Colombia: Vibrant Life and Business in South America

On our blog, we’ve already talked about many tax havens in Latin America. From Costa Rica to Uruguay, we’ve talked about countries where you can live without taxes on the continent. Today, we are going to talk about a country where, although it is not possible to reduce your tax burden to zero, it is still a very interesting place for tourism, to live and do business. That country is Colombia.

After all, the second most populous country in the South American continent is also, behind Chile and Uruguay, the third most economically free country and one of the countries with the fastest and most stable growth in the region – with an average growth rate of 4.8% in the last 5 years. It is not a surprise that the OECD has estimated that Colombia will be the third country with the fastest economic recovery from the pandemic in the world, behind China and India.

Along with that, there has been improvements in statistics in recent years regarding the country’s infrastructure and security – the country that was once famous for its cartels and Pablo Escobar, is now, on an average, safer than its neighbor Brazil. Combining these statistics with the growth of fintechs (Wise and Paypal are already there, Nubank is coming soon) and its vibrant, low-cost and internationally well-connected cities, it’s no wonder the country is now one of the biggest hubs for digital nomads of the Americas.

Indeed, when we talk about cities, Colombia has options for all kinds of people. Those who prefer the slightly colder weather of the mountains can stay in Bogotá or other cities around the Andes, lovers of a tropical climate and beaches can live in Cartagena, Barranquilla and other coastal cities, while those who prefer a mild climate all year round can go to Medellín, the city of eternal spring. For dancers, Cali – the salsa capital of the world – is also an ever-growing and very attractive city.

Bogotá, Medellín and Cali, in particular, have international airports with good connections to both South and North America as well as Europe, thus making Colombia a great base for travelers who are traveling between these continents. The country is home to the third largest airline on the continent, Avianca, which, unlike LATAM and GOL, is a member of the Star Alliance. For frequent travelers, earning an Avianca status allows you to earn a Star Alliance Silver or Gold status which will give you benefits across the entire alliance, unlike LATAM and GOL status, which are valid only for their own airlines and selected partners.

With a lower cost of living than Paraguay and Brazil, the country is a great choice for those who are starting their international journey and are looking for a country where they can save and increase their assets with little expense.

Taxation for residents of Colombia

Colombia is a country residential tax country in which income from fiscal residents is taxed globally. There are three main categories of income: General Income, which includes salaries and virtually all types of income, Retirement Income, and finally Dividend Income.

For general income, after an annual exempt amount of around €8,700, a progressive taxation ranging from 19% to 39% is applied. The last range of 39% applies for annual income starting at €247,000. For salaries, social security contributions are of 28.5%.

Different kinds of pension income are also taxed in the same progression, but they are a different income category and are calculated separately from general income – the amount received in pensions does not count for the progression of general income and vice versa.

Dividends, however, are taxed on a somewhat privileged manner. Dividends that have been taxed at the corporate level are exempt up to around €2,400 a year and taxed at 10% thereafter. However, dividends that have not been taxed at the corporate level are taxed at 31%, so Colombia is not a good country when one has a tax-free offshore company.

This is also because the country has strict CFC rules for companies controlled by Colombian tax residents if they own, directly or indirectly, 10% or more of the company shares. The CFC rules apply in their entirety if the controlled entity is in a blacklisted country for Colombia in any way. Investment vehicles are also considered CFCs in Colombia.

It may still make sense to have a company in places that are off the list and with double taxation treaties, such as Switzerland or in the special zones of Spain or Portugal, but there will always be a need to have real substance in the country.

Since we’re talking about agreements, Colombia’s non-double taxation agreement network is somewhat good for South American countries, and it includes some good options like the ones mentioned above and other interesting countries like the UAE, the UK and Czech Republic. An agreement with Brazil is also being negotiated. However, the tax-treaty network s is still not as good and complete as that of Brazil or Uruguay.

Other taxes to be mentioned: capital gains are taxed at 10% – with the exception of winnings from lottery, gambling or other related activities, in such cases the tax rate is 20%.

