Colombia Withholding Tax: Rates and Obligations

In Colombia, the tax system uses retención en la fuente, or withholding tax, to collect taxes in advance. This system requires the payer in a transaction to withhold a portion of the payment and remit it to the national tax authority, the Dirección de Impuestos y Aduanas Nacionales (DIAN). This process ensures a steady flow of revenue and simplifies tax collection.

The withheld amount is treated as a pre-payment or credit against the recipient’s final annual income tax liability. This collection method applies to a wide range of financial transactions, improving tax compliance by collecting tax at the source of income generation.

Transactions Subject to Withholding Tax

A broad range of commercial and financial activities in Colombia are subject to withholding tax. The obligation to withhold is triggered when a payment is made for a specified category of transaction. These categories include:

• Services: Payments for services are a significant category. The regulations differentiate between professional services, technical services, technical assistance, and a broader “general services” category for payments that do not fall into more specific classifications.
• Dividends: Distributions of profits from a Colombian company to its shareholders are subject to withholding tax. The requirement applies to payments made to both resident and non-resident shareholders.
• Royalties: Payments made for the use of, or the right to use, intellectual property such as software, patents, trademarks, and copyrights are classified as royalties and are subject to withholding.
• Interest: Withholding tax is applicable to interest payments on loans and other financial instruments. The rules can vary based on the term of the loan.
• Purchases: When a designated withholding agent buys goods or tangible property, they may be required to withhold a percentage of the payment made to the seller.
• Salaries: Employers are required to calculate and withhold income tax from the salaries paid to their employees. The amount is determined based on a progressive scale that considers the employee’s income level.

Determining Withholding Tax Rates

The applicable withholding tax rate in Colombia is determined by the nature of the transaction and the residency status of the recipient. Rates differ for payments made to Colombian residents versus those made to non-residents or foreign entities.

Payments to Colombian Residents

For payments made within Colombia to resident individuals or entities, the rates are lower. For general services, the rate is 4% or 6%, depending on whether the recipient is required to file an income tax return. Professional fees and commissions are subject to a rate of 10% or 11%.

Interest payments between residents face a 7% withholding tax. For purchases of goods, a common rate is 2.5% for filers. Dividends paid to resident individuals from profits already taxed at the corporate level are subject to a withholding tax rate that can range from 0% to 15%, depending on the amount.

Payments to Non-Residents

Payments to foreign individuals or companies without residency in Colombia are subject to higher withholding tax rates, as this is the primary mechanism by which Colombia taxes their Colombian-source income. The withholding tax rate for royalties, technical services, technical assistance, and consulting services is 20%. Interest payments to non-residents are also withheld at 20%, though a reduced rate of 15% may apply for loans with a term of at least one year.

Dividends paid to non-residents from profits that were already taxed at the corporate level are subject to a 20% withholding tax. If those profits were not taxed at the corporate level, the payment faces a combined effective rate of 48%. A rule for non-residents with a “Significant Economic Presence” (SEP) in Colombia subjects them to a 10% withholding tax on sales of goods or digital services, unless they opt to file a return at a 3% rate on gross income.

Obligations of the Withholding Agent

The entity or individual required to perform the withholding is known as an agente retenedor, or withholding agent. The DIAN legally designates who must act in this capacity, which includes most legal entities and some individuals who meet certain revenue or asset thresholds. The primary obligation of a withholding agent is to correctly apply the tax rules to each payment they make.

This involves identifying if the transaction is subject to withholding, determining the correct rate, and calculating the amount to be withheld from the gross payment. Once the tax is withheld, the agent is legally responsible for remitting these funds to the DIAN on a monthly basis according to a government schedule. The agent must also file a corresponding tax return detailing all amounts withheld.

A final obligation is the issuance of a withholding certificate, or certificado de retención, to the payee. These certificates must be provided annually and serve as the official proof of the tax that was withheld. The recipient uses this certificate to claim the withheld amount as a credit against their annual income tax liability when filing their own tax return.

Reporting and Remitting Withheld Taxes

After calculating and withholding the appropriate tax amounts, the withholding agent must fulfill specific procedural requirements for reporting and payment. The entire process is managed through the DIAN’s official channels and adheres to a strict timeline to avoid penalties.

Required Form

The document for reporting withheld taxes is Form 350, titled Declaración de Retención en la Fuente. This form is a monthly declaration where the agent consolidates all taxes withheld across different transaction types. It requires reporting the total base amount of payments subject to withholding for each concept and the corresponding tax that was withheld. Recent updates to Form 350 require separate reporting for withholdings made to individuals versus legal entities and for transactions related to payments to foreign entities with a Significant Economic Presence (SEP).

Submission Process

The submission of Form 350 is handled electronically through the DIAN’s online portal. Withholding agents must have an authorized electronic signature instrument (IFE) to file the return. The process involves completing the form online, reviewing the information, and officially presenting it using the electronic signature. Once the declaration is submitted, the system allows the agent to generate a payment receipt.

Deadlines and Certificates

The deadlines for filing Form 350 and paying the withheld taxes are set monthly. The specific date depends on the last digit of the withholding agent’s Tax Identification Number (NIT). The DIAN publishes a tax calendar each year that outlines these deadlines. A declaration filed without the full payment of the withheld tax is considered legally ineffective.

Utilizing Double Taxation Treaties

For foreign entities receiving payments from Colombia, Double Taxation Treaties (DTTs) can provide relief from standard withholding tax rates. Colombia has entered into agreements with countries to prevent the same income from being taxed by both the source country and the recipient’s country of residence. These treaties often stipulate reduced or zero withholding tax on income such as dividends, interest, and royalties.

Key treaty partners with Colombia include countries like Spain, Switzerland, Canada, and the United Kingdom. The benefits provided by a DTT are not automatic. To apply a reduced treaty rate, the foreign recipient of the income must prove they are a tax resident of the treaty partner country. The Colombian withholding agent needs proper documentation to justify not applying the standard domestic rate.

The document required to claim treaty benefits is a certificate of tax residence, issued by the tax authority of the foreign entity’s home country. This certificate serves as formal proof to the DIAN that the recipient is entitled to the preferential tax treatment. Without this certificate, the withholding agent must apply the higher domestic withholding tax rates, and the foreign entity would have to seek a refund later.