% up to a maximum of COP$122,146,560 (for 2023).
New Rules: Foreigners can still reduce their share of taxable employment income by up to 25% but maximum has been decreased to COP$33,505.480 (for 2023).
Net Effect: Foreigners will not be able to shield as much of their employment income from local tax calculations as they used to.

Independent Contractor Income

Prior Rules: Foreigners could deduct an unlimited amount of fees and expenses directly tied to their work as independent contractors.
New Rules: Foreigners can now only deduct up to a maximum of 60% of all applicable fees and expenses.
Net Effect: Foreigners will not be able to shield as much of their contractor income from local tax calculations as they used to.

Investment Income

Prior Rules: Foreigners could deduct an unlimited amount of fees and expenses directly tied to their investments.
New Rules: Foreigners can now only deduct up to a maximum of 60% of all applicable fees and expenses.
Net Effect: Foreigners will not be able to shield as much of their investment income from local tax calculations as they used to.

Documentation/Evidentiary Requirements

Prior Rules: Foreigners could provide very basic/generic documentation in order to substantiate costs, expenses, income, etc….for Colombian-based activity.
New Rules: Foreigners are now required to follow newly applicable electronic invoicing/receipts requirements for Colombian-based activity. In addition, foreigners are now required to submit a formal notification (the “Declaración de Activos en el Exterior”) listing all of their assets on a worldwide basis.
Net Effect: The tax filing process will become much more onerous and time-consuming for both the tax payer and their local accountant.

NET EFFECT

The net effect of these changes are:

More Foreigners Will Pay: Given these changes, more foreigners who are required to file a local tax return will also be required to pay something to the local tax authorities.
Added Complexity to Tax Filing Process: Filing a local tax return will become much more complicated, time-consuming and labor intensive.

WHAT NOW?

Foreigners who are required to file and pay locally will need to consider the following options:

Option 1: File and Pay

This option is pretty straightforward and will minimize your risk completely.

Option 2: File and Pay Based on “Colombian-Only” Activity

As explained in our Filing Personal Taxes in Colombia series, some local accountants interpret local rules as allowing foreign tax payers the opportunity to calculate obligations based only on assets and income located/sourced in Colombia. In theory, this strategy should decrease any payment obligations for many foreigners given that most don’t have any significant assets located in Colombia nor earn any significant income in Colombia.

However, it should be noted that our Firm does not recommend this strategy. First, we interpret the rules as requiring tax payers to report assets and income on a worldwide basis. This means that if you were ever audited, you may be subject to local penalties and fees assessed by the DIAN, the local tax authority. Second, governments are now sharing a great deal of tax information via international tax treaties. This increases the chances that, at some point, any violations will be identified by the DIAN.

Option 3: Don’t File

We outlined this option in our Filing Personal Taxes in Colombia series. Here is an excerpt:

We get this question a lot. The short answer is that if you fail to file a local tax return you could technically be subject to pretty extensive fines and penalties depending on a number of factors including your taxable income, the value of your worldwide assets and the number of years you fail to file a return.

In practice, the actual consequences of not filing can vary widely. Here are some specific risk scenarios that can help you decide whether it makes sense to file:

Foreign Tourists. Occasionally, foreign tourists may inadvertently become tax residents and are technically required to file a local tax return. However, assuming these foreign tourists do not plan to work, invest, retire or otherwise have any long-term ties to Colombia, the current risk level involved in not filing is fairly manageable.
Foreign Residents. If you plan to actually reside in Colombia the risk involved in not filing a local tax return increases substantially, particularly for foreigners who own businesses and/or invest in local assets like real estate. It is not uncommon for local tax authorities to attempt to seize personal assets in order to satisfy local tax obligations.
Non-Resident Foreigners Engaged in Business/Investment Activities. If you do not intend to reside in Colombia long-term but are otherwise engaged in specific business and/or investment activities in Colombia, the risk involved in not filing a local tax return is similar to that faced by foreign residents. While you may not be physically present in Colombia, local tax authorities can still seek to attach and seize local assets as a way to pressure you to pay any local tax obligations.

HAVE QUESTIONS?

If you have any questions feel free to contact the Firm by leaving us a message here.