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THE IMPACT OF THE FINANCING LAW IN THE CORPORATE SECTOR

THE IMPACT OF THE FINANCING LAW IN THE CORPORATE SECTOR

Law 1943 of 2018, known as the “financing law”, is nothing more than a tax reform that aims to achieve greater tax collection to address the fiscal deficit, however, the Government has stated that this law seeks to encourage private investment and to boost the economic development of the country, through the generation of jobs.

Law 1943 of 2018, known as the “financing law”, is nothing more than a tax reform that aims to achieve greater tax collection to address the fiscal deficit, however, the Government has stated that this law seeks to encourage private investment and to boost the economic development of the country, through the generation of jobs.

In order to illustrate our readers, we have decided to mention some of the changes in taxes, which the business sector must face, and those which we consider occupy a higher percentage in business activities.

Equity Tax: it is created for the years 2019, 2020 and 2021. The equity tax is generated by having a liquid wealth, as of January 1 of 2019, whose value is equal to, or greater than, $5,000 million Colombian pesos. The rate will be 1% for each year. The tax is payable on January 1 of 2019, 2020 and 2021.
This tax will be applied to:

Natural persons, illiquid inheritances and income tax payers. Although the law does not expressly mention legal persons, it must be interpreted as meaning that they are taxpayers of income tax and, therefore, are also subject to wealth/equity tax.
Natural persons, nationals or foreign non-residents, regarding to the patrimony directly possessed in Colombia, or indirectly possessed through permanent establishments, except for the exceptions of international treaties and law. In the latter case, the formal duty, to declare, corresponds to the branches or permanent establishments. Foreign entities that do not declare income, and that own assets in Colombia other than shares, accounts receivable, and/or portfolio investments, indicated in the law, such as real estates, yachts, boats, boats, works of art, aircrafts or mining or oil rights, that is to say, foreign entities that do not declare income and have assets in Colombia such as shares, accounts receivable and/or portfolio investments, are not subject to this tax, but if they have other taxed assets that exceed 5,000 million Colombian pesos, then they will be subject to this tax.
Illiquid successions of non-resident causers at the time of death, with respect to their property owned in Colombia.

National tax on the consumption of housing units: this tax is levied when there is a sale of real estate, new or used, which value exceeds 26,800 UVT 2, including those made through the assignment of trust rights or funds not listed on the stock exchange. The rate shall be two percent (2%) of the total sale price.

It is established that for those individuals who receive dividends from national companies, they must pay a 15% tax, when these dividends exceed 300 UVT, that, by 2019, correspond to ten million two hundred and eighty-one thousand Colombian pesos ($ 10′ 281,000). This, in addition to the 33% of income tax that the company must pay.

The Article 27 of Law 1943 of 2018, indicates a formula to when it is higher than 300 UVT. In those cases, a tariff of 15% is applied on the surplus. The formula is (dividends in UVT minus 300 UVT) x 15%.

E.g: if the dividends correspond to 34′ 270.000 million Colombian pesos, we must apply the formula:

34′ 270.000 (value of dividends)/ 34270 (value of UVT) = 1.000 UVT– 300UVT = 700UVT

700 UVT x 34270 (value of UVT) = 23′ 989.000 it is to this value to which we apply the rate of 15%, in this case you should pay a tax of 3′ 598.350.

Or, if you want, we get 15% of 700 UVT, which corresponds to 105UVT x 34270 (UVT value) = 3′ 598.350.

When a foreigner provides a service in Colombia or from abroad, a 20% withholding at source must be made.

Although the main purpose of the law is to collect more taxes, we could not deny that the same one created a series of benefits that, analyzed and applied, are very useful for the business sector. Some of the benefits are:

Tax discount of 50% of the value paid from ICA (100% from taxable year 2022) and 100% of VAT paid on the import, training, construction or acquisition of real productive fixed assets. This discount is applicable to legal and natural persons and is one of the great benefits that this Law has incorporated.
The Presumptive Income will go from 3.5% in 2018, to 1.5% in 2019 and 2020, and 0% in 2021.
Decrease in the Income Tax rate for companies (starting in 2019 at 33%, decreasing 1% each year until reach 30% by 2022).
In the Income Tax Return, it is possible to deduct 100% of the taxes, rates and contributions effectively paid during the year, which have a causal relationship with the commercial income activity. This deduction is also applicable to 50% of the Lien on Financial Movements (4 × 1000). Before the financing law, the only deductible tax was the ICA, if, for example, a company paid a special contribution for surveillance or the vehicle tax of the company, these were not deductible, but now, with this new law, those concepts will be deductible as long as they have a causal relationship with the activity generating the income tax.
Legal companies that carry out the economic activity related to the orange economy are exempt from income tax for 7 years. Within the requirements to be beneficiaries, we find the following:
— These companies must have their main domicile in the Colombian territory, and their exclusive corporate purpose must be the development of value-added industries.

