Colombia: Guidance on application of the significant economic presence rule

The Colombian Congress in December 2022 passed Law 2277 of 2022 (i.e., the “2022 Tax Reform”). The law introduced to the Colombian tax code (CTC) the significant economic presence (SEP) rule, which represents a new nexus criterion for corporate income tax (CIT) liability in Colombia, effective 1 January 2024. The SEP rule applies to nonresident companies engaged in the sale of goods to Colombian clients and/or the provision of qualified digital services to Colombian clients/users. The Ministry of Finance of Colombia in November 2023 issued Decree 2039 regulating application of the SEP rule.

The Colombian tax authority (CTA) on 30 April 2024 issued official guidance on application of the SEP rule, through Ruling No. 100208192-305.

In Ruling No. 100208192-305 the CTA answered several questions raised by taxpayers regarding the understanding and application of the provisions set forth in the CTC and in the Unique Tax Decree (UTD), which incorporates Decree 2039 of 2023.

The CTA:

• Reiterated that a Colombian SEP is triggered when the nonresident (1) has deliberated and systematic interaction with the Colombian market, which takes place when the nonresident (a) has 300,000 Colombian users/clients in the previous or current year or (b) keeps or establishes the possibility of seeing prices or allowing payments in COP; (2) obtains SEP-related income equivalent or higher than 31,300 units of tax value (approximately US$378,000); and (3) in the case of services operations, the respective services are within the listed qualified services.
• Stated that in the case of transactions with nonresidents with SEP who have chosen to comply with its CIT SEP obligations by (1) registering in the unique tax registry (“RUT by its acronym in Spanish) and filing an annual tax return; and (2) expressly requested that no withholding tax (WHT) is applied; the Colombian payor will be allowed to deduct 100% of the payment as the limitation set forth in article 122 of the CTC will not apply (the other deductibility requirements established in the CTC will be observed).
• Confirmed that to support the deductibility of the payment the WHT agent (i.e., the payor designed as such) will require (1) the RUT evidencing the registration and that the nonresident chose the not application of the WHT; or (2) a formal written attestation/certification (considered issued under oath) that expresses that the nonresident does not meet the conditions to have a Colombian SEP. In the absence of such evidence, the WHT agent will not be entitled to deduct the respective payment.
• Explained that the payors must undertake due diligence procedures to understand the Colombian tax situation of the payees, obtaining evidence of its registration in the RUT (by obtaining a copy of the same), confirming that they have opted for the not application of the WHT. If the respective evidence is not obtained the WHT must be applied.
• Clarified that in the case that a nonresident owns property located in Colombia that is rented through digital platform, and the nonresident meets the commented thresholds, no SEP will be originated in its hands, as its Colombian operation would be considered subject to CIT under the “ordinary rules” of the CTC and therefore will be liable to CIT at a 35% rate. The driving factor of this conclusion being that the property is in Colombia and therefore the renting activity considered carried out inside the Colombian territory.
  
  The foregoing is irrespective of the potential SEP CIT obligations in the hands of the digital platform.
  
  
• Ratified that SEP CIT provisions apply for both sale of goods and provision of services and therefore that the requirements established in article 20-3 of the CTC must be observed in any of said type of operations to determine whether a Colombian SEP is triggered.
  
  Furthermore, the CTA clarified that in the case of sale of goods, the applicable legislation did not establish as a requirement that the sale is carried out through digital means to originate a Colombian SEP; hence, to the extent that the commented thresholds are met then a nonresident may be liable to SEP CIT even if the sales are executed through non-digital means. The CTA highlighted that in order to determine whether clients/users are located in Colombia, two or more of the following circumstances (as established in the law) must exist:
  • The domicile or habitual abode of the client/user is in Colombia
  • The payments are made through credit/debit cards or other type of cards or vouchers, or any other means of payment located in Colombia
  • The credit/debit card used to pay has been issued in Colombia
  • The delivery address is in Colombia (for the case of sale of goods)
  • The IP address of the devise used by the client/user locates him in Colombia at the time the transaction is made
  • The mobile country code (MCC) of the international identity of the mobile service subscriber on the SIM card used by the client/user locates him in Colombia
     
• Asserted that nonresidents with Colombian SEP undertaking operations in currency other than COP, need to consider the exchange rate applicable at the time of the initial recognition of the respective entries in the financial statements, and that exchange rate difference adjustments must be recognized as well following the provisions of article 288 of the CTC (i.e., when realized).
• Explained that in accordance with the provisions of article 1.2.4.39 of the UTD (which establishes the order of priority to determine the withholding agent), when the financial entity (issuer of the credit/debit card) does not have sufficient information of the nonresident to apply the WHT, then the WHT must be applied by the payment processor / payment gateway, who is the WHT agent that follows the financial entity in the priority order.
  
  The CTA emphasized that the financial must first request the corresponding information to (1) the payment processor / payment gateway; and (2) all the other entities related to the payment, as they are obliged to provide such information. The financial entity must be in a position to substantiate / evidence that said information request took place. As follows the WHT agents’ priority order:
  • WHT agents listed in article 368 of the CTC
  • The financial entity issuer of the debit/credit card
  • The payment gateway when they make the payment (consider that the regulation emphasizes that irrespective of the WHT agent priority order, the gateway shall provide the information required by the issuer of the debit/credit card to withhold the respective tax when applicable)
  • The cash collectors on behalf of third parties
  • The seller of prepaid cards
  • Other withholding agents designed by the CTA

Ricardo Ruiz | ricardoaruiz@kpmg.com

Juan C Urrego | jurrego@kpmg.com

Oscar Munevar | omunevar@kpmg.com