Colombian Tax Authority clarifies aspects of Significant Economic Presence

On 17 October 2024, the Colombian Tax Authority (referred to as DIAN) issued Ruling 890 [007929], addressing several questions related to applying the new rules on Significant Economic Presence (SEP).

Under the SEP rules, which are applicable from 1 January 2024, nonresidents who sell goods and/or provide certain services to customers and/or users located in Colombia, may trigger a SEP and, therefore, be obliged to pay taxes in Colombia either: (i) via a 10% withholding tax or (ii) by filing a SEP tax return and apply a 3% rate on the gross income obtained in the country.

SEP will exist when the nonresident (or its related parties):

• Obtains gross revenues of more than 31,300 Tax Value Unit (approximately US$350,000) from transactions carried out with customers and/or users located in Colombia
• Has a systematic and deliberate interaction with the Colombian market, which is presumed to occur if: (i) an interaction or marketing deployment is maintained with 300,000 or more customers and/or users located in Colombia, or (ii) the nonresident displays prices in Colombian pesos (COP) or allows customers to pay in COP

Potentially, SEP rules would not apply under double-taxation treaties and future international treaties on digital economy taxation.

The main points of the ruling are described below.

Annual income tax return and withholding tax

The DIAN clarified that taxpayers who choose to file SEP tax returns, must report in their filing all the income obtained from 1 January to 31 December of the year in which the registration as a SEP tax filer was made in the Colombian tax registry ("RUT" per the acronym in Spanish), regardless of when during the year the registration was made.

Additionally, for those registered as SEP tax filers, any withholding tax applied at a rate of 10% (probably prior to the registration), may be requested against the tax due on the SEP tax return. If the withholding taxes exceed the tax due, the excess may be carried forward to offset tax dues in the following year's SEP tax returns, or a refund may be requested.

Bimonthly advance payments

The DIAN provided that the payment of bimonthly 2% advance payments on gross income, made by SEP tax filers that chose not to be subject to withholding tax, must begin from the date the SEP tax filer registered in the RUT.

In an example, the ruling indicates that if the registration as a SEP tax filer in the RUT was effectively made on 1 November 2024, the advance payment for gross income received for the months of November to December must be calculated, and then paid in January 2025.

Withholding tax and advance payments don't coexist

The DIAN clarifies that if a nonresident registered as a SEP tax filer decides to continue being subject to withholding (at the rate of 10%), the filer would not be obligated to make bimonthly advance payments.

Income recognition for SEP taxpayers

According to the DIAN, for SEP tax filers who keep accounting records, income will be recognized based on an accrual basis. On the contrary, for SEP tax filers who do not keep accounting records, the recognition of income will occur when they receive the actual payment.

It should be noted that the ruling does not refer to taxpayers who are either required, or not required, to keep accounting records under the Colombian law, but simply to those who do, or do not, keep accounting records, which could be the subject of controversy.

Recognition of canceled, annulled and rescinded transactions

The ruling clarifies that for nonresident taxpayers with SEP, the tax is calculated on gross income, which includes both ordinary and extraordinary income made during the taxable period and is likely to increase the taxpayer's net equity. In the specific case of canceled, annulled or rescinded transactions, the taxpayer must determine whether the income has been recognized in accordance with Article 27, (taxpayers not obliged to keep accounting records, i.e., payment in cash) or Article 28 (taxpayers obliged to keep accounting records, i.e., accrual system) of the Colombian Tax Code.