The nature of the payments abroad to non-residents or non-domiciled foreign entities determines the applicable income and remittance tax withholding in Colombia. This applies at a rate of 7% in the case of dividends, of 10% in the case of technical assistance, technical services and consulting services, and 39.55% in the case of financial earnings, commissions, fees, and royalties.
Article 89 of the Tax Reform Bill, which is now under discussion, says payments or accruals to non-resident individuals or non-domiciled foreign entities organized under or domiciled in jurisdictions that qualify as tax havens in the OECD list, or as determined by the Colombian government, will be subject to a 35% income tax withholding, plus a 7% remittance tax withholding. Dividend payments will only be subject to a 35% withholding.
If the proposed rule is passed by Congress, all the payments and accruals to non-resident individuals or non-domiciled foreign entities organized under or domiciled in jurisdictions that qualify as tax havens will be taxed at the same 35% rate. This means that payments for dividends, technical assistance, technical services, and consulting services will no longer have the general treatment described above if the beneficiary is located in a tax haven.
Additionally, Article 88 of the Bill under discussion provides that the payments or accruals to non-resident individuals and non-domiciled foreign entities that are organized under or domiciled in jurisdictions that qualify as tax havens will not be deductible if the applicable income tax withholding at source is not made.
This rule does not include significant changes to the general deductibility provisions. Under current law, costs and expenses incurred abroad are deductible, with certain limitations, provided that the corresponding tax withholdings are made (including any payment incurred abroad, regardless of the location of its beneficiary). However, the proposed rule reflects the intention of introducing more severe control over transactions performed with individuals and entities located in tax havens.
To carry out tax planning in the event that these new rules are approved by Congress (the Economic Committees of the Senate and the House of Representatives approved them on December 6 2002), companies must wait for corresponding regulations to be issued by the national government. If articles 88 and 89 of the Bill are approved, the government would be empowered to prepare its own list of tax havens.