There is also a wealth tax for those with assets of more than 1 million euros. The applicable tax rate is 1% over the taxable income of the year.

Doing business in Colombia

At first glance, Colombia is not exactly an attractive country for your company setup – after all, the corporate tax of 30% as of 2022 is not at all a low rate. The 19% VAT on most products is not low either.

However, the country offers interesting options especially for those who have either a small or large business.

The Simplified Tax System or STR is an alternative for small businesses, which mainly consists of replacing the income tax and consolidating the consumption tax, the value-added tax (VAT) and the industry and commerce tax.

The simple tax is calculated as of gross sales revenue at rates that vary by the amount and source of income. The rates range from 3.4% to 7% for transport, food and beverage activities (such as restaurants), from 2% to 11.6% for grocery stores and hair salons, from 4.9% to 8.5% for professional services and from 1.8% to 5.4% for other activities.

Similar to the Brazilian system, there is a sales revenue limit of around US$850,000. In addition, partners or managers of multiple companies will have their limit seen on a consolidated basis according to their ownership. Another similarity is that the system is only available to companies or individuals residing in the country.

The list of restrictions goes on. Entities that are franchisees, affiliates, subsidiaries, agencies or branches of non-domiciled national or foreign business entities cannot participate in the system.

Companies that are shareholders, participants, trustees or beneficiaries of other companies or business entities in Colombia or abroad are also not eligible for the system.

In addition to that, there are restrictions for the economic sector of the company. Financial entities or those comapnies in sectors such as microcredit, asset management or financial advisory are also not eligible. Energy, automobile, fuel or weapons and explosives companies do not qualify either.

Basically, the simplified system is good if you are a small business owner and you have or want to start a business of your own in a permitted industry, with sales revenue below US$850,000 that is not affiliated with any other business.

For those excluded due to the various restrictions of the simplified system, don’t lose hope. Colombia also has a strong system of private Free Trade Zones, with more than 120 of them spread across the country. These zones are good for both industrial and manufacturing as well as service companies.

Establishing a company in a Free Trade Zone brings significant benefits in fiscal, regulatory and customs terms.

These include a reduced corporate tax of 20%, 0% VAT or fees on goods entering the zones, and 0% VAT on raw materials sold from anywhere in the country to zone tenants. Companies in the Free Trade Zones do not even need to file for customs tax return.

This system, however, is better for companies that already have a certain scale, as depending on the amount to be invested in real productive fixed assets, the Colombian zone law requires the creation of job positions and additional investment.

For companies with an investment in fixed assets of up to €98,000, we are talking about 7 job positions to be created in the first three years – 3 in the first year, 2 in the following year and another two in the year after that.

In the second range, which is up to €985,000, it is 20 job positions and an investment of over 1,000 minimum wages (~€200,000). After this range, these numbers rise to 30 positions and 5,000 minimum wages (€1,000,000) with an investment of up to €5,900,000. Anything over this amount, the requirements are for 50 job positions and an additional investment of 11,500 minimum wages (€2,300,000).

It is also important to keep in mind that the company domicile must be within the Free Trade Zone, therefore the company has to rent a commercial property and have work being carried out from there.

As we can see, the Free Trade Zones system of Colombia has several benefits and fewer restrictions than the simplified system, however it is only good for companies that can fulfill the requirement of employing at least 7 people in the first three years.

Residency and citizenship options in Colombia

Well, is you’re interested in staying in Colombia, we now have the following question: “What are the options for me to become a resident in Colombia?”

The easier one is to be a citizen of a country in Mercosur, such as Brazil or Paraguay. In this case, by having this citizenship you can obtain the Mercosur temporary visa which gives you the right to live and work in Colombia for three years. After the second year, it is possible to obtain the permanent resident visa.

For our readers from other countries where this is not possible, Colombia has some fairly accessible immigration paths.

