Straddling the border between Central and South America, Colombia is one of the most biodiverse countries in the world. From the country’s high altitude sprawling capital Bogotá to the Caribbean island San Andres, Colombia offers some of the best natural resources in the world. The country is known for its robust education system, which makes it an appealing place to build out a local employment hub.
Are you thinking about expanding your business to or hiring in Colombia? You may have already started to research exactly how double taxation works in Colombia as a foreign business entity. The good news is that Colombia has tax treaties with many countries, including the Netherlands, Brazil, and Mexico.
In this guide, we’ll give you information about tax treaties and how these treaties affect payroll in Colombia as well as everything expats and businesses from around the world should know before moving into the country.
Colombia has signed tax treaties with various countries to avoid double taxation. These treaties outline how foreign earned income for Colombian businesses and foreigners residing in Colombia are taxed, and vice versa.
Under Colombian law, corporations are taxed on their worldwide income. Businesses are usually required to pay a corporate tax rate and withholding tax for their employees.
However, if a corporation is also taxed on the same income in another country, they may be entitled to a credit for the foreign taxes paid, up to the amount of the Colombian tax liability on that income.
These treaties generally provide rules for determining which country has the primary right to tax particular types of income, and they also provide relief for double taxation by allowing for foreign tax credits or exemptions.
An expat in Colombia is usually only taxed if they live in Colombia for more than 183 days. If a resident or foreigner earns most of their income in Colombia, they process their tax return in the country. Tax authorities have the right to use and share information if you have dual-citizenship outside of Colombia in case of tax evasion.
In Colombia, where you file taxes generally determined by domestic tax laws and tax treaties. Under Colombian domestic tax laws, individuals and corporations are taxed on their worldwide income, which includes income earned both domestically and abroad.
The Colombian tax system is based on a territorial principle, which means that income sourced in the country is generally subject to taxation by the Colombian tax authorities. The tax rates and rules are set out in the Colombian Tax Code. These treaties generally provide a framework for determining which country has the primary right to tax particular types of income, such as dividends, interest, royalties, and capital gains.
Most Colombian tax treaties provide a framework and policy for determining which country has the primary right to tax specific types of income or assets. They also provide relief from double taxation by allowing taxpayers to claim credits or exemptions on their tax return for what they’ve already paid in one country against the tax payable in the other country.
For example, if a Colombian resident earns income from a foreign source that is also taxed in the foreign country, the tax treaty between Colombia and that foreign country may provide for a tax credit or exemption to avoid double taxation.
The purpose of a savings clause is to ensure that each country can continue to tax its own residents and citizens, regardless of any provisions in the tax treaty. In other words, the savings clause preserves each country's sovereignty to tax its own residents and citizens according to its domestic tax laws, even if those residents or citizens also have income or assets that are subject to tax in the other country under the tax treaty.
The specific wording and scope of the savings clause can vary between tax treaties, but typically it provides that nothing in the tax treaty will prevent each country from applying its own domestic tax laws to its own residents and citizens.
Tax treaties in Colombia normally have a permanent establishment or PE clause specifying the circumstances under which a business presence in one country (the source country) can be deemed to have a taxable presence or "permanent establishment" in the other country (the residence country).
Most treaties define a permanent establishment as a fixed place of business, such as an office, factory, or workshop, where the business carries out its operations. These treaties also include other types of PEs, such as a construction site, a drilling rig, or a place where services are performed for a certain period.
Social security is normally always excluded from savings clauses in tax treaties, meaning that if you’re a resident in Brazil, but you’re receiving social security benefits in Colombia, you’ll be considered a resident in Colombia and your income taxes will be generated and paid there.
Government functions clauses are used in most tax treaties in Colombia to ensure that certain income received by the government of one country is exempt from tax in the other country. This exemption applies to income earned by a foreign government or its agencies in connection with their official functions, such as income from diplomatic activities, military operations, or other government activities.
The specific wording and scope of the government functions clause can vary between tax treaties, but typically it provides that certain income received by the government of one country in connection with its official functions is exempt from tax in the other country. This exemption is intended to avoid diplomatic or political conflicts that could arise if one country were to tax the government or its agencies of the other country.
Another typical provision in most Colombian tax treaties is an exchange of information clause (EOI). Under this clause, tax authorities in either country are required and encouraged to share relevant tax information to avoid tax evasion.
EOI clauses are an important tool for ensuring compliance with the tax laws of both countries and for preventing tax evasion and avoidance. It helps to ensure that taxpayers aren't hiding assets or income in one country to avoid taxation in the other country.
Many countries, including the Netherlands and Brazil, have signed tax treaties with Colombia, while others, including the US, do not have specific tax treaties with the South American country.
In Colombia, if you spend more than 183 days in one year in the country, no matter where you’re from, you are considered a resident and therefore required to file a tax return and be taxed on your worldwide income. You will typically only pay tax in Colombia on income generated in the country.
Below, you’ll find some standard clauses that are found in most of the tax treaties that Colombia has with other countries.
The Netherlands: This treaty regulates the individual exchange of information to avoid tax evasion in either country.
Brazil: This treaty helps eliminate double taxation by giving a foreign tax credit on investments and income.
Mexico: In 2009, this treaty entered into force as a way to boost economic growth and eliminate double taxation between both countries.
Chile: Under this treaty, Colombia and Chile eliminate double taxation on income in both countries and invest in the free movement of trade.
Portugal: This treaty eliminated double taxation between residents living in Colombia but who have citizenship in Portugal.
As of right now, Colombia does not have a tax treaty with the United States to avoid double taxation in either country.
A employer-of-record in Colombia may be your best solution when navigating the countries tax laws. An EOR in Colombia already has legal entities and experts in the country to help you avoid paying extra. Just like a Mexico employer-of-record, EORs like Via allow you to expand and hire without the headache and cost of entity set up.
Via makes hiring talent around the world and building your global team seamless. With our easy-to-use platform and payment tools, Via helps you manage local HR processes for direct employment such as work visas & permits, employee data privacy compliance, benefits, global payroll solutions, background checks, and other legal products. Our team of local labor lawyers and on-the-ground experts ensure that your company remains compliant while expanding abroad. As your employer-of-record/entity abroad, Via assumes responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team.