Tax Guide for US Expats Living and Working in Columbia
Who Is Liable For Income Taxes In Columbia
Colombian residents are subject to tax on their worldwide income. Nonresidents are subject to Colombian tax on their Colombian-source income only. Foreign residents are subject to tax on their Colombian-source income during the first four years or tax periods of continuous or discontinuous residence in Colombia. However, they are subject to tax on their worldwide income as of the beginning of their fifth year of residence in Colombia.
Individuals are considered resident for tax purposes in Colombia if they reside in Colombia for more than six consecutive or nonconsecutive months in the tax year or if they complete a consecutive six-month period during a tax year.
Colombian source income includes employment income attributable to services provided in Colombia, regardless of where the payments are made to the employee.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Taxable employment income for individuals consists of salaries, wages, bonuses, benefits in kind and any other income derived from a labor relationship. However, 25% of employment income is exempt from tax, limited to a monthly amount (see Exempt income) which is increased annually.
Self-employment and business income. Taxable self-employment and business income is income less allowable business expenses (see Business deductions).
Investment income. Dividends received by residents are subject to income tax. Interest received is also taxed together with any other income received by the individual at the rates, but relief is available for inflation with respect to interest received from financial entities. Royalties and rental income are also considered taxable income and are taxed at the regular rates.
Directors’ fees. Directors’ fees are considered taxable income and are subject to an 11% withholding tax (if the individual must file an income tax return; otherwise, a rate of 10% applies). The withholding tax is credited against the final tax liability if the individual must file a tax return.
Exempt income. Twenty-five percent of employment income is exempt from income tax, limited to a maximum monthly amount of Col$6,032,000 (approximately US$3,613) for the 2011 tax year.
Capital gains. Capital gains are taxed at the ordinary income tax rates. These rates are applied separately from the ordinary income. Because the tax rates are progressive, this separate calculation results in a reduction of the global effective tax rate. In determining the amount of capital gains, the acquisition costs of shares and real estate are calculated in Colombian pesos and adjusted for inflation, regardless of whether the asset is used in a trade or business.
Capital losses may offset only capital gains. Real estate losses are not allowed.
Deductions
Deductible expenses. Employees who are required to file tax returns and individuals who are not required to file tax returns, but would like to reduce the impact of withholding taxes, may deduct specified expenses, which are those indicated in Personal deductions and allowances.
These expenses reduce the withholding tax base.
In addition, mandatory contributions to the pension system, voluntary contributions deposited by the employee in a Colombian pension fund and deposits in AFC Accounts (for housing construction promotion) opened in local commercial banks and housing leasing payments are subtracted from employment income. However, the maximum total deduction for such payments is 30% of employment income.
Personal deductions and allowances. Interest and payments on loans for the acquisition of a taxpayer’s house are deductible, up to a limit set annually. Payments made for education and health in favor of a taxpayer, his or her spouse and up to two children can be treated as a deduction for income tax and withholding purposes, if such payments do not exceed 15% of the taxpayer’s taxable employment income and if the taxpayer’s income in the preceding year did not exceed Col$109,310,000 (for the 2011 tax year; approximately US$60,728).
Business deductions. Self-employed entrepreneurs and professionals may deduct all legally acceptable expenses incurred in carrying out their business activities. For self-employed professionals, deductible expenses may not exceed 50% of business income (90% for architects and engineers on construction contracts); however, this limitation does not apply if the taxpayer issues appropriate invoices for all his or her income and if such income is subject to withholding tax. The taxpayers must keep supporting documents (for example, invoices and agreements) for all expenses, but they are not required to maintain accounting books.
Relief for losses. Under Colombian tax law, employment income may not be reduced by any losses, regardless of the source.
B. Other taxes
Estate and gift tax. For the 2011 tax year, the first 1,200 UVT (Col$30,158,400) received as a gift or inheritance by spouses and legal heirs is exempt from tax. For inheritances or legacies received by persons other than the legitimate heirs and spouse, as well as for donations, the exempt amount of the capital gain is 20% of the value received, up to Col$30,158,400 (for the 2011tax year). A “capital gain” is unexpected income or profit from an extraordinary event, such as an extraordinary sale or winning a lottery or a raffle. In this case, an inheritance or legacy is deemed to be a capital gain if it is received by persons other than the legal inheritors.
Equity tax. Law 1430, 2010 introduced a new equity tax for the 2011 tax year for individuals. The following are principal aspects of the tax:
- It is an equity-based tax, which is paid by income taxpayers owning net equity of at least Col$1 billion (approximately US$560,981), as of 1 January 2011.
- For equity tax purposes, the value of shares owned in local companies can reduce the tax base, as well as the first Col $319,215,000 (approximately US$179,073) of the value of the individual’s house or apartment.
- If the tax base is equal to or higher than Col$1 billion (US$556,000), but not exceeding Col$2 billion (approximately US$1,111,000), the equity tax rate is 1%. If the tax base is more than Col$2 billion but not exceeding Col$3 billion (approximately US$1,666,000), the tax rate is 1.4%. If the tax base is more than Col$3 billion but not exceeding Col$5 billion (approximately US$2,777,000), the tax rate is 2.4%. If the tax base is more than Col$5 billion the tax rate is 4.8%. Both the 2.4% rate and the 4.8% rate have a surtax of 25%.
- The equity tax is payable during four years on dates established by the government in two installments per year. For 2011, the payments are due in May and September.
C. Social security
Employees may choose between a private social system and the public system administered by the Institute of Social Security (ISS). The contribution rates are the same in each system.
Employers and employees are subject to the following monthly social security contributions (amounts expressed as percentages of salaries).
The base on which these contributions are calculated is limited to the equivalent of 25 minimum legal salaries (Col$13,390,000 [approximately US$7,439] per month).
In addition to the above, employers must make an additional 9% contribution to the Family Compensation Fund, Colombian Family Welfare Institute (ICBF) and the National Apprentice Service (SENA), on the salaries paid and the mandatory days of rest provided to its employees. These contributions are known as payroll taxes. Payroll taxes do not have a ceiling. Non-salary clauses are acceptable (non-salary clauses represent agreements between employers and employees that certain benefits are not considered salary).
For social security purposes, non-salary payments are excluded from social security contributions up to 40% of the employee’s total remuneration. This 40% limit does not apply for payroll taxes.
If the employee earns an integral salary (package salary), social security contributions and payroll taxes are calculated on 70% of such salary, because the remaining 30% is deemed a social-benefit factor included in this type of salary and accordingly is not included in the base for the above-mentioned payments.
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We have been preparing US income tax returns for US Citizens and permanent residents living in Columbia for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Columbia and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Columbia, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Columbia.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email