— It must be constituted before December 31, 2021 and the company must be within the category of activities that are benefit with the incentive.

— It must comply with minimum employment amounts defined by the Government.

— It must present an investment project before the Orange Economy Committee of the Ministry of Culture, justifying the viability, economic convenience and qualification as an orange economy activity. The Ministry must issue an act of conformity with the project and confirm the development of value-added technological industries and creative activities.

— It must Comply with the minimum amounts of investment in terms defined by the national government, which in no case may be less than four thousand four hundred (4,400) UVT and in a maximum period of three (3) taxable years.

Special tax regime for Giant Investments. Companies that from 2019, and until January 1, 2024 generate at least 250 direct jobs and make investments in the national territory in a maximum period of five years, equal to or greater than (30,000,000) UVT in any industrial activity, service, commercial or other activity, will have an income tax rate of 27% for a period of 20 years, an exclusion of the estate tax and exclusion of the tax on the dividends they obtain, among others.

Once the general panorama for companies in Colombia has been clarified, it is clear that, while it is true that there is a high tax rate in Colombia, it is also true that the legal system has created mechanisms through benefits, exemptions and exclusions that allow companies to alleviate the tax burden.

That is why, as specialists in Tax Law, we always recommend that companies and individuals, regardless of the stage in which they find themselves, carry out a Tax Planning exercise, through which a diagnosis is made to determine the tax situation of the company and applying the knowledge regarding tax obligations depending on the sector in which it is located, advance a short and medium term plan taking advantage of the benefits granted by law in order to reduce the tax impact for the company. The purpose of this is that companies have a comprehensive analysis that allows them to make the best decisions with the greatest benefits adjusted to the law.

Author: Carolina Bertel.

Editing: Santiago Pinzon Sosa.

1 Article 20– 1. Tax Statute. A permanent establishment is understood to be a fixed place of business located in the country, through which a foreign company, whether a corporation or any other foreign entity, or natural person without residence in Colombia carries out all or part of its activity.

2 It means “Tax Value Unit” and is a unit of measurement that allows the different tax values to be homogenized. For 2019, the value of the UVT was set by DIAN at thirty-four thousand two hundred and seventy pesos ($34,270).

3 Decree 1766 of 2014 defines productive real fixed assets as tangible assets that are acquired to form part of the patrimony, participate directly and permanently in the income producing activity of the taxpayer and are fiscally depreciated.

In order to illustrate our readers, we have decided to mention some of the changes in taxes, which the business sector must face, and those which we consider occupy a higher percentage in business activities.

Equity Tax: it is created for the years 2019, 2020 and 2021. The equity tax is generated by having a liquid wealth, as of January 1 of 2019, whose value is equal to, or greater than, $5,000 million Colombian pesos. The rate will be 1% for each year. The tax is payable on January 1 of 2019, 2020 and 2021.
This tax will be applied to:

Natural persons, illiquid inheritances and income tax payers. Although the law does not expressly mention legal persons, it must be interpreted as meaning that they are taxpayers of income tax and, therefore, are also subject to wealth/equity tax.
Natural persons, nationals or foreign non-residents, regarding to the patrimony directly possessed in Colombia, or indirectly possessed through permanent establishments, except for the exceptions of international treaties and law. In the latter case, the formal duty, to declare, corresponds to the branches or permanent establishments. [1] Foreign entities that do not declare income, and that own assets in Colombia other than shares, accounts receivable, and/or portfolio investments, indicated in the law, such as real estates, yachts, boats, boats, works of art, aircrafts or mining or oil rights, that is to say, foreign entities that do not declare income and have assets in Colombia such as shares, accounts receivable and/or portfolio investments, are not subject to this tax, but if they have other taxed assets that exceed 5,000 million Colombian pesos, then they will be subject to this tax.
Illiquid successions of non-resident causers at the time of death, with respect to their property owned in Colombia.

National tax on the consumption of housing units: this tax is levied when there is a sale of real estate, new or used, which value exceeds 26,800 UVT [2], including those made through the assignment of trust rights or funds not listed on the stock exchange. The rate shall be two percent (2%) of the total sale price.

It is established that for those individuals who receive dividends from national companies, they must pay a 15% tax, when these dividends exceed 300 UVT, that, by 2019, correspond to ten million two hundred and eighty-one thousand Colombian pesos ($ 10′ 281,000). This, in addition to the 33% of income tax that the company must pay.

