ZOMAC: An Investment opportunity in areas affected by the armed conflict in Colombia27/06/2017
Tax incentives in areas 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 2016, some tax incentives are proposed for investments in the Zones Most Affected by the Armed Conflict, called ZOMAC. These incentives are stated in the law 1819 of 2016, part XI.
The ZOMAC is a set of municipalities considered as the most affected by the conflict and they were defined by the Ministry of Finance, the National Planning Department and the Territory Renewal Agency. The ZOMAC cover about 344 municipalities, defined by decree 1650 of October 9, 2017 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.
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.
In terms of the tax reform, a small enterprise is a company with total assets of more than 501 legal minimum wages (approx. 130,000 USD), but less than 5,001 legal monthly minimum wages (approx. 1,302,000 USD*).
A medium-sized enterprise, is a company with total assets between 5,001 and 15,000 legal monthly minimum wages (approx. 3,906,000 USD*). 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 Legal monthly minimum wages (approx. 2,600 USD*).
The company that wants to benefit from 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 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.
The following companies may not have access to the tax incentive:
- Companies classified as major contributors by the Directorate of National Taxes and Customs (DIAN).
- Companies dedicated to port activity with concessions legally granted by the authority.
- Companies engaged in mining or related activities, as a result of legally granted concessions.
- 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.
On the other hand, Colombia’s ZOMAC legal system was approved with the Decree 1650 of October 9, 2017, mentioning that for the benefit to be applied, the companies need to generate a certain amount of jobs in the areas.
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
*Figures are subject to change according to the Market Exchange Rate.