02 Mar Duty Free Zones in Colombia: tax and customs benefits
A good way to do business in Colombia and take advantage of tax and customs incentives
After the 2016 tax reform that took place in Colombia one thing is clear, Duty Free Zones (DFZ) took the best portion of tax benefits and incentives, and undoubtedly became the most attractive vehicle for a foreign investor to do business in Colombia.
Needless to say, the convenience of the DFZ also depends on whether the business model of the investor is adequate for DFZ, something that needs to be examined closely, case by case.
For instance, a DFZ user (namely a company established in a DFZ), will be able to:
- Pay income tax at a preferential rate
- Receive goods from the rest of the world without paying import duties
- Be exempt from value added tax (IVA) on purchases directly related to its corporate purpose.
As might be expected, these benefits have conditions and limitations. The following is a brief review of the tax and customs benefits just mentioned, and the limitations that apply to them.
The general corporate income tax today in Colombia, is 34% with a surtax of 6% when there are profits of more than COP 800’000.000. The general income tax rate for DFZ users is 20%, no surtaxes applicable regardless how profitable the venture is.
The sole condition for this benefit to apply is that the activities giving rise to the revenue upon which the tax is calculated, are strictly those authorized to the DFZ user.
Generally, an importer who imports goods into the country would have to pay customs duties when clearing the goods at customs. A DFZ user, however, does not technically import the goods into Colombia when they reach the DFZ. For that reason, those goods do not pay customs duties at clearance. This benefit has particularities.
If, for instance, that DFZ user takes the imported goods to assemble a finished product and then exports the finished good (or the same good originally received) to the rest of the world, no customs duties are paid in Colombia (at entrance or at the time of export).
However, if the good, or a finished product using it, is sold in the domestic market, there will be customs duties paid at the time the merchandise enters the Colombian customs territory.
There are different ways to calculate the customs duty payable when the finished product contains both, foreign and national materials.
DFZ could therefore be a good option for a company establishing as a user, bringing goods or raw material, processing, and then selling to the rest of the world. It is however, a viable option for companies selling in the Colombian territory, in the case of costly goods that pay high customs duties. The DFZ would allow that company to release the good in the Colombian market (and therefore paying the customs duty), only when the product is effectively sold.
Value Added Tax.-
When a company in the Colombian territory purchases goods or services, no matter the purpose of the purchase, those are affected by value added tax (IVA) that was recently fixed at 19% for most of the cases. A DFZ, however, will not pay IVA on purchases made in Colombia, if those purchases are directly related to the corporate purpose.
These are the three main features of the Duty Free Zones regulation in Colombia. In later documents we will explore opportunities that a foreign investor can benefit from while using this status.
Jose A. Abusaid