BDO Corporate Tax News

This article has been updated. It was originally published on 1 March 2024

A decree issued by the Colombian government at the end of 2023 contains regulations and guidance on the significant economic presence (SEP) rules that were introduced in 2022 and that apply as from 1 January 2024 (for prior coverage, see the article in the February 2023 issue of Corporate Tax News).  
 
The SEP rules expand Colombia’s right to tax the profits of foreign companies that do not have a physical presence in the country but have a connection with the Colombian market based on a digital presence or interaction with local customers or users. Nonresident persons or entities with a SEP in Colombia will be subject to a 3% income tax or a 10% withholding tax, as explained below. The decree includes definitions relevant to the application of the SEP rules, criteria for determining when customers of a nonresident will be deemed to be located in Colombia, criteria for determining who should withhold the tax, etc. 

SEP requirements 

 A nonresident that meets the following requirements will be deemed to have an SEP in Colombia: 

• The nonresident derived gross income of at least 31,300 Value Tax Units (approximately USD 377,726) from transactions involving the sale of goods and/or the provision of services to customers and/or users located in Colombia during 2023 or the current taxable year; and 
• The nonresident has “deliberate and systematic interactions” with the Colombian market. This is deemed to occur where the nonresident interacts with 300,000 or more customers and/or users in Colombia in the previous or current taxable year or allows prices to be displayed in Colombian pesos or allows payment to be made in Colombian pesos. 

Digital activities that will be taken into account in determining whether an SEP exists include the following: 

• Online advertising services; 
• Digital content services (e.g., e-books, music and films); 
• Over-the-air streaming services (e.g., TV shows, films, music, streaming media, podcasts and any form of digital content); 
• Any form of monetization of information and/or data of users located in Colombia and that have been generated by the activity of such users in digital markets; 
• Online services of intermediation platforms; 
• Digital subscriptions to audiovisual media (e.g., news, magazines, newspapers, music, videos, games of any kind); 
• Management, administration or the handling of electronic data, including web storage, online data storage, file sharing services or cloud storage; 
• Services or licensing of standardized or automated online search engines, including custom software; 
• Provision of the right to use or exploit intangibles; 
• Other electronic or digital services intended for users located in Colombia; and 
• Any other services provided through a digital marketplace for users in Colombia. 

If a nonresident meets the requirements to have an SEP, income generated will be considered Colombian-source income and therefore, the nonresident will be an income taxpayer in Colombia.  

Compliance obligations 

Nonresidents that fall within the scope of the SEP rules are subject to compliance obligations:  

• Filing and paying income tax directly: If the nonresident registers with the Colombian tax authorities as a taxpayer that will file a return, they will be subject to an income tax rate of 3% on the gross amount received from the sale of goods and the provision of services to Colombian customers/users. The nonresident will have to make advance payments of tax on a bimonthly basis at a rate of 2% of gross income, with the first advance payment due in March 2024. 
• Tax payment via withholding tax at source: The nonresident will be subject to a 10% withholding tax on the gross amount if it does not register as a taxpayer that will file an annual tax return or, if registered, elects to be subject to the withholding tax.  

If multiple withholding agents are involved in the same transaction, the decree sets out the order of priority to determine which agent is the withholding agent: 

• The withholding agents referred to in article 368 of the Tax Code (i.e., Colombian companies, public entities, etc.) when they directly acquire the goods or services; 
• The financial institution issuing the credit/debit card that is used as the means of payment and the institution has the necessary information to withhold the tax; 
• Payment gateways through which payments are made (however, the order of priority does not exempt the gateway from sharing the relevant information with the financial institution to enable it to make a correct withholding); 
• The entity that provides the financial product or service where payment for the transaction is not made by a credit or debit card but is settled via another financial product or service; 
• Third-party cash collectors; 
• Prepaid card sellers; and 
• Any other agent designated by the Special Administrative Unit of the Colombian tax authorities. 

The agent must withhold the tax unless the nonresident provider demonstrates that it has registered with the tax authorities as a taxpayer that will file an annual tax return and has not elected to be subject to the withholding tax or the nonresident states under oath that it does not meet the criteria to have an SEP in Colombia. For payments to be deductible, customers and/or users in Colombia must issue supporting documentation for transactions with providers that are not required to issue electronic invoices.

BDO insights 

Commercial transactions are evolving rapidly, posing a challenge for the tax administration to identify transactions, ensure compliance with the SEP regime and collect income tax. In addition, the SEP rules may impact Colombian end users and clients of these companies with increased costs or the unavailability of services because the income tax generated by SEP could lead to an increase in the price of goods or services or the Colombian buyer may assume the withholding tax as a higher cost. 

In conclusion, the full impact of the SEP regime is still uncertain, and ongoing monitoring will be necessary to fully understand the implications of the SEP on the local market and the effects in the long term. 

Martha Reyes
BDO in Colombia