In Colombia there’s a difference between immigrant and resident visas. Immigrant visas (M – Visa de migrante, in Spanish) cost around €250 including processing costs, and they expire if the visa holder leaves the country for over six months without returning – this also includes the Mercosur temporary visa. The resident visa (R) costs around €395 and has an unlimited term. The R visa needs to be renewed every 5 years and expires if the holder leaves the country for over two years without returning.

If you are interested in investing in a business in Colombia, it is possible to get an M6 immigrant visa by investing an amount of 100 minimum wages, about €20,000. By investing an amount of at least 350 minimum wages (€70,000) in real estate it is possible to get an M10 immigrant visa. Those with a monthly pension of at least €600 can get an M11 immigrant visa. There are also plans to introduce a visa for nomads in the near future.

Holders of M4 to M11 visas can apply for R residency after 5 years of living in the country. Those with a Mercosur, marriage or adoption visa can get a permanent residency after two years.

It is also possible to get an R visa of permanent residency right away by directly investing an amount that’s higher than around €130,000 in the country – and it doesn’t need to be only on real estate.

Another interesting alternative is to have a child that is a Colombian citizen. In case you have a child in Colombia and at least one of the parents is Colombian or a legal resident in the country, the child gets the citizenship and the parents get access to the R visa.

Therefore, if you think of having children in the near future and immigrating to Colombia, you can take advantage of birth tourism, get a second citizenship for you child and speed up your own process of getting an R visa from 2 to 5 years, depending on the visa used to become a resident in the country.

Speaking of nationality, Colombia is an interesting option for second citizenship. For Latin Americans (and that includes Portuguese-speaking Brazilians), naturalization is possible in only one – yes, one! – year of permanent residency. For Spanish citizens, spouses of a Colombian citizen, or parents of a Colombian child or one that’s eligible to Colombian citizenship, naturalization is possible in only two years.

In all other cases, and we include here readers other countries, the citizenship is obtained after five years of legal permanent residency, in line with the world average. In any way, the Colombian citizenship is a good complement for non-Mercosur citizens as it gives free access to live and work in any country belonging to the Mercosur block.

For Mercosur citizens, the Colombian passport does not bring lots of advantages. The country is also a member of the Andean Community, which can end up integrating tighter as a bloc in the future. For now, this does not make a difference since it is already possible to emigrate to all of the member countries with the Mercosur visa.

However, nobody knows what the future holds, and since the citizenship can be obtained in only one to two years with the right conditions, it ends up being one of the fastest second citizenships to obtain, and therefore, offers, at the very least, a solid and fast plan B.

Finally, it is worth mentioning that the candidates to naturalization also have to pass a test on Colombia’s history, geography and constitution. A Spanish test is also required for those whose native language is not Spanish. Those with a graduation degree from a Colombian university or are older than 65 are exempt from the tests.

Is it worth to have a Colombian residency?

To sum it all up, Colombia may not be a tax haven, but for several kinds of workers, self-employed people and entrepreneurs it can be a good deal. They can have a tax-optimized life in the country, especially those who can benefit from the Simplified System, the Free Trade Zones or those whose income comes mainly from dividends or capital gains.

Nomads that are not going to spend more than 183 days a year in Colombia, as long as they don’t forget to return to the country once every 6 months, can be residents in the country for years without becoming tax residents.

If you have decided to live in Colombia, whether it’s in the Andes, in the big cities, a quiet property or at the beautiful beaches the country has, we will be happy to help you with the process. Our partners can help you with immigration, accounting, tax filing, real estate acquisition, incorporations and bank account openings.

And of course, it’s not necessary to live in Colombia to enjoy its thriving economy and opportunities. Besides the possibility of opening a local business, our partners offer investors with amounts starting at US$40,000 professional access to a variety of investments in the Colombian market, including real estate, loans for mortgages and taxi cabs, timber plantations, among others.

If you’re interested in any of these services, write to us so our partners can help you. And if you want to understand if Colombia is the best option for you or if there are better solutions, book a consultation with our team.

Because your life is yours!