Colombian Tax Authority issues new ruling on Significant Economic Presence

On 30 April 2024, the Colombian Tax Authority (DIAN) issued Ruling No. 100208192-305, aimed at resolving several concerns in relation to the Significant Economic Presence (SEP) rules.

The SEP rules were created by Colombia's most recent tax reform, Law 2277 of 2022, and were regulated by Decree 2039 of 2023. (For more on the regulation, see EY Global Tax Alert, Colombia issues regulations on Significant Economic Presence, dated 4 December 2023.)

In general terms, under this set of rules, and provided certain conditions are met, nonresidents who sell goods and/or provide certain digital services to customers and/or users located in Colombia may create SEP. In such a scenario, the nonresident seller will be subject to Colombian income tax either through (i) a 10% withholding tax, or (ii) a 3% income tax to be filed annually, calculated on the gross income obtained in Colombia. The rule entered into force as of 1 January 2024.

No deductibility limitation on payments to nonresidents with SEP

The DIAN clarified that payments to nonresidents with SEP in Colombia that were not subject to withholding tax would not be subject to the limitation of Article 122 of the Colombia Tax Code (CTC).1 This is provided that the nonresident who created SEP has chosen to file an income tax return in Colombia and requested that no withholding tax should be applied.

Nevertheless, a Colombian taxpayer should collect withholding tax from a nonresident with SEP, absent an indication that withholding tax is not applicable (e.g., because they are an SEP income tax filer). Withholding tax is a requirement for the deductibility on SEP expenses in accordance with the tax law, particularly Article 121, CTC.

SEP registration and withholding

Nonresidents with SEP that have chosen to file and pay income tax should obtain a Colombia tax ID ("RUT" is the acronym in Spanish) and register the responsibility to act as income tax filer. If they decide not to be subject to withholding, they should submit, together with the petition for nonapplication of withholding tax, evidence of proper registration in the RUT.

In any case, Colombian withholding agents that make payments abroad to foreign providers of goods/services should duly inquire to determine whether these providers meet the criteria to apply the SEP withholding tax.

SEP for foreign goods providers

Regarding foreign-goods providers, the DIAN pointed out that sales of goods entering the country through an importation process and not acquired through digital platforms, will be subject to taxation via SEP if the transaction complies with the requirements, regardless of whether the goods were paid for using a foreign compensation account.

The DIAN clarified that SEP rules do not require interaction through a digital ecosystem to trigger SEP in the sale of goods. Therefore, according to the DIAN, any sale that meets the criteria for revenue and "deliberate and systematic interaction" will fall under the SEP rules.

Digital services taxed with SEP

The DIAN clarified that digital services taxed for the purposes of SEP are solely those included in the list provided by tax law. According to this clarification, any service not found on said list will be subject to the general rules provided by Colombian tax law.

SEP for Foreign Housing Service Providers

The DIAN confirmed that foreign service providers using a digital platform to offer accommodation/housing services in real estate located within the country generate Colombian-source income from the exploitation of these asset and will be subject to tax according to the general rules of the tax law. Consequently, this income is not taxed under SEP special rules, although the commissions obtained for the use of the platform may be taxed under special rules.

Exchange rate applicable to the sale of goods by SEP taxpayers/filers

The DIAN stated that for sales of goods payable in foreign currency, it is mandatory to use the exchange rate applicable at the moment of initial recognition in the accounting records, particularly in the financial statements in which assets and liabilities are to be expressed in foreign currency. It is also noted that adjustments for exchange differences will be recognized in accordance with Colombian tax law.

Withholding tax agents and SEP

The DIAN clarified two features regarding the obligations to be triggered to SEP withholding agents. First, it indicated that there are only two situations in which withholding is not applicable — when the foreign entity (i) has stated that it does not meet the criteria to be subject to Colombian SEP rules, or (ii) has chosen to file income tax (which will be verified with the appropriate registration in the Colombian Tax ID) and has requested that no withholding should apply. In all other cases, the withholding tax should apply; otherwise the deductibility of the expense may be challenged.

As a second point, The DIAN stated that if financial entities lack the information to act as SEP withholding agents and lack the possibility to obtain the information, the payment processors will be in charge of acting as SEP withholding agents. However, a financial institution issuing a credit card that could not act as withholding agent should be able demonstrate that it requested the information from (i) the payment processors and (ii) all entities related to the payment of goods/services subject to SEP taxation.