Last updated on 7 de April de 2023
Colombia is one of the countries with the best quality of life in South America. For those interested in Colombia, we analyze the most important taxes.
Content
- Introduction
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
- VAT
- Real Estate Taxes
- Inheritance and Gift Tax
- Colombia Public Finances
- Conclusion
Introduction
Latin America is a region with a lot to offer when it comes to weather, quality of life and food. Colombia is one of the most prominent examples of that.
Additionally, the cost of living in Colombia is significantly lower than in many other places. According to the comparison website WorldData.info, prices in Colombia are about 60% lower than in the United States. This means our money goes much further.
When it comes to the currency, Colombia uses the Colombian Peso (COP). Throughout this analysis we will mention the original tax amounts in Pesos, as well as their equivalent in US Dollars. For this we will use an approximate exchange rate of $1 = COP 5,000.
Taxes on Earned Income
Labor income in Colombia is subject to social security payments and income tax:
Social Security
Colombia has a social security system responsible for managing various services enjoyed by citizens. These services, however, are not free and need to be financed with contributions.
Employers bear most of the cost of social security payments. They must pay the equivalent of 12% of the employee’s gross salary to the social security.
The minimum salary base for the calculation of employer contributions is the legal minimum wage of 828,116 COP ($166) per month. The maximum base is 25 times that amount, or 20.7 million COP ($4,141). As a result, the maximum employer contribution will be 29.8 million COP ($5,960) per year.
When it comes to employees, most of them will pay 4% of their gross salary in social security contributions.
However, if their gross salary exceeds the equivalent of 4 times the minimum wage, the percentage will increase to 6% for that portion between 4 and 15 times the minimum wage. Between 15 and 20 times the minimum wage, the percentage will be 7%. Social security contributions will not apply for the portion of someone’s salary above 20 times the minimum wage.
Income Tax
Colombia has a progressive income tax system. This means that those with higher incomes must pay a higher percentage of their income in tax.
Income tax in Colombia has 7 brackets and the applicable thresholds are determined by the value of the Tax Value Unit, known as UVT in Colombia.
The UVT is a value that updates annually in line with inflation. The income tax thresholds are fixed in terms of UVT units and adjust in terms of Pesos.
The value of a UVT in 2023 is 42,412 Pesos, equivalent to $8.48. Consequently, the are the applicable income tax rate in Colombia:
- From 0 to 46 million COP ($0 to $9,200): 0%
- From 46 to 73 million COP ($9,200 to $14,600): 19%
- From 73 to 174 million COP ($14,600 to $34,800): 28%
- From 174 to 367 million COP ($34,800 to $73,400): 33%
- From 367 to 805 million COP ($73,400 to $161,000): 35%
- From 805 to 1,315 million COP ($161,000 to $263,000): 37%
- More than 1,315 million COP (more than $263,000): 39%
Income taxes in Colombia are quite moderate. The lowest income people pay no income tax whatsoever. The bill gets more expensive for the middle and upper classes, but without reaching the levels that can be found in many states within the US or European countries.
Capital Income Taxes
Let us next analyze that taxes apply to income from savings and investments in Colombia:
Interest Income
Interest income is treated the same way as earned income. In fact, it is added to our labor income and taxed at the applicable marginal rate which can be as high as 39%.
Dividends
Dividends may come from companies that have already paid corporate tax or not. Depending on that, dividends will be taxed one way or another.
If a company has not paid corporate tax and is distributing money to shareholders, the dividends will be taxed at a flat rate of 35%.
Dividends received from companies that have paid corporate tax will be treated more favorably. The first 12.72 million COP ($2,544) will be exempt from tax, and any amount above that taxed at 10%.
Rental Income
Net rental income, after having deducted all expenses associated with the ownership and upkeep of our properties, will be subject to a flat tax rate of 35%.
Realized Capital Gains
When it comes to realized capital gains, how they are taxed will depend on how long we have owned those assets before selling them.
If we have owned an asset for less than 2 years and sell it at a profit, the capital gain will be subject to a tax rate of 33%.
However, if we owned the asset for at least 2 years prior to selling it, the tax rate applicable to the capital gain will only be 10%.
Corporate Tax
Most business profits in Colombia are subject to corporate taxes. Since the beginning of 2022, the general corporate tax rate in Colombia is 35%.
This rate is higher than in many other countries and in line with major European economies. On the other hand, dividends paid by corporations subject to this corporate tax rate are taxed less heavily when shareholders receive that money.
Financial institution face a surcharge of 3% on their profits, bringing their applicable corporate tax rate to 38%.
VAT
In Colombia, the consumption of goods and services is subject to VAT. Different VAT rates apply to different products.
Thus, the general VAT rate in Colombia is 19% and used for all goods and services that are not explicitly subject to one of the reduced rates.
Meat and fish are subject to a reduced VAT rate of 5%, while more basic products such as bread and vegetables are exempt from VAT.
Real Estate Taxes
Two types of real estate taxes exist in Colombia: for buying it and, subsequently, for owning it.
The purchase of a home is subject to the payment of a title fee, equivalent to 1% of the value of the transaction, a registration tax, equivalent to 1.67%, and notary fees, whose cost is 0.27% for both the buyer and the seller.
Therefore, for the buyer of a property, the associated expenses are equivalent to 2.94% of the transaction amount. The cost for sellers is only 0.27%.
Once we own the real estate, we will have to pay property taxes. These depend on the municipality in which our apartment or house is located and range between 0.4 and 1.2% of its value.
Inheritance and Gift Tax
Colombia does not have an inheritance and gift tax per se, but any assets received in the form of an inheritance or gift will be subject to long-term capital gains tax.
Thus, the applicable rate will be 10% of the value of the assets.
Colombia Public Finances
Let us now analyze the degree of sustainability of the existing tax system in Colombia. To do this, we will look at the level of public debt relative to the size of the country’s economy.
Public debt is a particularly delicate issue for emerging countries, as they lack the ability to issue hard currency. Therefore, excessive levels of public debt can lead to monetary devaluation and civil unrest
The graph below shows the level of public debt in Colombia since the mid-1990s:
As we can see, although debt has increased over the last few decades, it is still at a manageable level. Nonetheless, it would be beneficial if the long-term trend was reversed.
Conclusion
Colombia has relatively moderate taxes. Therefore, if we just want to find the jurisdiction with the lowest tax rates, there are other places that we would find more appealing.
However, Colombia enjoys a very high quality of life. This can make it possible for us to strike a balance between how much tax we pay and the type of life we have.
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And if you want to read about taxes in another promising Latin American country, check out this link:
Taxes in Mexico – A Complete Guide
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