27 Jun ZOMAC: an Investment opportunity in areas affected by the armed conflict in Colombia
Tax incentives in zones affected by the armed conflict in Colombia
For more than five decades, Colombia had been immersed in an armed conflict that has left millions of victims. Within the national geography there are some territories that, socially and economically have been more affected than others, and require a greater intervention of the state to reestablish their progress.
After the signature of the peace treaty, the Colombian Government has created programs for these areas mentioned above that are now free of conflict and need more investment.
Within the tax reform of 2017, some tax incentives are proposed for investments in the Zones Most Affected by the Armed Conflict, now called ZOMAC. These come from the regulation of the law 1819 of 2016, for Colombia’s latest tax reform.
The ZOMAC will be a set of municipalities considered as the most affected by the conflict and they will be defined by the Ministry of Finance, the National Planning Department and the Territory Renewal Agency. The ZOMAC cover about 344 municipalities, defined by decree by the national government.
There are two major tax incentives related to ZOMAC:
The first incentive is that Corporations may choose to pay up to 50% of their taxes through direct investment in projects of social importance or infrastructure, in the areas classified as ZOMAC. In other words, it is the investment and direct financing by the Taxpayer of effective and irrevocable contributions of resources that are for the execution of Projects directly approved in ZOMAC areas.
The contributions made by the taxpayer may be used as an effective discount on the payment of up to 50% of Tax on income and complementary paid in the taxable year. The National Government will define a list of priority projects that can be financed through this mechanism with the hopes that corporations would be interested in the investment.
The second tax benefit is aimed at new businesses established in ZOMAC. New companies that are micro and small entities that start their activities in the ZOMAC by the years 2017 to 2021, will pay 0% income tax; From 2022 until 2024, the tariff will be 25% of the general income tax rate for legal entities; and For the years 2025 to 2027 the rate will be 50% of the general rate. In terms of the tax reform, it will be understood as a small enterprise, a company with total assets of more than 501 legal minimum wages (aprox 121,060 USD), but less than 5,001legal minimum wages (aprox 12,084,495 USD).
As for the medium and large companies that start their activities in the ZOMAC for the years 2017 to 2021, income tax will be 50% of the general rate from 2022 until 2027, the rate will be 75% of the general rate, and from 2027 onwards, the new large companies will be taxed at the general rate. A medium-sized enterprise, is a company with total assets between 5,001 (1,208,425 USD) and 15,000 (3,624,551 USD) legal minimum wages. Finally, it will be the large companies those whose total assets are equal to or greater than 15,000 legal monthly minimum wages.
In addition to the two main tax incentives, micro and small companies will be relieved from paying payroll taxes on the salary part of their workers that earn less than 10 (2,416 USD) Legal minimum wages.
The company benefiting from the tax incentives must develop all its production process in the ZOMAC, and the resulting products must be sold and dispatched from the area, to other parts of the country or abroad.
On the other hand, Colombia’s ZOMAC legal system has just been approved. Law 1819 of 2016 mentions that for the benefit to be applied, the companies need to generate a certain amount of jobs in the areas, but the law has not specified the number of jobs yet.
The company that chooses the benefit of the tax incentives, must state it before the Directorate of Taxes and National Customs (DIAN). It must register or update its Single Tax Registry (RUT), and indicate in it that the company has the condition of ZOMAC.
The following companies may not have access to the tax incentive:
- Companies classified as major contributors by the U.A.E. Tax Management and National Customs (DIAN).
- Companies dedicated to port activity with concessions legally granted by the authority.
- Companies engaged in mining or related activities, by virtue of concessions legally granted.
- Companies engaged in the exploitation of hydrocarbons or related services to this, under concessions legally granted by the authorities.
There are four causes for the loss of the tax incentives. The company:
- Changes the main address to a municipality that has not been declared as ZOMAC during the term of the benefit.
- Develops of all its main economic activity in a different territory than the ZOMAC Municipality where it was registered at the beginning.
- Does not meet the minimum investment and employment requirements.
- Performs any activity or conduct that may be classified as tax abuse.
It is also important to mention that companies that started their projects before the tax reform was implemented in 2017, would not have tax benefits.
By means of Decree 1650 of October 9, 2017, the Ministry of Finance and Public Credit of Colombia established the rules for business reorganizations by companies that decide for the tax benefits that apply in the Zones Most Affected by the Armed Conflict (ZOMAC). This decree includes the methodology and the list of municipalities most affected by the conflict.
Jose A. Abusaid