The Article 27 of Law 1943 of 2018, indicates a formula to when it is higher than 300 UVT. In those cases, a tariff of 15% is applied on the surplus. The formula is (dividends in UVT minus 300 UVT) x 15%.

E.g: if the dividends correspond to 34′ 270.000 million Colombian pesos, we must apply the formula:

34′ 270.000 (value of dividends)/ 34270 (value of UVT) = 1.000 UVT– 300UVT = 700UVT

700 UVT x 34270 (value of UVT) = 23′ 989.000 it is to this value to which we apply the rate of 15%, in this case you should pay a tax of 3′ 598.350.

Or, if you want, we get 15% of 700 UVT, which corresponds to 105UVT x 34270 (UVT value) = 3′ 598.350.

When a foreigner provides a service in Colombia or from abroad, a 20% withholding at source must be made.

Although the main purpose of the law is to collect more taxes, we could not deny that the same one created a series of benefits that, analyzed and applied, are very useful for the business sector. Some of the benefits are:

Tax discount of 50% of the value paid from ICA (100% from taxable year 2022) and 100% of VAT paid on the import, training, construction or acquisition of real productive fixed assets. [3] This discount is applicable to legal and natural persons and is one of the great benefits that this Law has incorporated.
The Presumptive Income will go from 3.5% in 2018, to 1.5% in 2019 and 2020, and 0% in 2021.
Decrease in the Income Tax rate for companies (starting in 2019 at 33%, decreasing 1% each year until reach 30% by 2022).
In the Income Tax Return, it is possible to deduct 100% of the taxes, rates and contributions effectively paid during the year, which have a causal relationship with the commercial income activity. This deduction is also applicable to 50% of the Lien on Financial Movements (4 × 1000). Before the financing law, the only deductible tax was the ICA, if, for example, a company paid a special contribution for surveillance or the vehicle tax of the company, these were not deductible, but now, with this new law, those concepts will be deductible as long as they have a causal relationship with the activity generating the income tax.
Legal companies that carry out the economic activity related to the orange economy are exempt from income tax for 7 years. Within the requirements to be beneficiaries, we find the following:
— These companies must have their main domicile in the Colombian territory, and their exclusive corporate purpose must be the development of value-added industries.

— It must be constituted before December 31, 2021 and the company must be within the category of activities that are benefit with the incentive.

— It must comply with minimum employment amounts defined by the Government.

— It must present an investment project before the Orange Economy Committee of the Ministry of Culture, justifying the viability, economic convenience and qualification as an orange economy activity. The Ministry must issue an act of conformity with the project and confirm the development of value-added technological industries and creative activities.

— It must Comply with the minimum amounts of investment in terms defined by the national government, which in no case may be less than four thousand four hundred (4,400) UVT and in a maximum period of three (3) taxable years.

Special tax regime for Giant Investments. Companies that from 2019, and until January 1, 2024 generate at least 250 direct jobs and make investments in the national territory in a maximum period of five years, equal to or greater than (30,000,000) UVT in any industrial activity, service, commercial or other activity, will have an income tax rate of 27% for a period of 20 years, an exclusion of the estate tax and exclusion of the tax on the dividends they obtain, among others.

Once the general panorama for companies in Colombia has been clarified, it is clear that, while it is true that there is a high tax rate in Colombia, it is also true that the legal system has created mechanisms through benefits, exemptions and exclusions that allow companies to alleviate the tax burden.

That is why, as specialists in Tax Law, we always recommend that companies and individuals, regardless of the stage in which they find themselves, carry out a Tax Planning exercise, through which a diagnosis is made to determine the tax situation of the company and applying the knowledge regarding tax obligations depending on the sector in which it is located, advance a short and medium term plan taking advantage of the benefits granted by law in order to reduce the tax impact for the company. The purpose of this is that companies have a comprehensive analysis that allows them to make the best decisions with the greatest benefits adjusted to the law.

Author: Carolina Bertel.

Editing: Santiago Pinzon Sosa.

[1] Article 20– 1. Tax Statute. A permanent establishment is understood to be a fixed place of business located in the country, through which a foreign company, whether a corporation or any other foreign entity, or natural person without residence in Colombia carries out all or part of its activity.

[2] It means “Tax Value Unit” and is a unit of measurement that allows the different tax values to be homogenized. For 2019, the value of the UVT was set by DIAN at thirty-four thousand two hundred and seventy pesos ($34,270).

[3] Decree 1766 of 2014 defines productive real fixed assets as tangible assets that are acquired to form part of the patrimony, participate directly and permanently in the income producing activity of the taxpayer and are fiscally depreciated.

Yuki

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