27 Jun Investment opportunities in areas affected by the armed conflict in Colombia
For more than five decades, Colombia has 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 in order to reestablish their progress.
Within the structural tax reform of 2017, some tax incentives are proposed to close the gaps of socioeconomic inequality in the zones most affected by the 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 constituted by the set of municipalities that are considered most affected by the conflict and that for this purpose they would be defined by the Ministry of Finance (Ministerio de hacienda), the National Planning Department (Departamento National de Planeación) and the Territory Renewal Agency (Agencia de Renovación del Territorio.) The ZOMAC cover about 300 municipalities, defined by decree by the national government. Among the departments with the highest number of municipalities benefit from ZOMAC are Antioquia with 57 zones, Tolima with 21 zones, Casanare with 15, Cundinamarca with 12, Meta, Nariño, Cauca and Tolima. There are two major tax incentives related to ZOMAC. The first 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 consists of investment and direct financing by the Taxpayer through effective and irrevocable contributions of resources to the execution of Projects directly approved in ZOMAC areas. The contributions thus made by the taxpayer, may be used as an effective discount on the payment of up to fifty percent (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 areas most affected by the conflict. 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. 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 a 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 continues to be in constructions. The law 1819 0f 2016 mentions that for the benefit to apply, the companies need to generate a certain amount of jobs in the areas, but the law does specify the number of jobs yet. In the legal text it is constantly mentioned that ZOMAC only works in certain areas, but there is no specific mention of each specific department or municipality as of today. The government needs to continue developing a more concrete and specific legal system concerning ZOMAC in order to gain more investors, because a secure legal framework generates greater possibilities of investment. The company that opts for the benefit of the tax incentives, must manifest them before the Directorate of Taxes and National Customs (DIAN), for which it must register or update its Single Tax Registry (RUT), and indicate in a section of such registry that the company has the condition of ZOMAC. The following companies may not have access to the tax incentive: the first ones are those classified as major contributors by the U.A.E. Tax Management and National Customs (DIAN), those dedicated to the port activity with concessions legally granted by the competent authority, the companies engaged in mining or related activities, by virtue of concessions legally granted. And lastly, companies engaged in the exploitation of hydrocarbons or related services to this, under concessions legally granted by the competent authorities. There are four causes for the loss of the tax incentives. First of all, if the company changes the main address to a municipality that has not been declared as ZOMAC, during the term of the benefit. Secondly, if it develops all of its main economic activity in a territory other than that of the Municipality where ZOMAC at the beginning was registered. Third, if the company does not meet the minimum investment and employment requirements. And lastly, if it 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. Nowadays the Colombian government is in the process of implementing a law that complies with the 1819 law, with the aim of specifying the steps that an investor must follow for the development of projects in ZOMAC zones. No date has been decided for it expedition, but the government projects it would occur on the second trimester of 2017. Jose A Abusaid