Tax exemptions: their application and tax benefits in Colombia

exenciones tributarias

What are Tax Exemptions?

In the first place, tax exemptions are understood as the circumstances under which a natural or legal person does not have to assume all or part of a certain tax burden on a certain activity.

It is important to clarify that they will always be contemplated in the law along with the conditions for their application and that the registration and declaration process must be carried out in the same way.

Tax exemptions can be of two types:

  • Objective: they refer to who performs the operation.
  • Subjective: they refer to the type of activity.

Income Tax:

Tax exemptions for this tax are mainly found in the Tax Statute.

One of the most important exemptions is related to exempt income for workers, which allows them not to pay taxes on income received for items such as service bonuses, vacations, bonuses, among others.

There are also tax exemptions for individuals earning salaries and for companies that generate income from certain businesses such as the sale of cultural goods, the production of renewable energy, among others.

Value Added Tax (VAT):

VAT is the tax levied on the consumption of goods and services. There are certain economic activities that are exempt from the payment of this tax, such as education, health, culture, among others.

Industry and Commerce Tax (ICA):

In the case of ICA, tax exemptions are established by the municipalities and districts. For example, exemptions may be granted to new companies establishing themselves in the area, to businesses engaged in exporting, among others.

Wealth Tax:

This tax is levied on the net worth of individuals and legal entities. In Colombia, there are some tax exemptions for certain assets, such as the principal residence, certain financial assets, among others.

It is important to note that tax exemptions may vary depending on the legislation in force and, in some cases, may be subject to certain conditions.

In addition, it is essential that taxpayers are aware of the exemptions that apply to them in order to be able to take advantage of them correctly.

Benefits of tax exemptions:

Tax benefits are reductions in the amount of a certain tax to be paid in order to encourage taxpayers and promote certain economic or social activities in the country.

These benefits may take the form of deductions, exemptions, tax credits, tax rate reductions, among others. Some of these benefits are:

  1. Deduction for investment in research and technological development projects:
    Any person who makes investments in projects qualified as “research and technological development”, according to the criteria and conditions defined by the National Council for Tax Benefits in Science, Technology and Innovation -CNBT-, will be entitled to deduct from their income.
    One hundred and seventy-five percent (175%) of the value invested in such projects, without exceeding forty percent (40%) of the net income, determined before subtracting the value of the investment.
  2. Deduction for investment in productive fixed assets:
    Both individuals and legal entities that pay income tax can make use of this benefit and it allows deducting 40% of the investment with the fulfillment of certain requirements.
  3. Deduction for donations to non-profit entities:
    Income taxpayers obliged to file income tax returns may take as a tax deduction the value of donations made during the taxable year.
  4. Free trade zones:
    Companies that establish themselves in free trade zones can enjoy tax benefits such as income tax and VAT exemption.
  5. Special tax regime for the orange economy:
    Companies engaged in creative and cultural activities may opt for a special tax regime that allows them to pay a reduced income tax rate.
  6. Special tax regime for small companies:
    Companies whose income does not exceed a certain threshold are eligible for a special tax regime that allows them to pay a reduced income tax rate.

It is important to note that these tax benefits are subject to certain conditions and requirements that must be met by taxpayers in order to be eligible for them.